Adding Value and Porters Value Chain
Added value is the difference between the selling price and the cost price of a product or service. When a product is made more appealing, customers will usually be willing to pay more.
The addition of value can increase either the product's price or value. For example, offering one year of free support on a new scanner would be a value-added feature. Organisations can also add value to services they perform, such as bringing advanced skills and knowledge into the workforce or offering additional training and support.
Understanding how your organisation adds value, and looking for ways to add more value, are important for gaining advantage over your competitors.
The first step is to identify the value chain, the set of activities that your organisation carries out to create value. The way in which value chain activities are performed determines costs.
Many organisations use a model known as Porter’s Value Chain to help them through this process. Rather than looking at individual departments in an organisation, Porter’s Value Chain focuses on systems and how inputs are changed into outputs purchased by consumers. This model identifies a chain of activities common to all organisations.
Porter’s Value Chain works by breaking an organisation's activities down into strategically relevant pieces, so that you can see a fuller picture of the cost drivers and sources of differentiation, and then make changes appropriately.
The added value is around the inbound/operations/outbound activity in red. The operations block can be referred to as the transformation process or added value activities. Take raw materials and machine them or paint them in some way and as a result the products are worth more than before they were processed and you have added more value than the cost of the process itself. All businesses both public and private have to add value to justify their existence. In the same way business processes and people also have to be as efficient as possible so as to add value in the most cost effective way. This is why organisations are so focused on improvement.
The items in green are the overheads or infrastructure which support the added value operations. For example, the IT function adds value in that it helps the operations activities make decisions about customer requirements and priorities.
In healthcare a doctor adds value by diagnosing a patient’s illness and prescribing drugs for improvement. Another example is the fitting of a replacement knee. These procedures add value but also incur an additional cost. Any sort of surgical operation is a transformation process.
More like this
Ask The Expert - Risk Management Process - Assets
This session focuses on procurement risk management with an emphasis on the importance of procurement to an organisations strategic ...
Spend Analysis
In an increasingly complex world of global supply chains, procuring organisations are exerting pressure on their procurement functions ...
Value-Adding Supply Chain Activities – Value Chain Management
Value chain management is the process of organizing all activities within the supply chain so that they add value in the most efficient ...
The Benefits of Category Management
Lucy Mason, Strategic Procurement Manager for the Department of Health and Social Care in the UK, talks us through the benefits of ...