It is no longer news that our country is going through a recession which means apart from profitability; the reasons for any business entity to remain as a growing concern is survival and value creation.
In fact, survival comes first at these perilous times. More entrepreneurship, local production and consumption of locally made products have been proffered as one of the surest route to get out of this economic quagmire.
No business can break even or make reasonable profit without value creation. Value relates to the benefit a customer obtains from a product or service. Customers are willing to pay their hard earned monies to obtain goods or services because of the benefits they receive. For instance, if a business entity buys a raw material for N200,000 and converts this into sellable form, which it later sells for N500, 000. It has created value of N300,000.
In a competitive market, the most successful and profitable business entities are those that are most successful in creating value. At these austere times of prioritization, rationed consumption and spending patterns, the only reason why a customer will be willing to pay a higher price than the lowest price in the market is that he sees additional value in the higher priced product, and he is willing to pay more to obtain the value. Creating value for customers will, over the long term, create more value for shareholders who are expecting reasonable returns on the amount they’ve invested in the business.
Finding ways of adding value is a key aspect of strategic management. Answers need to be provided to the following question: Who is the customer? How do we provide value to the customer in the products or services we provide? How can we add to the value that the customer receives? How can we add value more successfully than our competitors? Do we have the requisite core competencies than we can use to give us a competitive advantage?
There can’t be value creation without a value chain which is a series of activities, each of which adds value. The total value added by the business entity is the sum of the value created by each stage along the chain. According to Porter, there is a primary and secondary (support activities) value chain within an entity. The primary activities include inbound logistics, operations, outbound logistics, marketing & sales and service. Inbound logistics deals with the receiving and handling purchased materials and components, and storing them until they are needed. Operations are activities concerned with converting the purchased materials into an item that customer will buy. Outbound logistics relates to activities concerned with the storage of finished goods before sale, and the distribution and delivery. Marketing & sales relates to those activities that occur after the point of sale such as installation, repairs, warranties and maintenance, providing training to the employees of customers and after sales services.
While the secondary activities or support activities include procurement, technology development, human resources management and corporate infrastructure. Support activities are necessary because they provide support to the primary value chain. Every business must look for ways of adding value at each stage in the primary value chain and support activities in order to improve competitiveness.
It is important to recognise that value is added by all the activities on the primary value chain, including logistics. Customers might be willing to pay more for a product or a service if it is delivered to them in a more convenient way. For example, customers might be willing to pay more for household shopping items if the items are delivered to their home, so they do not have to go out to a supermarket or a store to get them. Value can also be added by making it easier for the customer to buy a product, for example, providing a website where customers can make purchase. It can also be added by delivering a service or product more quickly.
The nature of activities in the value chain varies from one industry to another, and there are also differences between the value chain of manufacturers, commercial farmers, retailers and other service industries. For instance, a primary value chain of a service entity can be a secondary value chain component in a manufacturing company. However, the concept of value chain is valid for all types of business entity.
By adding value more successfully, an entity will improve its profitability, by reducing cost or improving sales. You can now see the understanding and building of a smooth and functional value chain process within a business process is of utmost importance.
Adeniyi Bamgboye is a consultant who focuses on accounting, audit, tax and business advisory. He holds an MBA in financial management. He is a member of Association of Certified Chartered Accountants (ACCA)-UK, Institute of Chartered Accountants of Nigeria (ICAN) and the Chartered Institute of Taxation of Nigeria (CITN). Adeniyi Bamgboye can be reached on 08060603156, bamgboyeadeniyi@yahoo.com