What is Value Chain Analysis? - The in-depth Guide
Value Chain Analysis Basic Definition
The theory is popular in business field and was first pointed out by Harvard Business School professor Michael Porter in 1985. To better understand value chain analysis, Let's breakdown the concept into the following parts:
- Value is the profit margin that created and captured by an organization. Margin in this case equals Value (total revenue) minus Cost.
- Value chain shows the full process of internal activities for a firm to transforming inputs (money, labour, materials etc.) into final goods or services.
- Value chain analysis therefore is the analysis of a series of value chains for organizations to find out activities that add value to its final product or service in order to gain more competitive advantages including cost leadership and high degree of product differentiation.
Here you can see a value chain analysis example in the public products sector with a series of activities including channel management and distribution management. You can click on it to see more details.
Main Value Chain Analysis Activities
In reality, firms may undertake thousands of activities in producing goods or services. According to Porter, all of these activities can be put into two general common groups: the primary activities and the support activities. Companies can gain more profit if combing these two activities efficiently. Porter's theory can be drawn as a diagram below:
These activities have direct relationship with creating and delivering a product, and they are usually considered as the main source of cost advantage where costs can be quickly found. Primary activities have five sub-categories:
- Inbound logistics refers to the receive, storage and distribution of raw resources during the production process. Here supplier relationships plays an important role.
- Operations is the process (assembling, packaging etc.) at which the raw resources are turned into the final service or product. At this stage value is added to the product through the production line.
- Outbound logistics is the distribution of the final product to consumers, wholesalers or retailers etc. At this stage your operational systems create value.
- Marketing and sales including activities such as advertising, promoting, selling, analyzing market and pricing the final product to ensure it is targeted to the appropriate consumer groups. The key aim is to make your customer groups aware of the product in order to create demand for it. At this stage, you should focus on consumer relationship management.
- Service refers to the activities (warranty and ater-sale services etc.) needed to improve or maintain your service's or product's performance after ordering.
Organizations usually use support activities with the primary activities to gain profit. Support activities also used as the most key source of differentiation advantage. Furthermore, each support activity can be used in each primary activity. There are four main sub-groups of support activities as shown below:
- Infrastructure refers to organizational management, risk management, accounting, legal, and quality-control mechanisms for productive daily operations. Inefficient infrastructures would lead to the waste of organizational resources and a lower level of productivity.
- Human resource management mainly refer to hire, train, compensate, and retain proper professional employees. In service sectors where face-to-face interactions commonly exist, employees can be the competitive advantages of their firms.
- Procurement is how the raw resources (machinery items etc.) for the product or service are obtained. Procurement normally involves finding vendors, managing suppliers' relationships, and negotiations based on agreements. The biggest challenge for purchasing is to get suitable quality at the best price according to the budget.
- Technology is used by firms in many ways to research, design, improve and develop new production and reduce cost. In modern times, technical development may require high level of expenditure and long time, but organizations can therefore enjoy long-term benefits and gain more values.
Any Value Chain Analysis Usages?
Value chain analysis can be used in nearly all fields and industries including manufacturing (automobiles etc.), trade, retail (supermarkets etc.), logistic, finance (online banking etc.). So far, many world top 500 companies, such as FedEx, Toyota, Walmart and Nestle etc., integrate the basic value chain analysis models for the changing market demand. Here is an example of value chain analysis in the finance sector (click on the image to see more).
Some other noticeable usages of value chain analysis are:
- Food Sector - coffee beans; the use of agri-food value chains in developing countries and areas such as India, Kenya and Latin America; help farmers to operate profitable products in the long term.
- IT - software development etc. Developers can use value chain analysis model to identify the problems of online order tracking, system programme testing and so on.
- Public Sector - international enterprise use value chain analysis models to improve rural development and worldwide sustainable development by working with local governments and some other non-profit organizations.
How to Use the Value Chain Analysis Model?
Cost advantage and differentiation advantage are two key approaches for undertaking a value chain analysis for a whole producing line or process.
This method is used when firms want to analyze the sources of their cost advantages, and the factors that drive these costs. A typical cost advantage approach has the following five steps:
1. Find out the organization's primary and support activities by deeply looking into capabilities of the organization (e.g. direct-selling activities and indirect-selling activities).
2. Break down the total costs of producing a product or service and assign to each activity.
3. Explore cost drivers for each activity (economics of scale, organizational policies, location, and labor-intensive activities etc.).
4. Analyze the relationships between different activities (e.g. the reason of cost reduction).
5. Find out any breakpoints to reduce costs (e.g. outsourcing).
This method is used when organizations want to create superior products or services compared to their competitors in the market. A general differentiation advantage has the following three steps:
1. Find out the customers' value-generating activities, for example, the outstanding product functions by a leading company.
2. Integrate strategies (e.g. competitor analysis, human resource management, technology innovation, customer relationship management) to improve user experience, customer service and more.
3. Look for the best sustainable choice of product/service differentiation and achieve them in a step-by-step way.
Further Value Chain Analysis Tips
Here are some tips to overcome challenges:
- Communication - Listen to and gain feedback from a wide range of roles, for example, team members, staff from other departments, loyalty customers, stakeholders and so on.
- Use Supportive Tools - Try to use Gantt charts, timelines, brainstorming skills, flowcharts or mind maps to improve your work productivity, make flexible time tables and visualize all of your ideas.
- Data Collection - Leave more time for gathering data for your value chains. The process could be labor or time-intensive.
More Free Value Chain Analysis Templates
Free download templates are available below to help your team determine and analyze value chains in different sectors. Click on any of these to see more details.
|Academic Research VCA Template||New Media VCA Template||Profit VCA Template|
Create Easy Value Chain Diagrams with Edraw Max
Creating an in-depth value chain analysis diagram with the easy yet professional Edraw Max to collaborate and share your work on Edraw team cloud with your stakeholders, business partners, and team members. Quickly generate a list of all your primary and supportive activities and draw your diagram with the rich preset themes. Easily format your diagram by adding more supportive materials including attachments and comments on the drag-and-drop user interface. Once finished your work, feel free to export to a wide range of formats including MS Visio, PDF, Graphics and more. Click on the Download PC Version or Mac Version to start your creation right away!