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A Guide to value chain analysis

What is a Value Chain?

The term value chain refers to the various business activities and processes involved in creating a product or performing a service. A value chain can consist of multiple stages of a product or service’s lifecycle, including research and development, sales, and everything in between. The concept was conceived by Harvard Business School Professor Michael Porter in his book The Competitive Advantage: Creating and Sustaining Superior Performance.

Examining the processes that make up a company's value chain can give you a better understanding of what goes into each of its transactions. A company can be better positioned to share more value with consumers while capturing a larger part of the value created at each point in the chain by maximising the value created at each point in the chain.

Understanding how a company generates value can help you gain a better grasp of its competitive edge.

What is Value Chain Analysis?

Value chain analysis is a method of assessing each activity in a company's value chain to determine where improvements might be made.

A value chain analysis forces you to analyse how each step contributes to or detracts from the value of your end product or service. As a result, you may be able to gain a competitive edge, 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

Components of a Value Chain?

According to Porter’s definition, all of the activities that make up a firm's value chain can be split into two categories that contribute to its margin: primary activities and support 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 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 an