Value chain analysis is a powerful tool that helps businesses understand the various activities and processes that go into creating a product or service.
By identifying the individual components of their value chain, businesses can identify opportunities to create cost advantages, differentiate their offerings, and form strategic partnerships.
In this comprehensive guide, we will explore the concept of value chain analysis in detail, including what a value chain is, how to identify primary and support activities, and how to use value chain analysis to unlock competitive advantage.
We will also provide a fully worked example and a real-world example to illustrate the concepts covered.
What Is A Value Chain?
A value chain refers to the series of activities that go into creating a product or service. These activities can be divided into two categories: primary activities and support activities.
Primary activities are directly involved in the production and distribution of a product or service. These include activities such as inbound logistics, operations, outbound logistics, marketing and sales, and customer service.
Support activities, on the other hand, help to support and enable the primary activities. These include activities such as procurement, human resource management, technology development, and infrastructure.
Here is an example of a simple value chain for a manufacturer of wooden toys:
- Inbound logistics: Receiving raw materials and components from suppliers
- Operations: Assembling the toys using the raw materials and components
- Outbound logistics: Shipping the finished toys to retailers or directly to customers
- Marketing and sales: Promoting the toys through advertising and promoting them to retailers or directly to customers
- Customer service: Responding to customer inquiries and complaints
Identifying Primary And Support Activities In A Value Chain:
To conduct a value chain analysis, it is first necessary to identify the primary and support activities of a business. This can be done by breaking down the various activities involved in creating a product or service and determining which activities are directly involved in production and which activities support the production process.
For example, consider a software company that develops and sells productivity software. The primary activities of this company might include research and development, marketing and sales, and customer support.
The support activities might include procurement (obtaining the necessary hardware and software to develop and test the software), human resource management (hiring and training employees), and infrastructure (maintaining the necessary IT systems and networks).
Value Chain Analysis For Cost Advantage:
One of the primary benefits of value chain analysis is the ability to identify cost savings opportunities. By understanding the various activities and processes involved in creating a product or service, businesses can identify areas where they can reduce costs or improve efficiency.
For example, a company that manufactures clothing might be able to reduce costs by sourcing materials from lower-cost suppliers, streamlining its production process, or reducing waste.
Here is a fully worked example of how value chain analysis can be used to identify cost savings opportunities:
Consider a bakery that produces and sells a variety of baked goods. The bakery’s value chain includes activities such as sourcing ingredients, mixing and baking the dough, packaging the finished products, and marketing and selling the products.
By analyzing each of these activities, the bakery may identify the following cost savings opportunities:
- Sourcing ingredients: The bakery can negotiate lower prices with suppliers by bulk purchasing ingredients or by switching to lower-cost suppliers.
- Mixing and baking the dough: The bakery can improve efficiency by investing in more efficient mixing and baking equipment, or by streamlining the production process.
- Packaging the finished products: The bakery can reduce packaging costs by using more eco-friendly and cost-effective packaging materials.
- Marketing and selling the products: The bakery can reduce marketing costs by using more cost-effective advertising channels, such as social media, or by negotiating lower prices with retailers.
By implementing these cost savings opportunities, the bakery can reduce its overall costs and increase its profitability.
One real-world example of a company that has used value chain analysis to unlock competitive advantage is Dell. In the 1990s, Dell revolutionised the computer industry by using a direct-to-customer model that cut out the middlemen and reduced costs.
To achieve this cost advantage, Dell carefully analysed each step in its value chain and identified opportunities to streamline operations and reduce costs.
For example, the company implemented just-in-time inventory management and used the Internet to communicate directly with customers and take orders.
These changes allowed Dell to offer computers at a lower price than its competitors, giving it a significant cost advantage and helping it to become one of the leading computer manufacturers in the world.
Value chain analysis is a powerful tool that can help businesses understand the various activities and processes involved in creating a product or service.
By identifying primary and support activities, businesses can identify cost savings opportunities, differentiate their offerings, and form strategic partnerships.
Whether you are looking to reduce costs, stand out in a crowded market, or build strategic relationships, value chain analysis can provide valuable insights and help you unlock competitive advantage.