Value Chain Analysis: Definitions, Methods and Descriptions

What Is 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.

Value chain analysis is a method for visually examining a company’s business operations to determine how the company might gain a competitive edge. Value chain analysis aids a business in comprehending how it adds value and, consequently, how to sell its good or service for a profit over the cost of doing so. In other words, if they are managed effectively, the value produced ought to outweigh the costs associated with managing them. e. Customers should use the business again and freely and voluntarily transact business.

Value chain analysis, which Michael Porter invented in the 1980s, is the idea of value added in the form of a value chain. He proposed dividing an organization’s activities into core and auxiliary activities. According to Porter’s Value Chain Analysis model, activities are divided into primary and supporting activities in the diagram below:

Value Chain Analysis is extensively discussed in the first half of Michael Porter’s 1985 book “Competitive Advantage.” Porter argued that for an organization to truly gain a competitive advantage, all internal activities within the organization that add value to the services and goods the organization produces should be carried out at their highest level. Competitive advantage is the capacity of an organization to implement “generic strategy,” which comprises:

Margin suggests that businesses realize a profit margin that is based on their capacity to manage the connections between all of the value chain’s activities. In other words, the business is able to provide a good or service for which the client is willing to pay more than the total cost of all value-added activities.

A value chain focuses on the processes from the conversion of raw materials into finished goods or services. The discrete activities of a firm and how they interact with one another can reveal the sources of its competitive advantage. The ultimate objectives of value chain analysis are to increase value creation while also keeping an eye on and reducing costs.

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What are the benefits of value chain analysis?

A company benefits from value chain analysis by being able to comprehend how it adds value to customers and to maximize that value at a price higher than the cost to produce and sell its good or service. The objective is to develop a vision that enables the generation of a profit margin and distinguishes the business from its rivals to stay relevant and continue generating future sales. When applied correctly, value chain analysis can help a company increase its profits by producing goods that are less expensive to produce but are so valuable that consumers will pay a higher price for them.

What is value chain analysis?

Value chain analysis is a graphic examination of a company’s operations. Businesses use it to identify the best strategies for gaining a competitive advantage by determining which operations are most beneficial to the business and which ones require improvement.

Cost or differentiation are the two methods for using the value chain analysis to gain a competitive advantage. Cost advantage is the term for competitive pricing or attempting to offer a good or service for less than your rivals while still maximizing your profit. When a business tries to differentiate itself from its rivals by developing an exclusive or superior good or service, it gains a differentiation or specialization advantage.

How to use value chain analysis

There are two methods for performing the value chain analysis, depending on the kind of competitive advantage your company wants to achieve. Before you get started, its important to consider:

After taking those into account, you can finish your value chain analysis using one of these two techniques:

Cost advantage analysis

The following five steps are carried out when using the cost advantage analysis:

A company’s operations include both primary and auxiliary tasks performed to produce goods and services. This step entails identifying and decoupling each activity to gain a thorough understanding of the company’s processes and the work carried out in particular ways to produce and provide clients with valuable products and services.

Descriptions of both primary and support activities include:

This stage of the analysis can help rank each activity according to cost so you can take action to replace or completely eliminate those activities that are being carried out inefficiently. You must allocate a specific price within the overall cost of the product to each activity in order to complete this step. Determine the relative importance of your most expensive activities to the overall process and whether they are improvable first.

Cost drivers cause changes in the cost of an activity. Labor, maintenance, and other variable or fluctuating costs are affected differently depending on the activity due to different cost drivers. You can work to reduce costs by identifying and understanding these influencing or driving factors. In order to offer your goods and services at more affordable prices, you should identify the sources of your company’s overhead and take steps to reduce them.

The quantity of electricity consumed over a predetermined period of time, which determines the total electricity bill, is one example of a cost driver. The number of units qualifies as the cost driver. Other examples include:

If you change something for one activity, it might have an impact on other activities as well. These changes can be positive or negative; for example, cutting costs for one activity may result in cost reductions for other activities, but it may also have the opposite effect. Knowing how activities are connected can help you make the best choices possible regarding how to maximize cost reductions.

You can develop a plan to improve your ineffective activities after identifying your cost drivers. The strategy you develop depends on the activities you decide to prioritize. If an activity costs more than it should, you can choose new ways to do it or, if it is not crucial to the overall production process, you can decide to do away with it entirely.

If it will have a favorable impact, you can also decide to alter a related activity that costs more. For instance, instead of cutting wages, implementing layoffs, or outsourcing work at lower costs because labor costs are high and increasing the cost of a product, you might choose to find a way to speed up production or automate some production processes.

Differentiation advantage analysis

For the differentiation advantage analysis, you use these three steps:

This step requires a business to list all of its value chain activities before determining which ones produce the most value for customers. The chosen activities must differentiate the business from competing businesses. Even though you might provide comparable goods or services, this step will help you concentrate on what you do better than your rivals.

Here, you can generate and consider various ideas for improving your product’s specialization or differentiation in order to increase customer value. Depending on the type of company, products, and services offered, there are various ways to complete this step.

Presenting supplementary features or complementary goods or services, building strong brand recognition, sophistication, and loyalty, and improving personalized customer service are all strategies to take into consideration. An illustration would be a retail outlet that provides comparable clothing options to a number of nearby competitors, but chooses to use personal shoppers to differentiate their customers’ experience.

Whatever approach you decide on, it must be long-lasting or able to be maintained over time. Combining the top initiatives and tactics will enable your business to offer better goods, services, or advantages that will increase customer value and allow for higher prices.

FAQ

What are the 5 primary activities of a value chain?

Businesses can evaluate their operations and look for competitive opportunities by finishing a value chain analysis. For instance, McDonald’s mission is to offer customers affordable food options.

What is value chain analysis What are the steps in value chain analysis?

The value chain framework is made up of four secondary activities, procurement and purchasing, human resource management, technological development, and business infrastructure, in addition to five primary activities: inbound operations, operations, outbound logistics, marketing and sales, and service.

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