Introduction to the value chain
The objective of this post is for you to get acquainted with what a value chain is, how we can price each of the steps of the value chain, and how this is a tool you should have in your toolbox for negotiations.
What is a Value Chain?
Understanding the Value Chain: From Production to Consumption
The Value Chain is a critical concept in business, particularly in the export sector. It refers to the series of steps and processes that a product undergoes from its initial production at the manufacturing plant to its final placement on a store shelf for consumer purchase.
Breaking Down a Simple Value Chain
In an export-oriented Value Chain, the main actors typically include the producer, importer, distributor, retailer, and consumer. Each participant in the Value Chain plays a distinct role in moving the product closer to the consumer. As the product progresses through each stage, value is added – reflected in the price structure, which is a crucial element in understanding the Value Chain.
Price Structure: A Lens for Analyzing Value Creation
The price structure within the Value Chain is more than just a list of costs; it’s a framework that helps identify which participants are adding value and how much of that value they retain. This analysis is crucial for strategic decision-making, especially when negotiating with customers, benchmarking against competitors, and understanding the impact of pricing decisions on the final shelf price.
Strategic Importance in the Export Business
In the export business, analyzing the Value Chain is essential. It provides insights into how value is created and distributed among different stakeholders. This understanding is vital for setting competitive prices, ensuring profitability, and making informed decisions that affect the entire chain, from the producer to the end consumer.
The price structure
Maximizing Benefits Through Price Structure Analysis in the Value Chain
- Understanding Market Positioning: From the producer’s perspective, a price structure helps understand the final consumer price, offering insights into market positioning. This understanding is crucial for targeting specific price points, mainly if the goal is to align with specific market segments. Producers can then reverse-engineer their prices (EXW or FOB) accordingly.
- Cost of Distribution Insights: Analyzing the price structure reveals the distribution cost. This is vital for businesses that aren’t vertically integrated and depend on third parties to reach consumers. Understanding these costs helps evaluate how much value these intermediaries add and how they impact the overall Value Chain.
- Effective Margin Management: Businesses can determine appropriate margins for third-party players by analyzing billing and brand costs. This analysis considers the effort these players require in specific markets, ensuring that the margins paid are justifiable and aligned with the value provided.
- Profit and Loss Management: Knowing the consumer price helps manage the profit and loss (P&L). Businesses can assess profitability at different price levels, understanding the direct impact on their P&L. This level of insight is essential for sustainable business operations.
- ‘What-If’ Scenario Modeling for Distribution Negotiations: Utilizing a price structure for ‘what-if’ scenarios aids distribution negotiations with wholesalers, importers, or retailers. It clearly shows where consumer prices may land and what margins are acceptable at each Value Chain stage.
Applying Price Structure Analysis: A Practical Example
To illustrate these benefits, let’s delve into a simplified example of a price structure. This will show how it functions in a real-world context and how you can leverage it for strategic decision-making in your business.
Our Price Stricture model
As anticipated, our Excel file consists of two separate in-panel approaches. We are first looking at the price structure from the producer to the market. So from our own, the EXW or FOB price towards the values players will distribute, buy, and sell the products in the market and deliver them to the consumers. You can download the file here.
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Value chain analysis is a helpful tool for working out how you can create the most significant possible value.
Value chain analysis is a helpful tool for working out how you can create the most significant possible value for your customers, the customers of their customers, and your company. It helps you to benchmark that with your competitors.
It’s also a good way of understanding what drives these different parts of your business and allows you to adjust or change them if necessary.
In business, we often talk about “value-added” – in other words, the added value that your company brings to its products or services to differentiate itself from its competitors. One way to think about this is through a value chain analysis, which allows you to identify the parts of your business that add the most value for customers.
We can do this individually if you want to know if a particular channel is valuable for your business and whether it adds value to your route to market.
Value chain analysis is a powerful tool that can help any business to improve its operations and analyze its domestic and international commercial efforts. It allows you to measure which actors in the chain create and grab the most value, assessing the overall “distribution costs.” Furthermore, when viewed through the lens of a price structure – it’s a helpful framework for negotiating with agents, distributors, and partners.