Can Activity Chain Analysis improve value creation?
This is the question that I wanted to answer when working recently with a client. The owner of the Private Training Establishment needed to identify which segments of his business were profitable and which were not.
With no separation of cost and revenue my client was in a situation typical of many small businesses. This made it difficult for him to spot which services were delivering to the bottom line. Costs were recorded against line items, but the revenue was recorded in one single bucket.
Activity Chain Analysis, developed in the 1980’s (then called Value Chain Analysis) as a way to assist companies in identifying their competitive advantage, seemed like a good match for my client’s needs.
This is how it works:
Step1: Separate core processes into primary activities
After some process mapping and intense debate with my client we were able to establish the
company’s primary internal activities in sequential order, thus creating the Activity/Value Chain.
Step2: Identify support activities
We identified HR and Procurement amongst others as support activities.
With these two steps we now had the ability to examine all the activities that impacted my client’s profitability.
Step3: Allocate costs against activities
Are costs aligned against the right revenue streams? What does this tell us about the profitability by service? This process can be tricky but time spent debating will greatly improve your results.
- First- Break down each process/activity. This creates focus and the esire to make each activity as efficient as possible.
⎯ My client identified the benefit of having a smooth transition between attracting, recruiting and enrolling students. This could be achieved by having just one person dealing with the communication and admin rather than several people.
- Then– Look at the demarcations of activities in terms of staff responsibilities and costs. What is being replicated? Replication is a good indicator of wasted resource (read dollars).
⎯ My client saw the value in developing a handover process for the enrolled student to the
designated teacher, reducing replication with a single point of contact.
- After that – Compare your cost structure to your competitors.
- Ask- What are the opportunities for fine tuning?
⎯ My client’s competitor had a fully integrated IT system and therefore a lower service cost. The need to review this process without investing in expensive technology was identified.
Utilising Activity/Value Chain Analysis proved to be very beneficial to my client. It was a great tool to review their processes and corresponding costs and, best of all, as a direct result an additional $12,000 was added to their annual bottom line.
So yes – Activity/Value Chain Analysis definitely identifies value creation opportunities!