WHAT IS VALUE CHAIN ANALYSIS? Definition, Importance, and Examples

What is Value Chain Analysis
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Are you a small business owner or entrepreneur looking to better understand and improve your company’s processes? You’ve been wondering why certain businesses’ profit margins are higher than their competitors’. How can a business distinguish itself from its rivals and get competitive advantages over them? A key part of creating a competitive strategy is determining how your organization adds value and figuring out how to do it even more effectively. Hence, value chain analysis may provide solutions to all of your questions. A value proposition aids firms in determining what makes them unique and differentiates them from their competition. Nevertheless, how can you tell if your business activities are delivering the most value to your clients while also generating a high profit margin? Together, we can learn more about what a value chain analysis is and how Porter’s model works in this in-depth article that includes examples and explanations.

Let’s get to work……

What is Value Chain Analysis?

Value chain analysis is a process or method of assessing each step in a company’s value chain to identify areas for improvement. To put it another way, the concept of a “value chain” refers to the entire process of creating a product or service, from receiving raw materials to distributing it to customers.

Generally, in the process of value chain analysis, a company defines its major and supporting operations that give value to its final product and then analyzes these activities to cut costs or enhance distinction.

In addition, using value chain analysis, business owners can break down each process their company employs into its component parts. Likewise, individual business processes can be improved using this analysis, allowing the company to gain an advantage in terms of efficiency and profitability.

However, there are several steps in the value chain that a company goes through as it transforms raw materials into finished goods.

Understanding the VCA

A value chain analysis is a process by which a company identifies and assesses the efficiency of its main, secondary, and sub activities. Using a value chain analysis, you can discover the links, dependencies, and patterns in the value chain

This tool is a strategy technique for analyzing internal company operations. Basically, its purpose is to identify which activities are most valuable to the company ( cost advantages and differentiation advantages). And also ones that need improvement to offer a competitive advantage.

In other words, a company’s competitive advantages and drawbacks can be discovered by looking at its internal activities. While differentiation  advantage allows a company to outperform its rivals in all of its operations. On the other hand, through cost advantages, a company in order to gain an advantage over the competition, must reduce the cost of its own internal operations. Besides, a business will be able to generate more profits when it  is able to produce things at a cheaper cost than the market price or to offer better commodities.

Accordingly, four subsidiary functions; procurement and purchasing, human resource management (HRM), technical development (TD), as well as company infrastructure, complete the value chain architecture. While, the basic five functions are: inbound operations, outbound logistics, marketing and sales, and service.

All firms, from sole proprietorships to large corporations, use value chain analysis. This is because you can employ this tool to evaluate and enhance the procedures each and every company is using to carry out its operations.

After completing a value chain analysis, you’ll be able to determine your competitive advantage. Cost advantage and differentiation advantage are generally the two types of competitive advantage available to businesses.

Competitive Advantage

It is which sets you apart from your adversaries that gives you a distinct advantage over them. However, to  get an advantage, you’ll have to have a strong understanding of your target audience. As a result, choosing the  right niche market for introducing or distributing your items is essential if you want to precisely define your business’ target customer and market.

Hence you’ll need to know how your product helps the target market and have a firm grasp on your competitors’ products and services. Gaining a  competitive advantage in value chain analysis, a business typically look at one of two categories or areas; 

#1. Cost Advantages

In order to achieve a cost advantage, the objective is to be the lowest-cost vendor in your sector or market area of expertise. In order to keep their product or service costs low, companies that utilize a low-cost approach excel at operational efficiency and use low-cost materials and resources. McDonald’s and Walmart are two examples of the cost-advantage strategy of value chain analysis.

#2. Differentiation Advantages

As part of the differentiation strategy, to get an advantage in the marketplace, you will need to offer a unique or highly specific product or service. Innovation, research, and development must be a priority for the company. A company’s differentiation strategy must be strong and successful in order to get a higher price for a product or service. Starbucks and Apple are only two examples of companies that might be mentioned when it comes to the differentiation advantage of value chain analysis.

Porter’s Value Chain Analysis

In his book, Competitive Advantage, Harvard Business School professor Michael Porter explains a simple value chain analysis. He devised the value chain analysis, and divided corporate activities into primary and support activities.

In Porter’s explanation, to construct a value chain analysis, it is essential to first identify all of the major and supporting activities. By doing this, your organization will gain an advantage over your competitors. And you’ll also be able to see where your resources are being spent the most efficiently.

An important part of creating a competitive strategy is figuring out how your organization adds value and how to do it even more effectively. In Porter’s seminal 1985 book “Competitive Advantage,”  he originally established the concept of value chain analysis, which he discussed in detail.

Creating value for consumers is the purpose of a value chain, which is a series of operations that a firm performs. Basically, companies can use Porter’s general-purpose value chain analysis to assess all of their activities and determine how they are interconnected. In addition, this tool can help you identify the sources of value for your company. This, is done by appropriately analyzing the value chain activities that drive expenses and profits.

According to Porter’s analysis, a company’s value chain can be broken down into primary and support activities, both of which contribute to the company’s profit margin.

Activities that take inputs, transform them into products and deliver those products to customers are the major ones (primary activities). While the support activities provide a supporting role to the primary activities.  If a corporation is successful in integrating these operations to create a compelling value proposition, the client will be more than willing to pay higher for particular products than it costs to manufacture and distribute, resulting in a bigger profit margin.

Primary Activities

Generally, the physical creation, sales, maintenance, and support of a product or service are all primary activities. Basically, They’re made up of the following:

#1. Inbound Logistics

This has to do with the internally handling and management of resources. In other words, these are all the processes that deal with receiving, storing, and distributing inputs. Your supplier relationships are critical to generating value in this situation.

#2. Operations

Activities and procedures that convert inputs into “outputs.” Or the product or service that the company sells and distributes to clients. These “outputs” are the primary items that a firm can liquidate for a profit by charging a greater price than the cost of materials and manufacture. Your operational systems generate value in this area.

#3. Outbound Logistics

These operations are responsible for getting your product or service to the customer. The process of delivering outputs to clients. Systems for storage, collecting, and distribution to customers are all part of the process. This, however, might be internal or external ( that customers provide) to your company.

#4. Marketing and Sales

These are the methods you employ to persuade customers to buy from you rather than your competition. Here, the value comes from the benefits you provide and how well you explain them.

#5. Service

These are the activities that keep your product or service valuable to your customers after they’ve bought it. Activities such as customer service and product support.

Support Activities.

Just like the primary activities, in order to get an advantage over the competition, supporting actions are also necessary. This may include;

#1. Infrastructure

This includes all of a company’s administrative, financial, and legal frameworks for making strategic decisions and effectively managing its resources. They are the support system as well as functions that foster and maintain a company’s day to day operations.

#2. Human Resources Management

The methods and systems involved in managing employees and employing new ones are all part of human resource management. Typically, excellent personnel can be a competitive advantage for businesses that offer in-person service. This is especially true for such businesses.

#3. Technology Development

These tasks have to do with information management and processing, as well as safeguarding a business’s knowledge base. Generally, a company’s ability to innovate is aided by the advancement of technology. Likewise, a competitive advantage can be gained by boosting efficiency or decreasing manufacturing. This, however, is done at a cost through the application of technology throughout the value chain.

#4. Procurement

Basically, this has to do with the manner in which a company sources suppliers and resources for products. The objective is to discover cost-effective, high-quality supplies for the company.

Applying the Porter’s Value Chain as a Tool of Analysis

 To identify and understand the value chain of your business using Porter’s analysis, you can follow the below steps

#1. Determine the Sub Activities for Each Primary Activity

For each primary action, identify the sub activities that contribute to its success. Sub activities generally comes in three different categories;

  • Direct Activity: This is one that generates value on its own. An example of a direct sub activity in a beer brand company’s marketing and sales activity is making sales calls, bars and or clubhouses, advertising, and selling online.
  • Indirect Activities: Direct activities normally function more smoothly when there are no issues with indirect activities. The management of sales personnel and the maintenance of client records are examples of indirect sub activities in the sales and marketing activities.
  • Quality Assurance: Direct and indirect actions are subject to quality assurance checks to make sure they satisfy the essential requirements. Doing follow-ups as well as checking, rechecking, and making sure every bottle matches customers’ or consumers’ requirements and meets their satisfaction, may be part of the sales and marketing efforts of a known beer brands company.

#2. Each Support Activity should have a list of subactivities.

You should identify sub-activities that provide value to the major activities of Human Resource Management, technology development and procurement support for each of these activities. As an illustration, think about the value that human resource management brings to the many aspects of logistics, such as receiving, processing, and shipping goods.

Once you’re able to do this, the next thing is to identify the various value-creating sub activities in your business framework. For the most part, these will be cross-functional in character, rather than focused on a single principal task. As before, keep an eye out for all kinds of direct, indirect, and quality assurance actions.

See how the value activities you’ve identified are interconnected. It will take some time, but the links are critical to enhancing the value chain framework’s competitive edge. For instance, human resources (HR) investments can have an impact on sales volume. Likewise, a correlation exists between transaction processing and timely delivery and customer support calls from dissatisfied consumers.

#4. Search for Opportunities to Add Value to Your Business.

Examine each of the sub-activities and relationships you’ve found. And consider how you may improve or adjust them to increase the value you provide to clients.

Value Chain Analysis Examples

Basically, there are various examples of businesses creating value for their customers, while also monitoring the value chain analysis among which are Apple, Amazon, Starbucks, McDonalds etc. But we’re going to use Amazon.

Here are a few examples of Amazon’s key activities in technology and e-commerce.

#1. Inbound Logistics

Let’s put it this way, basically, Amazon’s key inputs are products sold through its own fulfillment services and the data center resources that power Amazon Web Services (AWS).

As a massive business, Amazon is able to cut the cost per unit of things it buys from external vendors because of its size.

#2. Operations

This has to do with how Amazon transform its inputs into outputs. Customers and sellers alike benefit from Amazon’s online marketplace, which is at the heart of the company’s main product. A two-day shipping option for Prime members provides a secure, convenient, and user-friendly consumer experience. Especially, one that is far faster than that of its rivals at the same price range.

Customers can use AWS to store apps as well as other content on cloud servers and many other data center resources created and maintained by AWS, another Amazon business entity.

#3. Outbound Logistics

It encompasses Amazon fulfillment facilities, digital delivery, co-sourcing and outsourcing, and brick-and-mortar stores in its outbound logistics network.

Robotics are also working at Amazon’s 109 fulfillment centers to speed up and reduce the cost of warehouse labor. The two-day shipping guarantee offered by Amazon sets them apart from the competition.

As a result of co-sourcing and outsourcing partnerships, Amazon is able to expand its fulfillment operations beyond the limits of its own facilities. It can also offer some services, like Amazon’s online marketplace software and AWS cloud services digitally.

Whole Foods and other Amazon retail locations are examples of brick-and-mortar retailers. Other Amazon functions, such as customer service, are also supported by these physical retail locations. In addition, clients who prefer to get assistance in person will find customer support representatives in these locations.

#4. Sales and Marketing

In 2021,  Amazon will have spent $16.9 billion on marketing and advertising, according to Statista.com. With this kind of financial muscle, Amazon hopes to preserve its position as one of the most known companies in the world.

#5. Service

As part of its goal to be the most customer-centric corporation, Amazon is well-known for the ease and speed with which its AWS cloud services are returned by customers.

Conclusion

The value chain has to do with business operations that go from product conception through delivery. These include everything from design and development to manufacturing, as well as marketing and distributing the commodities. When it comes to manufacturing goods, the value chain begins with the raw materials and extends all the way up to the point of sale to the final customer. Any flaws in these procedures can be identified and corrected through the use of value chain analysis. This, however, results in cost savings as well as higher quality and a shorter time to market.

Porter’s Value chain analysis can help a company change, enhance its products and services. While also strengthening its ties with other businesses and consumers or clients.

Value Chain Analysis FAQs

What is a Value Chain?

The concept of value chain describes the entire process of a company’s actions in creating a product or service, from receiving raw materials to delivering it to customers, and everything else in between.

How can VCA benefit your company?

Having a competitive advantage over your competitors might help you increase earnings and attract new clients. Value chain analysis allows you to assess major and secondary business processes and uncover ways to improve efficiency, provide value, and differentiate yourself from the competition.

What are examples of value chain analysis?

McDonald’s and Walmart are two examples of cost-advantage strategies of value chain analysis. While Starbucks and Apple are only two examples of companies that might be mentioned when it comes to the differentiation advantage of value chain analysis.

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