Value Chain Analysis
Business Dictionary defines Value Chain analysis as an "Examination of the value chain of an
enterprise to ascertain how much and at which stage value is added to its goods and/or services,
and how it can be increased to enhance the product differentiation (competitive advantage)."[1]
Value chain analysis focuses on analyzing the internal activities of a business in an effort to
understand costs, locate the activities that add the most value, and differentiate from the
competition. To develop an analysis, Porter's model outlines primary business functions as the
basic areas and activities of inbound logistics, operations, outbound logistics, marketing and
sales, and service. The model also identifies the discrete tasks found in the important support
activities of firm infrastructure, human resources management, technology, and procurement.
The overall goal of value chain analysis it to identify areas and activities that will benefit from
change in order to improve profitability and efficiency. For more on Porter’s value chain model
and a detailed description of the goals, functions, and tasks of a value chain, read The Art of
Value Chain Analysis.[2]
The Formal Elements of Value Chain Analysis[3]
Porter built his value chain analysis model on a manufacturing business – back in 1985 there
were many more around in the United States. He split the value chain into two parts:
· 1. Primary value activities: Primary value activities included:
o Inbound logistics
o Operations
o Outbound logistics
o Marketing & sales
o Customer service
· 2. Support value activities: Support value activities include:
o Procurement
o Technology
o Human resources
o Firm infrastructure
Creating a Value Chain Analysis Chart[4]
A value chain analysis chart can be created in just a few simple steps.
· 1. Inbound logistics. The first step in value chain analysis is to examine inbound
logistical items. Start with a column labeled "Inbound Logistics" and list and
describe all of the systems and processes related to inbound logistics, such as
purchasing systems, transportation, and other production and employee related
activities that may be involved.
· 2. Operations. The second step is to analyze operations. Create a new column to
the right of Logistics and label it "Operations." List and describe the various
operational processes and systems from product development to the finished
state. Items to consider may include raw materials and inventory, including how
they are moved and handled.
· 3. Outbound logistics. Next, focus on outbound logistics. Begin a new column to
the right and label it "Outbound Logistics." Consider the processes and systems
involved in how the finished product ends up in the hands of customers and
clients.
· 4. Sales and Marketing. Consider marketing activities and sales processes. Begin
a new column, adjacent to the third with the label "Sales and Marketing." Record
your analysis of the customer-purchasing experience and the post-purchase
experience and activities.
· 5. Service. Look at the service-related activities of your business. In the fifth and
final column, include analysis related to the various services provided by your
business.
· 6. Underneath each of the columns you'll want to include the foundational
activities of your business layered upon each other. In separate rows, include
analysis that focuses on:
o Administration and Infrastructure
o Human Resources
o Product
o Technology and Development
o Procurement
· 7. Along the right side of the columns and rows, include a delta or triangle shape
that focused on profit: "Value Added - Cost = Margin".
source: SmartSheet
Key Points of Value Chain Analysis[5]
Value Chain Analysis is a useful way of thinking through the ways in which you deliver value to
your customers, and reviewing all of the things you can do to maximize that value. By using
Value Chain Analysis and by following it through to action, you can achieve excellence in the
things that really matter to your customers. Value Chain Analysis takes place as a three stage
process:
· 1. Activity Analysis, where you identify the activities that contribute to the
delivery of your product or service.
· 2. Value Analysis, where you identify the things that your customers value in the
way you conduct each activity, and then work out the changes that are needed.
· 3. Evaluation and Planning, where you decide what changes to make and plan
how you will make them.
Value Chain Analysis is a three-step process[6]
1. Analyze Activities: This step consists of identifying all key activities of a company that are
involved in delivering the final product or service to its customers. A popular way to do this is to
classify activities as either primary or support. Michael Porter identified five primary company
activities:
· Inbound Logistics
· Operations
· Outbound Logistics
· Marketing and Sales
· Service
Primary activities are reinforced by support activities such as procurement, human resource
development, technological development, and infrastructure. The list of activities and each
activity classification may be adjusted by the company, as necessary. For example, inbound and
outbound logistics may not be relevant for purely online businesses. After all activities are
identified, the links between the activities need to be specified. For example, the service
function, which supports customers, will have links to the operations function, which fulfills
customer support requests, and the marketing and sales function, which analyzes customer
feedback to improve offerings. The activities, together with the links between them, form the
structure of the value chain.
2. Analyze Value Created by Those Activities: This step involves identifying where value is
created throughout the chain, and in what form and magnitude. Value always needs to be
explored from a customers point of view. A product feature or service component that does not
benefit the customer does not add any value. Such an activity represents an opportunity for
freeing up resources that could otherwise contribute to adding value through some other activity.
For example, in a manufacturing environment, each manufacturing process that is involved in
changing raw materials into finished product adds value by ensuring that the final product is
functional. Quality assurance activities add value by ensuring that the products meet the
standards required by customers. The sales teams efforts add value by encouraging more