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What is Value Chain Analysis? - The in-depth Guide

See this article for all the essential information you need to understand and undertake your value chain analysis. Feel free to create your own value chain diagrams with more free templates and the handy diagram software.

Contents

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:

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.

public products value chain analysis template

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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:

porter value chain analysis model

Primary Activities

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:

Support Activities

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:

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).

finance value chain analysis template

Some other noticeable usages of value chain analysis are:

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.

Cost Advantage

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).

Differentiation Advantage

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:

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 value chain diagram new media value chain template profit value chain template
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!

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