The role of value chain analysis in helping the organization to identify its strengths

and weaknesses

1. Introduction

The value chain is a systematic approach to examining the development of competitive

advantage. It was created by M. E. Porter in his book, Competitive Advantage (1980).

The chain consists of a series of activities that create and build value. They culminate in

the total value delivered by an organisation. The ‘margin’ depicted in the diagram is the

same as added value. The organisation is split into ‘primary activities’ and ‘support

activities.’

Value Chain Analysis describes the activities that take place in a business and relates

them to an analysis of the competitive strength of the business. Influential work by

Michael Porter suggested that the activities of a business could be grouped under two

headings:

Primary Activities - those that are directly concerned with creating and delivering a

product (e.g. component assembly); and

Support Activities, which whilst they are not directly involved in production, may

increase effectiveness or efficiency (e.g. human resource management). It is rare for a

business to undertake all primary and support activities.

Value Chain Analysis is one way of identifying which activities are best undertaken by a

business and which are best provided by others (‘out sourced’).

(Porter, M. E., 1990, The competitive advantage of nations, Pg. 141-143)

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2. Main aspects of Value Chain Analysis

Value chain analysis is a powerful tool for managers to identify the key activities within

the firm which form the value chain for that organization, and have the potential of a

sustainable competitive advantage for a company. Therein, competitive advantage of an

organisation lies in its ability to perform crucial activities along the value chain better

than its competitors.

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). In order to conduct the value chain analysis, the company is split

into primary and support activities. Primary activities are those that are related with

production, while support activities are those that provide the background necessary for

the effectiveness and efficiency of the firm, such as human resource managmenet. The

primary and secondary activities of the firm are discussed in detail below.

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3. Primary Activities

A. Inbound Logistics

Here goods are received from a company's suppliers. They are stored until they are

needed on the production/assembly line. Goods are moved around the organisation.

B. Operations

This is where goods are manufactured or assembled. Individual operations could include

room service in an hotel, packing of books/videos/games by an online retailer, or the final

tune for a new car's engine.

C. Outbound Logistics

The goods are now finihed, and they need to be sent along the supply chain to

wholesalers, retailers or the final consumer.

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D. Marketing and Sales

In true customer orientated fashion, at this stage the organisation prepares the offering to

meet the needs of targeted customers. This area focuses strongly upon marketing

communications and the promotions mix.

E. Service

This includes all areas of service such as installation, after-sales service, complaints

handling, training and so on.

Support Activities.

(Porter, M. E., 1985, Competitive Advantage: Creating and Sustaining Superior

Performance, Pg. 71-76)

3.1 Support Activities

A. Procurement

This function is responsible for all purchasing of goods, services and materials. The aim

is to secure the lowest possible price for purchases of the highest possible quality. They

will be responsible for outsourcing (components or operations that would normally be

done in-house are done by other organisations), and ePurchasing (using IT and web-

based technologies to achieve procurement aims).

B. Technology Development

Technology is an important source of competitive advantage. Companies need to

innovate to reduce costs and to protect and sustain competitive advantage. This could

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include production technology, Internet marketing activities, lean manufacturing,

Customer Relationship Management (CRM), and many other technological

developments.

C. Human Resource Management (HRM)

Employees are an expensive and vital resource. An organisation would manage

recruitment and s election, training and development, and rewards and remuneration. The

mission and objectives of the organisation would be driving force behind the HRM

strategy.

D. Firm Infrastructure

This activity includes and is driven by corporate or strategic planning. It includes the

Management Information System (MIS), and other mechanisms for planning and control

such as the accounting department.

(Lynch, R., 2003, Corporate Strategy, 3rd ed., Pg. 161-165)

4. Importance of Value Chain Analysis

Value chain analysis is a business design approach that defines processes based on

economic value to a customer. To illustrate the value of the approach, we can briefly

compare it to two other widely used business process design approaches, 1) work activity

and, 2) functional organization:

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4.1 Work Activity Based

A work activity based approach is a process design based purely on some set of activities

supporting a workflow. An activity is defined as some effort that transforms or creates an

object.

For example: A work activity based process design on a purchasing workflow would

include the creation of a purchase order. This approach is useful in determining the

efficiency or effectiveness of a workflow process, but is not always useful in determining

whether the activity should have been performed in the first place. A value chain

approach or value coalition approach could have resulted in the finding that setting up a

reverse auction capability would not have only streamlined the process, but would

provide improved customer service and competitive advantage for the business. More

often then not a well-executed pure work activity based approach will result in efficient

processes, but will not be useful in determining if those processes are appropriate for the

business. In other words, the enterprise could end up doing the wrong things very well.

4.2 Functional Organization

This approach involves the top to down organization of functions based on types of

activities, e.g., finance, marketing, and engineering. This approach is generally the least

effective as it tends to result in disconnects across the enterprise as well as sub-optimized

processes, but it is very popular due to its simplicity. A process-based design will more

than likely result in different activity descriptions then a functional organization. The

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theory is that the process-based activities, especially in the case of a value chain based

process design, will better align your enterprise to its customers.

Using the value chain approach, processes that provide direct value to the customer are

modeled first. Derivative processes that support the value chain processes are modeled to

support the value chain. The general concept is that by defining the enterprise around the

revenue producing value chain processes, the enterprise will be more effectively aligned

with its customer’s needs. Supporting processes that are cost center based would be

modeled to support the revenue producing value chain.

By way of example, following is a straw man value chain developed for GSA, a

multinational company. Since GSA is in the business of purchasing items for its

customer, purchasing is a value chain process at GSA. In most cases purchasing would be

considered a cost of doing business, and a derivative process:

An important outcome of the value chain is simplicity and business focus. The

frameworks that follow the work activity or functional organization models result in

needless complexity and inefficiency.

Michael Porter first developed the concept of value chains in his work on competitive

advantage. Since then, there has been a considerable amount of work to expand on Mr.

Porter’s original concepts. Value chain analysis, along with supply and demand chain

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analysis, are staples of modern business management. Readers wishing to learn more

will have no trouble finding relevant material.

For example, customers in focus groups run by Marketing might communicate how yet-

to-be-developed products/services could add value. Marketing then communicates this

information to R&D. While new products are still in the concept stage, R&D and

Production communicate about how different product designs could be more or less

difficult to manufacture. Marketing might also be involved in this communication so that

it can provide its analysis of customer reactions to modifications in the yet-to-be-

developed product.

4.3 Achieving Excellence in the Things that Really Matter

Value Chain Analysis or Value Stream Mapping is a useful tool for working out how to

create the greatest possible value for the customers, as well as best route to profit

maximization.

In business, it is paid to take raw inputs, and to “add value” to them by turning them into

something of worth to other people. This is easy to see in manufacturing, where the

manufacturer “adds value” by taking a raw material of little use to the end-user (for

example, wood pulp) and converting it into something that people are prepared to pay

money for (e.g. paper). But this idea is just as important in service industries, where

people use inputs of time, knowledge, equipment and systems to create services of real

value to the person being served - the customer.

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And the customers aren’t necessarily outside the organization: they can be bosses, co-

workers, or the people who depend on for what to do. Or all of these people could be the

customers in one way or another, just as long as they (directly or indirectly) pay the

wages.

Now, this is really important: In most cases, the more value is created, the more people

will be prepared to pay a good price for the product or service, and the more they will

they keep on buying. On a personal level, if added a lot of value to the team, they will

excel in what they do. It should then expect to be rewarded in line with the contribution.

(Pearson, G., 1999, Strategy in Action, Pg. 71-96)

5. So how do you find out where you, your team or your company can create value?

This is where the “Value Chain Analysis” tool is useful. Value Chain Analysis helps you

identify the ways in which you create value for your customers, and then helps you think

through how you can maximize this value: whether through superb products, great

services, or jobs well done.

6. How to use the tool:

Value Chain Analysis is a three-step process:

1. Activity Analysis: Firstly, you identify the activities you undertake to deliver

your product or service;

2. Value Analysis: Secondly, for each activity, you think through what you would

do to add the greatest value for your customer; and

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 3. Evaluation and Planning: Thirdly you evaluate whether it is worth making

changes, and then plan for action.

6.1. Activity Analysis:

The first step to take is to brainstorm the activities that you, your team or your company

undertakes that in some way contribute towards your customer’s experience.

At an organizational level, this will include the step-by-step business processes that you

use to serve the customer; Michael Porter calls these “Primary Activities”. These will

include marketing of your products or services; sales and order taking; operational

processes; delivery; support; and so on (this will may also involve many other steps or

processes specific to your industry).

At a personal of team level, it will involve the step-by-step flow of work that you carry

out.

 But this will also involve other things as well (Porter’s “Support Activities”). For

example:

 How you recruit people with the skills to give the best service;

 How you motivate yourself or your team to perform well;

 How you keep up-to-date with the most efficient and effective techniques;

 How you select and develop the technologies that give you the edge; and

 How you get feedback from your customer on how you’re doing, and how you

can improve further.

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Once you have brainstormed the activities, which add value for your company, list them.

A useful way of doing this is to lay them out as a simplified flow chart as this gives a

good visual representation of your “value chain”.

6.2. Value Analysis:

Now, for each activity you’ve identified, list the “Value Factors” - the things that your

customers’ value in the way that each activity is conducted.

For example, if you’re thinking about a telephone order-taking process, your customer

will value a quick answer to his or her call; a polite manner; efficient taking of order

details; fast and knowledgeable answering of questions; and an efficient and quick

resolution to any problems that arise.

If you’re thinking about delivery of a professional service, your customer will most likely

value an accurate and correct solution; a solution based on completely up-to-date

information; a solution that is clearly expressed and easily actionable; and so on.

And next to these, write down what needs to be done or changed to provide great value

for each value factor.

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6.3. Evaluate Changes and Plan for Action:

Screening the more difficult changes. Some may be impractical. Others will deliver only

marginal improvements, but at great cost. And then prioritize the remaining tasks and

plan to tackle them in an achievable, step-by-step way that delivers steady improvement

at the same time that it keeps your team’s enthusiasm going.

((Pearson, G., 1999, Strategy in Action, Pg. 101-111)

7. EXAMPLE:

Khaled Al Busaidy is a software development manager for a software house. He and his

team handle short software enhancements for many clients. As part of a team

development day, he and his team use Value Chain Analysis to think about how they can

deliver excellent service to their clients.

 During the Activity Analysis part of the session, they identify the following Primary

Activities that create value for clients:

 Order taking

 Enhancement specification

 Scheduling

 Software development

 Programmer testing

 Secondary testing

 Delivery

 Support

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Khaled Al Busaidy also identifies the following Support Activities as being important:

 Recruitment: Choosing people who will work well with the team

 Training: Helping new team members become effective as quickly as possible,

and helping team members learn about new software, techniques and technologies

as they are developed.

Khaled Al Busaidy marks these out in a vertical value chain on his whiteboard.

Next, he and his team focus on the Order Taking process, and identify the factors that will

give the greatest value to customers as part of this process. They identify the following

Value Factors:

 Giving a quick answer to incoming phone calls;

 Having a good knowledge of the customer’s business, situation and system, so

that they do not waste the customer’s time with unnecessary explanation;

 Asking all the right questions, and getting a full and accurate understanding of the

customer’s needs; and

 Explaining the development process to the customer and managing his or her

expectations as to the likely timetable for delivery.

They then look at what they need to do to deliver the maximum value to the customer.

They then do the same for all other processes.

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Once all brainstorming is complete, Khaled Al Busaidy and his team may be able to

identify quick wins, reject low yield or high cost options, and agree their priorities for

implementation.

8. Key points:

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.

 It takes place as a three-stage process:

1. Firstly with Activity Analysis, where you identify the activities that contribute to

the delivery of your product or service;

2. Secondly with 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; and

3. Thirdly with Evaluation and Planning, where you decide what changes to make

and plan how you will make them.

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.

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9. CONCLUSION

The value chain framework has been used as a powerful analysis tool for organizational

strategic planning for nearly two decades now. The value chain framework shows that the

value chain of a company may be useful in identifying and understanding crucial aspects

to achieve competitive strengths and core competencies in the marketplace. The model

also reveals how the value chain activities are tied together to ultimately create value for

the consumer. The five primary activities and four support activities form an

interdependent system that is connected by linkages. Analysts conducting the value chain

analysis should break down the key activities of the company according to the activities

entailed in the framework, and assess the potential for adding value through the means of

cost advantage or differentiation. Finally, it is important to determine strategies that focus

on those activities that would enable the company to attain sustainable competitive

advantage.

It is important to analyse the value chain of a company with the core competence at its

very heart. The nature of value chain activities differs greatly in accordance with the

types of companies and industries. The value chains of companies have undergone many

changes in the last two decades due to advancements in technology facilitating change at

a very rapid pace in the business environment. Outsourcing will cause major changes in

organisations and their value chains, with significant managerial implications.

Sources for finding information on value chain analysis include three years annual reports

of the particular company and its key competitors, company websites, journal articles,

and other reputed trade magazines etc. Use of other planning tools and techniques like

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Porter’s generic strategies, analysis of critical success factors etc. is suggested in

conjunction with the value chain framework for a more comprehensive analysis of a

company’s strategic planning.

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10. REFERENCES

 Porter, M. E., 1990, The competitive advantage of nations, New York: Free Press.

 Pathania-Jain, G., 2001, Global parents, local partners: A value-chain analysis of

collaborative strategies of media firms in India, Journal of Media Economics, Vol.

14, No. 3, p. 169-187.

 Lynch, R., 2003, Corporate Strategy, 3rd ed., Prentice Hall Financial Times.

 Pearson, G., 1999, Strategy in Action, Prentice Hall Financial Times.

 Porter, M. E., 1985, Competitive Advantage: Creating and Sustaining Superior

Performance, New York: Free Press.

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