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With every passing day, the environment of competition for businesses and organizations, irrespective of their size or industry, grows more and more challenging. On top of this, rapid technological progress has speeded up the designing and building processes for businesses. A thorough business analysis process would point to these truths. An organization can now build a network, respond speedily to changing customer needs, sell across several channels and reduce expenditure with the simple act of outsourcing work.
It’s these factors that give certain businesses a competitive advantage over others. This competitive edge can help a business provide value to their customers at prices that are the same as or lower than those of their competitors. How does an organization gain this advantage? This is where value chain analysis comes in.
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What Is Value Chain Analysis?
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Porter’s Value Chain Model: What Is It?
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Activities Of The Value Chain Model
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Value Chain Analysis Approaches
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Value Chain Analysis Examples
What Is Value Chain Analysis?
Simply put, a value chain analysis is a process used by a business to correctly identify the primary and secondary activities that enhance the value of its final product, and then examine those activities with the view of cutting costs or increasing differentiation. But before we delve into this further, it’s first important to look at what a value chain model is, as it’ll help us better understand the concept of value chain analysis.
A value chain model essentially comprises all of the business activities required to make a product from start to finish. These components would include design, production and distribution, among others. The term “value chain model” was coined by Michael Porter in 1985 in his seminal book, Competitive Advantage: Creating and Sustaining Superior Performance, in which he examined the competitive advantage enjoyed by big corporations across a large cross-section of businesses. Since then, Porter’s value chain model, often called the five forces model, has been an instrument used by several companies to create and hold on to significant competitive advantages.
This brings us back to the question, “what is value chain analysis?” As mentioned earlier, a value chain analysis provides businesses with a visual map of their primary and secondary activities, thereby helping them identify areas for cost-cutting. In other words, it’s the process of examining the activities a business undertook to deliver a valuable product or service to its client base. It would be helpful to examine this process through the lens of Porter’s value chain. Let’s take a closer look at Porter’s value chain model.
Porter’s Value Chain Model: What Is It?
It’s been established that a value chain analysis helps determine whether the value provided to the customer by each activity exceeds the cost incurred by the business when it carries out that activity. As such, it’s a great way for an organization to figure out how it can create optimal value for its customers.
According to Porter’s value chain model, giving customers a greater level of value in a product results in a competitive advantage and higher profits for a business. In Porter’s value chain analysis lie the answers to several important questions. For instance, how do some organizations become more profitable than their rivals in the market? How do they gain a competitive advantage over their competitors? Porter’s value chain prioritizes activities and systems that are geared toward customers as the focal point, as opposed to training a lens on corporate departments and expenditure. In this way, Porter’s value chain analysis uncovers modes of creating and losing value that may have been overlooked on account of corporate silos. “A company’s competitive advantage cannot be seen from the perspective of the entire enterprise as a whole,” he’d said, “it stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation.”
Now that we’ve looked at the value chain model and its analysis, it would be helpful to examine the kind of activities that would comprise Porter’s value chain. Let’s take a look.
Activities Of The Value Chain Model
Porter’s value chain puts such activities into primary and secondary categories. While primary activities involve the core work required to create and deliver a product to customers, secondary activities are carried out in support of the primary activities. Some key primary activities are:
- Inbound Logistics: These include all supplier-related processes and are geared towards receiving, storing and distributing raw materials
- Operations: These activities involve steps that add the value required to transform the raw materials into the finished products and services
- Outbound Logistics: Under this category come all the activities a business undertakes to collect, store and disseminate the product to customers
- Marketing and Sales: These are measures undertaken to make the target audience aware of the product, engage and attract buyers and boost the sales process. This category involves activities like product development, pricing and promotions
- Customer Service: This is a crucial action, and includes factors like installation, maintenance, warranty response and repairs. Such after-sales services are imperative to ensure customer loyalty after the product is sold
While it’s believed that secondary activities just play a supportive role to primary activities, in Porter’s value chain they’re often far more important than they’re given credit for. Some secondary activities involve:
- Procurement: A crucial stage that involves sourcing and acquiring inputs or raw materials, handling supplier relationships and discussing costs. This step would ideally be a part of the inbound logistics and operations part of the primary activities
- HR: This stage is an ongoing one, and deals with everything from hiring, onboarding, remunerating and letting go of people who design, create and market the product
- Technology: This involves the handling of all equipment and the knowledge of hardware, software and procedures. It also involves the technical know-how required to design and create the product
- Infrastructure: This secondary category involves functions like accounting, finance, government relations, legal affairs and quality assurance
Having delved into the activities that bear the scrutiny of a value chain analysis process, it would help to shift the focus to the different ways in which a value chain analysis can be carried out. Let’s take a look.
Value Chain Analysis Approaches
Two main approaches to conducting a value chain analysis exist. One focuses on the cost advantage to the business, while the other prioritizes differentiation advantage. Let’s look at both.
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Cost Advantage
It’s imperative for businesses that focus on expenses to pinpoint the cost drivers for every activity, including input materials, labor and manufacturing. The next step is to closely examine the links between the activities to understand what to change. For example, expenditure on labor can be cut down with the help of further. Expensive secondary activities such as logistics can be outsourced; by doing so, businesses can almost entirely do away with spending on warehousing and transportation.
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Differentiation Advantage
Other businesses focus on factors like product exclusivity or outstanding customer service to give customers more value. For them, the key is to figure out the services that clients would covet and be willing to pay for. For instance, an artisanal chocolate business could focus on using healthier ingredients in its products.
Now that we’ve covered the varying approaches with which a value chain analysis could be conducted, it would be interesting to turn our attention to a value chain analysis example or two. Let’s proceed.
Value Chain Analysis Examples
Porter’s value chain continues to serve as a handy strategy across industries. However, as businesses expand and gain more social awareness, they tend to approach value chains in the light of more specific requirements. For instance, the World Bank uses international value chains to get help for impoverished nations from governments across the world. What are some other examples?
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Starbucks
The American coffeehouse chain gained its competitive edge by sourcing top-quality coffee beans, providing great service, fostering customer loyalty and innovatively marketing the brand.
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FedEx
With an eye on growing both market share and customer loyalty, the American transportation conglomerate focuses on upgrading infrastructure, employee development and outstanding HR initiatives.
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Walmart
The retail corporation is known to carry out value chain analysis all the time in a bid to keep prices low for buyers. They do this by constant supplier evaluation and the integration of the online and brick-and-mortar shopping experiences.
The conducting of regular, thorough and successful value chain analysis is imperative not only to the profitability of an organization but also to its viability and competitive advantage. Harappa’s Select A Strategy pathway is specially designed to aid ambitious professionals to acquire and master such analytical skills. The Thrive Skills included in the pathway such as Decoding Ambiguity, Intellectual Curiosity and Overcoming Bias teach learners to strive to get all of the information first and then make the best decision possible in all scenarios. They also learn to actively engage in cognitively challenging tasks and purposefully seek knowledge. With the help of a stellar faculty and techniques like Second-Order Thinking, learners get to ask the right questions, challenge their assumptions, analyze information and choose the most practical strategy. Sign up for the Select A Strategy pathway to zero in on the right strategy through sound inquiry and reasoning!
