Value Chain Analysis

Inbound

Logistics

Operations

Outbound

Logistics

Marketing

& Sales

Service

Procurement

Human Resource ManagementTechnology Development

Procurement

SUPPORT

ACTIVITIES

Primary ActivitiesFigure 3

Margin

Margin

Value Chain Analysis

Importance of value-chain analysis is that it provides a framework for identifying or

developing a distinctive competence.

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A value chain identifies and isolates the various economic value adding activities of the firm such as differentiating a product, lowering cost, meeting customer needs quickly.

Primary activities

Inbound logisticsOperationsOutbound logisticsMarketing and salesService

Support activities

Firm’s infrastructureHuman resource managementTechnological development

The value chain framework of Porter (1990) is “an interdependent system or network of activities, connected by linkages” (p. 41). When the system is managed carefully, the linkages can be a vital source of competitive advantage (Pathania-Jain, 2001). The value chain analysis essentially entails the linkage of two areas. Firstly, the value chain links the value of the organisations’ activities with its main functional parts. Then the assessment of the contribution of each part in the overall added value of the business is made (Lynch, 2003).

Components of value chainInbound logisticsThese are the activities concerned with receiving the materials from suppliers, storing these externally sourced materials, and handling them within the firm.Operations These are the activities related to the production of products and services. This area can be split into more departments in certain companies. For example, the operations in case of a hotel would include reception, room service etc.Outbound logistics These are all the activities concerned with distributing the final product and/or service to the customers. For example, in case of a hotel this activity would entail the ways of bringing customers to the hotel.Marketing and sales This functional area essentially analyses the needs and wants of customers and is responsible for creating awareness among the target audience of the company about the firm’s products and services. Companies make use of marketing communications tools like advertising, sales promotions etc. to attract customers to their products.ServiceThere is often a need to provide services like pre-installation or after-sales service before or after the sale of the product or service

Support activitiesThe support activities of a company include the following:Procurement This function is responsible for purchasing the materials that are necessary for the company’s operations. An efficient procurement department should be able to obtain the highest quality goods at the lowest prices.Human Resource Management This is a function concerned with recruiting, training, motivating and rewarding the workforce of the company. Human resources are increasingly becoming an important way of attaining sustainable competitive advantage.Technology Development This is an area that is concerned with technological innovation, training and knowledge that is crucial for most companies today in order to survive.Firm Infrastructure This includes planning and control systems, such as finance, accounting, and corporate strategy etc. (Lynch, 2003).

How to write a value chain analysis

The first step in conducting the value chain analysis is to break down the key activities of the company according to the activities entailed in the framework. The next step is to assess the potential for adding value through the means of cost advantage or differentiation. Finally, it is imperative for the analyst to determine strategies that focus on those activities that would enable the company to attain sustainable competitive advantage.It is important for analysts to remember to use the value chain as a simple checklist to analyse each activity in the business with some depth (Pearson, 1999). The value chain should be analysed with the core competence of the company at its very heart (Macmillan et al, 2003). The value chain framework is a handy tool for analysing the activities in which the firm can pursue its distinctive core competencies, in the form of a low cost strategy or a differentiation strategy. It is to be noted that the value chain analysis, when used appropriately, makes the implementation of competitive strategies more systematic overall. Analysts should use the value chain analysis to identify how each business activity contributes to a particular competitive strategy. A company may benefit from cost advantages if it either reduces the cost of individual activities in the value chain or the value chain is essentially reconfigured, through structural changes in the activities. One of the problematic areas of the value chain model, however, is that the costs of the different activities of the value chain need to be attributed to an activity.