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 and planning
How to conduct a Value Chain Analysis?
Identify Value Chain Activities
The first step in conducting a value chain analysis is to understand all of the primary and secondary activities that go into a product or service’s creation. If a company sells multiple products or services, it’s important to perform this process for each one
Determine the Cost and Value of Activities
After identifying the primary and secondary operations, the next step is to assess the value that each activity brings to the process, as well as the associated expenses. It's critical to comprehend the prices linked with each stage of the procedure. Depending on the situation, you may discover that cutting costs is a simple method to increase the value of each transaction
Identify Opportunities for Competitive Advantage
Once you’ve compiled your value chain and understand the cost and value associated with each step, you can analyze it through the lens of whatever competitive advantage you’re trying to achieve. Using value chain analysis, you can uncover several opportunities for your firm, which can prove difficult to prioritize. It’s typically best to begin with improvements that take the least effort but offer the greatest return on investment.
Example - McDonald's Value Chain Analysis
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