Value Chain Analysis
Value chain is the analysis of a business as a chain of activities that transform inputs into outputs that creates value for customers. Customer value comes from three basic sources: activities that differentiate the product, activities that lower its cost, and activities that meet the customer’s need quickly. Value chain analysis looks at how a business creates customer value by examining the activities and corresponding contributions within a business.
Typically, a business is comprised of both primary and secondary activities. Primary activities are those involved in the physical creation of the product or service, its marketing and delivery and after-sale support. Primary activities typically include.
- Inbound logistics
- Operations
- Outbound logistics
- Marketing and sales
- Service
Support activities provide the infrastructure or inputs that allow the primary activities to take place. Support activities typically include general administration, human resources management and research, technology and systems development.
For example, some of the factors for assessing sources of differentiation in a primary activity such as Marketing and Sales include…
- Effectiveness of market research to identify customer segments and needs.
- Innovation in sales promotion and advertising.
- Evaluation of alternate distribution channels.
- Motivation and competence of sales force.
- Development of an image of quality and favorable reputation.
- Extent of brand loyalty among customers.
The initial step in value chain analysis is to divide a company’s operations into specific activities or business processes. The next step is to attempt to attach costs to each discrete activity. Each activity in the value chain incurs costs and ties up time and assets. This will reveal either cost advantages or disadvantages.
Once the value chain has been documented, it becomes important to identify the activities that are critical to buyer satisfaction and market success. The activities that are examined are based upon the basic mission of the company e.g. superior service, low cost producer, quality, etc. The value chains and the relative importance of the activities will vary by industry. The relative importance of value activities also can vary by a company’s position in a broader value system. This broader value system can include the value chains of its upstream suppliers and downstream customers.
Value chain analysis is most effective when comparing the value chains of activities of key competitors. A meaningful comparison is critical when evaluating value activity so it can be determined if it is a strength or a weakness to the business.