Value Chain Analysis

Unit 2

This Photo by Unknown author is licensed under CC BY-SA-NC.

Meaning and Purpose of value
chain analysis
Value chain analysis allows the firm to understand the parts
of its operations that create value and those that do not.
Understanding these issues is important because the firm
earns above-average returns only when the value it creates
is greater than the costs incurred to create that value. The
value chain is a template that firms use to analyze their cost
position and identify the multiple means that can be used
to facilitate implementation of a chosen strategy. Today’s
competitive landscape demands that firms examine their
value chains in a global rather than a domestic-only context.
In particular, the activities associated with supply chains
should be studied within a global context.
 Value Chain Analysis
• Value chain analysis is a means of evaluating each of the activities in a company’s value chain to understand
where opportunities for improvement lie.

• Conducting a value chain analysis prompts you to consider how each step adds or subtracts value from your final
product or service. This, in turn, can help you realize some form of competitive advantage, such as:

• Cost reduction, by making each activity in the value chain more efficient and, therefore, less expensive

• Product differentiation, by investing more time and resources into activities like research and development,
design, or marketing that can help your product stand out

• Typically, increasing the performance of one of the four secondary activities can benefit at least one of the
primary activities.
 Purpose of Value Chain Analysis
• Value chain analysis is essential for businesses to understand the sequence of activities required to deliver a product or service.

• In addition to optimizing budgets and establishing competitive advantage, businesses can also use value chain analysis for:

• Supply chain management: Value chain analysis provides insights into how each component of the supply chain adds value to the
final product or service, which can lead to better supplier coordination and logistics management.

• Strategic decision-making: Because the value chain provides an overview of the company's operations and interactions with
external stakeholders, you can use it to help inform strategic decisions regarding partnerships, outsourcing, product development,
and market expansion strategies.

• Improving customer satisfaction: Insights gained from conducting a value chain analysis can be used to enhance the quality of your
product and customer service, which can lead to higher customer satisfaction and loyalty.

• Innovation and development: The value chain can also highlight opportunities for innovation like improving existing processes or
identifying new ways in which your product can provide value to the consumer.

• Environmental and social impact: Additionally, value chain analysis can be used to assess a company's operations' environmental
and social impacts, which can help businesses adopt more sustainable practices and reduce their environmental footprint.
A model of a Value Chain
Components of a Value Chain
As depicted in the model, a firm’s value chain is segmented into value
chain activities and support functions. Value chain activities are activities
or tasks the firm completes in order to produce products and then sell,
distribute, and service those products in ways that create value for
customers. Support functions include the activities or tasks the firm
completes in order to support the work being done to produce, sell,
distribute, and service the products the firm is producing. A firm can
develop a capability and/or a core competence in any of the value chain
activities and in any of the support functions. When it does so, it has
established an ability to create value for customers. In fact, as shown in
the model, customers are the ones firms seek to serve when using value
chain analysis to identify their capabilities and core competencies. When
using their unique core competencies to create unique value for
customers that competitors cannot duplicate, firms have established one
or more competitive advantages.
Model of Value Chain
activities
Model of Support
activities
 Primary Activities
• Primary activities are those that go directly into the creation of a product or the execution of a service,
including:

• Inbound logistics: Activities related to receiving, warehousing, and inventory management of source materials
and components

• Operations: Activities related to turning raw materials and components into a finished product

• Outbound logistics: Activities related to distribution, including packaging, sorting, and shipping

• Marketing and sales: Activities related to the marketing and sale of a product or service, including promotion,
advertising, and pricing strategy

• After-sales services: Activities that take place after a sale has been finalized, including installation, training,
quality assurance, repair, and customer service
 Secondary Activities
• Secondary activities help primary activities become more efficient—effectively creating a
competitive advantage—and are broken down into:

• Procurement: Activities related to the sourcing of raw materials, components, equipment,

and services

• Technological development: Activities related to research and development, including

product design, market research, and process development

• Human resources management: Activities related to the recruitment, hiring, training,

development, retention, and compensation of employees

• Infrastructure: Activities related to the company’s overhead and management, including

financing and planning
Steps in Value Chain Analysis
1. Identify Value Chain Activities
The first step in conducting a value chain analysis is to understand all of the primary and secondary activities that go into your product
or service’s creation. If your company sells multiple products or services, it’s important to perform this process for each one.

2. Determine Activities' Values and Costs

Once the primary and secondary activities have been identified, the next step is to determine the value that each business activity adds
to the process, along with the costs involved.

When thinking about the value created by activities, ask yourself: How does each increase the end user’s satisfaction or enjoyment?
How does it create value for my firm? For example, does constructing the product out of certain materials make it more durable or
luxurious for the user? Does including a certain feature make it more likely your firm will benefit from network effects and increased
business?

Similarly, it’s important to understand the costs associated with each step in the process. Depending on your situation, you may find
that lowering expenses is an easy way to improve the value each transaction provides.
3. Identify Competitive Advantage Opportunities
Once you’ve compiled your value chain and understand the cost and value associated with each step, you can analyze it through the lens
of whatever competitive advantage you’re trying to achieve.

For example, if your primary goal is to reduce your firm’s costs, you should evaluate each piece of your value chain through the lens of
reducing expenses. Which steps could be more efficient? Are there any that don’t create significant value and could be outsourced or
eliminated to substantially reduce costs?

Similarly, if your primary goal is to achieve product differentiation, which parts of your value chain offer the best opportunity to realize
that goal? Would the value created justify the investment of additional resources?

Using value chain analysis, you can uncover several opportunities for your firm, which can prove difficult to prioritize. It’s typically best
to begin with improvements that take the least effort but offer the greatest return on investment.
Thank You