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SME value chains can boost your business

Do you know what your SME’s value chain looks like? By closing examining your business’ value chain, you can find areas where you can boost your company. You can also look at regional and global value chains and look for how you can become a member of the chain and grow your business through these connections.

But what is a value chain?

The idea of a value chain was first introduced by Michael Porter in his book, Competitive Advantage. In his book, Porter explains the competitive advantage is created when companies look at the various activities that a company takes part in and how these processes and functions add value to what the business does.

The value chain is broken up into primary activities and support activities.

In the primary activities,  you will examine how the following activities add value to the final product or service:

  • Inbound logistics refers to the receiving, storing and distributing of raw materials and resources within your business.
  • Operations refers to the process of convert the raw materials into a finished product or service. This is also concerned with the quality assurance you have in this process.
  • Outbound logistics refers to how you deliver or distribute your product or service to the customer. Do you use a third party or do you deal directly with the client?
  • Marketing and sales refers to the activities you use to convince your customers to buy from you rather than a competitor.
  • Service refers to the after-sales service you offer a client once they have purchased your products.

In the support activities, you will look at:

  • Infrastructure refers to the structures which are in place to help the business operate day-to-day. These structures are finance, legal, accounting, regulation, general management, quality assurance, public relations, etc. These structures are the ones not directly involved with the creation of the product.
  • Human resource management refers to how you recruit, hire, motivate, reward and retain your staff. For service industries, people management is critical as they influence your client’s experience of your service.
  • Technology development refers to all the software, hardware, procedures, equipment and technical knowledge that you need to create your final product. This is usually largely focused on at the research and development stage of your business. You need to stay on top of the recent technical trends in your industry.
  • Procurement refers to the actions involved in getting the raw materials and resources you need to produce your product or service.

It is important to remember that none of these areas work in isolation and rather that they add value to each other. Secondly, the value chain is a two-way system with information going to the client and feedback coming back from the client telling where you have lost value or how you have had added value to the client’s experience.

How to boost your business with a value chain?

1. Draw a diagram of your value chain

Start with your end-product or service and work backwards to identify the various steps that were involved in getting the product produced. Ask yourself “What happens to the product right before it gets here?” Now that you have all the processes highlighted, write down the partners and resources involved in them.

2. Evaluate your value chain

Now that you know what your value chain looks like, you need to evaluate it. According to the Canadian Government’s guide on Linking into Global Value Chains, you should ask yourself the following questions:

  • What are you doing well?
  • What are you not doing well? Where are the weak points of the chain?
  • Where is there room for improvement (product quality, production or processing efficiencies, logistics, and/or specialized product qualities)?
  • Where are most resources concentrated? Does this correspond with your most value-adding process competency?
  • Where are there limited/abundant resources?
  • What limits your growth?
  • What do you wish you had more of? Less of?
  • Are there logistical problems (think of supply, transportation and storage issues)? Where are they in the chain?
  • What information do you and your partners need which could help you operate more efficiently?
  • What change(s) would provide your firm with the greatest benefits?
  • What relationships in the chain are the strongest and which ones could use more work?
  • What would your consumers say are the product or service’s strengths or weaknesses? Are these reflected in your chain?

By going through these questions you will be able to highlight weak areas in your value chain.

3. Design a plan to work on your weaknesses

Now that you have highlighted the weakness, you need to design a plan on how to overcome them. Depending on the weakness, will depend on the solution. Here are four ideas:

  • Outsource the weakness: Try to find a company that specialises in the area where you have a weakness. This is especially appropriate for areas that are supportive to your business.
  • Learn: If you lack technical knowledge when it comes to creating your service or product then you may need to go back to school. Depending on the knowledge you need to gain, you may use an online service like Coursera to develop the knowledge you need.
  • Collaborate: Find firms who you would be willing to collaborate with you to create an excellent product.
  • Brainstorm: Get your team together to help offer suggestions on how to improve on your weaknesses.

By following these three steps, you will be able to use value chains to boost your business. Remember that value chains are not static and do change with the business environment you work in so you must review your value chain regularly.

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