Some people claim that Value Creation is a Lame Duck and is an obsolete approach to our nowadays digital world. Well, I am not so sure.
I may be a dinosaur but I do believe that value creation tools are still as valid as they have always been.
What gives me confidence? I am confident because I have used the Activity ChainAnalysis Business Tool to do precisely that: identify and fine tune the value creation process.
So what – give us a specific example? One of the best examples I know: IKEA – the Scandinavian furniture designer that sells products that are simple, practical and at low cost to the consumer. I would estimate that 90% of German households have a least one item from IKEA.
What makes IKEA unique? IKEA develops consistently outstanding products with unique design that fit nicely into the IKEA logistics (flat cartons). The innovative idea that the customer collects the package after purchase and assembles it at home. Although it can be a frustrating experience too!
How do they do it? Constant review of their Activity Chain. The whole economic basis of IKEA’s is focussed on targeted cost. The relentless pursuit of optimising all processes in the company.
“Wasting resources is a mortal sin at Ikea”Ikea founder Ingvar Kamprad
Activity Chain Analysis in action If IKEA encounter a problem in their Activity Chain Analysis, they attack it and turn into an opportunity.
“Solve big problems in small steps”Ingvar Kamprad
A strong focus on cost-optimised manufacturing. Yet they still sell attractive furniture for the mass market. A fine balancing act indeed. IKEA also optimise processes with their suppliers and communicate closely with their customers.
Can I also use Activity Chain Analysis?
Yes, you can. The principles apply to small and big. Manufacturing or service industry. Online or ‘bricks and mortar’. All organisations can benefit from this powerful analytical tool.
Evaluation of Activity Chain Analysis Activity chain analysis reveals the strengths and weaknessesof a particular activity. It provides insight where to focus the company’s resources and more importantly it uncovers new opportunities for differentiation and possible cost advantages over the competition.
Is this tool only for big organisations?
No, certainly not. Any size and any type of organisation can engage this tool and receive valuable insights into their current and future activities.
Is this type of Analysis time consuming? To be honest: it is. Getting the right people together and creating a meaningful analysis does take time. This type of analysis is not a quick fix – however, it is like any other process, if one spendsquality time and energy on this, the outcomes are very useful in terms of rectifying current issues and targeting future opportunities that may have not been sighted without this type of analysis.
How difficult is it to allocate the true costs to an Activity?
The cost allocation to activities is usually the hardest part in reaching a meaningful activity or value chain map. There are a number of issues at play: the access to hard cost data may be difficult (this varies between organisation) and there may be considerable debate how to and where to allocate cost.
This is indeed one of the great benefits of the activity chain analysis: it challenges current thinking, generates different viewpoints and delivers surprising results.
How often does one have to carry out this Activity Analysis?
The good thing is, once the hard work is complete it typically only requires regular reviews and some tweaking. However, I would suggest to embed the findings of the analysis into the company’sDashboard or similar KPI monthly reporting.
This concludes the brief 3-part series on activity/value chain analysis.
Where do you start with a Activity/Value Chain Analysis?
Sketch a detailed picture of the actual process situation – this is indispensable for a meaningful analysis.
A flow diagram provides a graphical representation and is a good starting point – for extensive process modelling there also a number of software programs available such as EPC diagram.
I tend to use a whiteboard and/or paper with my clients to draft up the initial process flow:
Start listing key activities, identify dependencies and overlaps with particular focus on weak or ambiguous spots.
After that you can start and build your activity/value chain in sequential order
Then review the potential for the direct changes to the process, at technical or human level.
In principle, the value aspect is the focus: you may detect unnecessary activities or duplications, which effectively diminish your value chain.
This may a good point-in-time to clarify which business areas are serviced in your own company and which fit better better with external service providers (‘make or buy’ decision).
Core Business Activities
It is vital to really question all areas and to check whether the cost of in-house activities are lower than the external providers. I usually recommend a strict focus on the core areas of the company and ‘pass-on’ any ancillary activities to third parties.
It goes without saying that if and when third party providers are used – an intensive information and communication exchange is required if you wish to strengthen the interfaces between activities rather than weaken them – such as Just-In-Time (JIT) delivery comes to mind.
This is an area where even the best in world have at times big issues.
A carefully conducted value chain analysis is not only beneficial when the company hits the wall – it is extremely useful for a regular review of the internal supply chain and the development of future strategy.
A sound value chain analysis can lead to the identification of advantages (or the lack of) over competitors and provides a checking point how you can improve the market position of your company.
I continue to scratch my head and wonder why this wonderful tool is not used more widely.
Follow me on part 3 next week – then we look at horizontal and vertical activities within the activity/value chain.
There are moments when your business is going to hit the wall – costs getting out of hand, competitors becoming a major nuisance, staff squabbles take your focus and margins are starting to fall. An all too familiar scenario? What can you do?
There is no silver bullet but one tool I always trusted is the old Activity or Value Chain Analysis – a tool often underrated yet it has proven very powerful in my work to date – and it keeps delivering.
Activity/Value Chain Analysis – what is it?
An activity/value chain is a set of interlinked processes – The notion is: each step in the process chain adds a certain amount of value assuming that the input factors produce a higher quality output good.
The analysis simply investigates these interlinked activities/processes within an organisation.
Why and how would you use this tool?
The analysis of in-house processes enables you to pinpoint obstacles of internal interfaces such as waiting and lead times between progress steps or receiving and storing goods.
In order to reduce (usually costly) obstacles and to optimize the process chain, performing a detailed analysis is recommended.
An activity/value chain analysis is particularly suitable as part of a realignment of the internal logistics as this analysis will expose ineffectiveness and inefficiency with brutal clarity.
Why would this help you to control costs and/or be more competitive?
Activity/Value Chain Analysis typically identifies the following:
Identifies strengths and weaknesses → Enhance strengths, eliminate weaknesses
Taps unused potential
Identifies alternative processes or structures
Reduce throughput times
Furthermore it assists with the:
Coordination of the departments or business units
Improved communication between the processes actors
Clearer definition of roles and responsibilities
Activity Chain Analysis considers the contribution that each individual activity and step within the process chain adds to the total process – subsequently the value it delivers to the customer.
This is Part 1 of the series “When your business hits the wall and what you can do about it!”
Join me tomorrow for Part 2 – ‘How do I carry out an Activity/Value Chain Analysis.’
Raise your hand if you said or heard this before? You’re struggling to generate sufficient income, minimise ever increasing costs – and you look across the road – your competitor is just doing fine.
It’s depressing and demoralising and you keep asking yourself: “Why am I doing all this hard work and don’t seem to get any traction?”
According to the leading business magazine Fortune to be ‘outcompeted’ is one of the top reasons that businesses fail. Nothing new there I guess.
You can’t control what the competition is doing
I heard this cry (the competition is killing me) many times during my career in finance and business development.
The competition is killing you – this may be the case or only your perception as in most cases you don’t know how well or badly the competition is doing – usually you don’t have insight into their internal workings to see if they are profitable.
There are a number of options available to improve your own competitive position.
Gain an unfair advantage
You could argue: Who cares what they do as long as I fully understand what I do, do it well and deliver what my customer wants – and indeed you can’t control what your competitors do – however you can control what you do and check: Are my internal business activities/processes as good as they could be?
Well, there is no silver bullet but there is a simple business tool you could use to gain a real unfair advantage over your competition.
Here is the thing: A thorough understanding of your business or operation requires insight of the different stages through which a product or service, and its interlinked activities, pass on from production/creation to consumption or end use.
Setting up the 5-step-process
The below process flow shows the 5-step process to review your internal activities:
How to use the 5-step-process
1 Activity analysis
List the internal business activities you undertake to deliver your product or service to your customer – list your key activities.
Example – education service: connect with student, inform student, enlist student, enroll student, welcome student, orient student and so.
Example – restaurant: order raw foods, deliver raw foods, receive raw foods, store raw foods, retrieve raw foods, prepare raw foods, cook food and so on.
Start in broad steps and ideally use process mapping – this will give everyone a good overview and the ability to contribute.
A good start is also to schedule a brainstorming session with your team and then start the mapping process. Below is the education service mapped: 2 Activity review
Next review each of your activities and identify roadblocks & linkages to other activities in your activity chain. Potential roadblocks are everywhere.
Example – restaurant, e.g. ordering the right quantity at the right for meal plan, order fresh foods every day or twice a week, if so what the storage facility like, are the food prepared in the right order or too late/too early and lose their freshness and so on.
Staying with the education services example: There is indeed a roadblock or obstacle: connecting and enlisting students is difficult especially when dealing with international students like language, different time zones, different way of doing things – there could major roadblocks just connecting and informing students.
Potential solution might be: have website information in multiple languages that prevents students turning away due to lack of understanding. Additionally education services could have contact staff versed in multiple languages.
3 Data linking
After that, link hard data (volumes, units, stock sheets, order forms) to your activities – use any data to start off with. Some data is better than no data at all.
Attach the data to the corresponding process step in the chain.
Example – education service: No. of people/students visiting website, how many of those connect with us, how many students do we enroll and we have data (incl feedback from students) on our enrollment system, how many students turn up on the first second, third etc. days.
Example – restaurant: Data relating to order volumes, deliveries, stock held, repeat orders, different kind of raw foods – does this match what is needed later on for preparation and cooking?
4 Cost linking
Then it’s on to cost linking – linking each activity to your activity costs. This is often the most difficult part due to lack of accessibility to costs or inability to break down cost lumps into chunks that relate to activities. One option is to ask your accountant for assistance or ideally break it down yourself, e.g. take your monthly costs for supplies, payroll, storage, delivery etc. or in the case of education services: online services costs, payroll costs, lease of your building etc.
Put into cost pools and use estimates to allocate to the activities. You can always re-check later on. But do check as you want to make the wrong decisions due to the lack of cost allocations to the right activity.
Use a matrix to summarise:
Next, break it down by student (e.g. 500 students
Cost per student by activity is a good indicator to identify where the real costs are spent and it show sits relative position all the other activity costs. To connect students via website or social media costs
$20 per student and to enrol each students costs a whopping $50. Already food for thought!
Now lean back (not too far) and start to review the activity list/chain, review the quantative data and your cost data. Does it make sense? Any surprises?
Have a break after steps 1 to 4 to give yourself and your team time to think and reflect.
Review with others
Another option is it to present your activity chain to another person (outside your business) and explain it (your accountant, business mentor or partner). Note the feedback: is it easy to follow? Does it fairly reflect your internal business activities? Are the cost allocations reasonable (and add up to the total cost of business)?
Understanding own activities and costs
Understanding your own activities and related costs is like a prerequisite BEFORE thinking about your competition – once you adjusted your internal activities/costs to max efficiency, chances are you become automatically more competitive and a real threat to your completion.
Be Honest with yourself
The key is to rid yourself of the mystery why your business is not performing as well as your competition and apply the above 5-step-process with an unbiased view.
I have yet to see a business that has not any opportunities to improve their performance with the customer in mind.
Speaking of customer: as an additional validation: check if all the activities and cost you identified ALL serve the customer (in our equation example the students) – if they are not, eliminate them or turn them into value add activities, e.g. enrolment staff also conducts the orientation.
The application of the 5-step-process is one way to get on top of your own business activities and ultimately on your competition. There are obviously a number of other components of running a successful business such as cash flow management, debt servicing, personnel management and effective marketing.
However, the 5-step-process provides you with a sound starting point to highlight bottlenecks, obstacles and most of all plenty of opportunities as you keep reviewing your activities and related costs.
I am a numbers nerd. If you’re a business owner struggling for cash flow, mental energy or enough free time to spend with whanau and friends, I’m exactly the person you need.
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