SUMMARY

The idea of a value chain was first suggested by Michael Porter (1985) to depict how customer value accumulates
along a chain of activities that lead to an end product or service. Porter describes the value chain as the internal
processes or activities a company performs “to design, produce, market, deliver and support its product.”
Primary Activities
primary activities are the processes that are directly involved in the production and sales of the products, from
physically creating the product to providing aftermarket services and support.
● Inbound Logistics : This section includes all activities related to inventory handling for incoming raw
materials and parts, from receiving in the warehouse to issuing the inventory to production.
● Operations : These activities encompass the production process itself, covering every aspect of turning all the
inputs to the final product.
● Outbound Logistics : This group includes activities related to collecting the finished goods from production,
storing them, and dispatching orders to clients. This section covers all processes that physically get the
product to the customer.
● Sales and Marketing : These are all activities for finding potential clients, introducing the product, and
enticing new customers to purchase it. The group includes running ads and promotions, pricing, quoting,
sales, and others.
● Services : All activities engaged with improving or maintaining the product’s value for the customer after the
sale fall in this section. These may include installations, training, support, repairs, warranty replacement, and
others.
Supporting Activities
The supporting activities go across the primary ones to support and organize their function and communication with
each other. These can either be associated with a specific primary activity or contribute to the whole value chain.
● Firm Infrastructure : Here activities is for general management, planning, finance and accounting, analysis,
legal, quality control, and others.
● Human Resources Management : This group consists of activities like recruiting, hiring, development,
training, assessment, and firing of employees. Human resources management has a tight connection to the
competitive advantages of the company through the aim to hire, train, and keep the best people.
● Technology Development : These are activities that have to do with developing internal technologies.
● Procurement : All activities related to the purchase of inputs are in this section. It is essential to separate
purchasing from handling of the inputs, which is outside the Procurement activities. The activities cover all
inputs for the company, not just those required for Operations activities.
Competitive Advantage
The idea of the Value Chain Analysis is to achieve one of two things to increase margins:
● Cost advantage – perform activities cheaper than the competition
● Differentiation advantage – do activities in a manner to get a superior final product.
The way that the value chain approach helps organizations assess competitive advantage is through the following
types of analysis:
Internal cost analysis : We perform such analysis in companies that aim to compete on costs. The goal is to understand
the sources of the costs and the drivers behind them. Such companies are Tesco, Ford, Burger King, and others. The
process consists of five steps :
Step 1. Identify the firm’s primary and support activities : We need to make sure we identify and separate the
procedures. Doing so requires good knowledge of the company and its business operations and the links between the
activities within.
Step 2. Calculate the relative importance of each activity in the total cost of the product : We have to analyze the total
cost of production or provision of service and break them down so that we can assign them to the separate activities.
Those with higher costs or performed inefficiently, when compared to competitors, are the ones we will address first.
Step 3. Identify the cost drivers for each activity : We need to know what are the drivers behind each cost so that we
can improve them. We have to remember that different processes have different cost drivers. For example, labor-
intensive processes will most likely be driven by work hours, wage rates, or others.
Step 4. Identify links between activities : It is crucial that we correctly identify the links within the Value Chain
because some cost-reductions might lead to increased costs in other activities. We need to be aware and look synergies
where optimizations in one procedure can also lead to optimizations in other ones.
Step 5. Identify cost-reduction opportunities : Once we know the cost drivers and have identified the company’s
inefficiencies, we can start planning improvements.
Internal Differentiation Analysis : The process of performing a Value Chain Analysis looks differently when the
company aims for a differentiation advantage. These advantages come from introducing additional features and
creating a superior product.
Step 1. Identify the value-creating activities : In this step, we identify the activities that create the most value for the
customer.
Step 2. Evaluate strategies to improve value for the customer : In this step, we evaluate a variety of strategies to helps
us improve customer value. The most common of those are: product features; Better customer support;
Complementary products; Optimization choices.
Step 3. Identify the most sustainable differentiation : To achieve and maintain a competitive differentiation advantage,
we will usually implement many strategies in various activities.
Vertical linkage analysis : Vertical linkage analysis is a much broader application of internal cost and differentiation
analysis that includes all upstream and downstream value-creating processes throughout the industry.Vertical linkage
analysis considers all links from the source of raw materials to the disposal and/or recycling of the product. Vertical
linkage analysis includes the following steps:
Step 1. identify the industry’s value chain and assign costs, revenues and assets to value-creating processes;
Step 2. the cost drivers for each value-creating process
Step 3. evaluate the opportunities for sustainable competitive advantage.
Value chain analysis requires a strategic framework or focus for organizing internal and external information, for
analyzing information, and for summarizing findings and recommendations. Because value chain analysis is still
evolving, no uniform practices have yet been established. However, borrowing recent concepts from strategists and
organization experts, three useful strategic frameworks for value chain analysis are:
structure analysis : Michael Porter (1980, 1985) developed the five forces model as a way to organize information
about an industry structure to evaluate its potential attractiveness. The framework for the Five Forces Analysis
consists of these competitive forces:
1. Industry rivalry (degree of competition among existing firms)—intense competition leads to reduced profit
potential for companies in the same industry
2. Threat of substitutes (products or services)—availability of substitute products will limit your ability to raise
prices
3. Bargaining power of buyers—powerful buyers have a significant impact on prices
4. Bargaining power of suppliers—powerful suppliers can demand premium prices and limit your profit
5. Barriers to entry (threat of new entrants)—act as a deterrent against new competitors
core competencies : Core competencies are created by superior integration of technological, physical and human
resources. Core competencies are the connective tissue that holds together a portfolio of seemingly diverse businesses.
A core competence is identified by the following tests:
● Can it be leveraged?—does it provide potential access to a wide variety of markets?
● Does it enhance customer value?—does it make a significant contribution to the perceived customer benefits
of the end product?
● Can it be imitated?—does it reduce the threat of imitation by competitors?
For Applying the value chain approach to core competencies for competitive advantage includes the following steps:
 ● validate core competencies in current businesses
● export or leverage core competencies to the value chains of other existing businesses
● use core competencies to reconfigure the value chains of existing businesses
● use core competencies to create new value chains
segmentation analysis : Using the value chain approach for segmentation analysis, Grant (1991) recommended five
steps
1. Identify segmentation variables and categories : There may be literally millions of ways to divide up the market into
segments. Typically, an analysis considers between five to ten segmentation variables. These variables are evaluated
on the basis of their ability to identify segments for which different competitive strategies are (or should be) pursued.
The selection of the most useful segment-defining variables is rarely obvious. Industries may be subdivided by
product lines, type of customer, channels of distribution and region/geography. Segmenting by competitor is useful
because it frequently leads to a well-defined strategy and a strong position.
2. Construct a segmentation matrix : After customer and product related variables have been selected for identifying
different segments, a segmentation matrix can be developed. Two or more dimensions may be used to partition an
industry.
3. segment attractiveness : Competitive assessments using industry structure analysis or core competencies analysis
can also be used to evaluate the profitability of different segments. However, the competitive focus shifts to an
analysis of the different segments.
4. Identify key success factors for each segment : Quality, delivery, customer satisfaction, market share, profitability
and return on investment are common measures of corporate success. In this regard, each segment must be assessed
using the most appropriate key success factors. Cost and differentiation advantages should be highlighted by these
measures.
5. Analyse attractiveness of broad versus narrow segment scope : A wide choice of segments for an industry requires
careful matching of a firm’s resources with the market. The competitive advantage of each segment may be identified
in terms of low cost and/or differentiation.
Value chain analysis is neither an exact science nor is it easy. There are several limitations to the implementation and
interpretation of value chain analysis. First, the internal data on costs, revenues and assets used for value chain
analysis are derived from one period’s financial information. Finding the costs, revenues and assets for each value
chain activity sometimes presents serious difficulties. There is much experimentation underway that may provide
better approaches. Having at least one firm operate in each value chain activity helps identify external prices for goods
and services transferred between value chains. Despite the calculational difficulties, experience indicates that
performing value chain analysis can yield firms invaluable information on their competitive situation, cost structure,
and linkages with suppliers and customers.
There are several challenge for manager on value chain analysis :
1. recognize that the traditional, functional, internally oriented information system is inadequate for the firm engaged
in global competition.
2. bring the importance of customer value to the forefront of managements’ strategic thinking.