Value Chain Analysis

Value chain
- is the complete range of activities consisting of design production, marketing, and distribution
businesses pass through to bring a product or services from formation to delivery to consumers
- represents the internal activities a firm engages in when transforming inputs into outputs
Value chain Analysis
- Value chain analysis (VGA) is a methodical of scanning all of the organization’s functional
activities and how sound they generate customer value. It examines the organization’s ability
to build customer value through its different activities.
- is a process where a firm identifies its primary and support activities that add value to its final
product and then analyze these activities to reduce costs or increase differentiation
- Value chain analysis focuses on analyzing the internal activities of a business in an effort to
understand costs, locate the activities that add the most value, and differentiate from the
competition. The overall goal of value chain analysis it to identify areas and activities that will
benefit from change in order to improve profitability and efficiency.

Customer value comes from the following three extensive categories:

1. The product is exceptional and different
2. The product is economical
3. The providing organization has the ability to quickly respond to specific or distinctive
customers needs.

M. Porter introduced the generic value chain model in 1985. Value chain represents all the internal
activities a firm engages in to produce goods and services. VC is formed of primary activities that add
value to the final product directly and support activities that add value indirectly
PORTER’S VALUE CHAIN MODEL
The value chain consists of 9 value activities and divided to 2 main categories
Primary activities are those that are actually generate customer value. These activities include:
1. Inbound Logistics
- this refers to everything that entails in the receipt, storage and distribution of the raw
materials for use in the production process. The receipt and the storage of raw materials s a
huge responsibility for big manufacturers, but it is a major part of inbound logistics for every
business.
2. Operations
- this is step where the raw materials product is transformed into the finished product.
Operations segue tot outbound logistics and then products move into marketing, sales, and
service stage.
3. Outbound Logistics
- This is the delivery of the finished products to customers. This part of logistics are lies deeply
on transportation and storage of finished goods. The storage part of the activity uses
warehousing method to maintain the finished goods protected and available. Since the
product may have to be moved out to a customer at any time.
4. Marketing and Sales
- This stage involves activities like advertising promotions, salesforce organization, selecting
distribution channels pricing and management of customers relationship of the finished
products to make certain it is targeted to the correct consumer group.
5. Service
- This refers to the activities needed to maintain the products performance after it has been
produced.
Support activities consists of 4 activities:
1. Procurement
2. Technology Development
3. Human Resource Management
4. Firm Infrastructure

The value chain model is a useful analysis tool for defining a firm's core competencies and the
activities in which it can pursue a competitive advantage as follows:
• Cost advantage: by better understanding costs and squeezing them out of the value-adding
activities.
A firm may create a cost advantage either by reducing the cost of individual value chain activities or
by reconfiguring the value chain.
Once the value chain is defined, a cost analysis can be performed by assigning costs to the value
chain activities. The costs obtained from the accounting report may need to be modified in order to
allocate them properly to the value creating activities
• Differentiation: by focusing on those activities associated with core competencies and capabilities
in order to perform them better than do competitors
A differentiation advantage can arise from any part of the value chain.
For example, procurement of inputs that are unique and not widely available to competitors can
create differentiation, as can distribution channels that offer high service levels.
Differentiation stems from uniqueness. A differentiation advantage may be achieved either by
changing individual value chain activities to increase uniqueness in the final product or by
reconfiguring the value chain.

COST DRIVERS
COST ADVANTAGE DIFFERENTRIATION
 Economies of scale  Policies and decisions
 Learning  Linkages among activities
 Capacity Utilization  Timing
 Linkages among activities  Location
 Interrelationships among business units  Interrelationships
 Degree of vertical integration  Learning
 Timing of market entry  Integration
 Firm’s policy of cost and differentiation  Scale (e.g. better service as a result of
large scale)
 Geographic Location  Institutional factors
 Institutional Factors (regulation, union
activity, taxes, etc.)

Benefits of Value Chains

The goal of a value chain strategy is to maintain or achieve a competitive advantage. This can be
accomplished through a purposefully structured process; however, it is the development of
effective cross-functional relationships within the enterprise that allow for growth and innovation.
These areas of differentiation, achieved through optimization and coordination, can be the catalysts
that bring real results in cost reduction, increased customer value, and market dominance. An
effective value chain analysis will help you:

 Identify activities that are useful vs. activities that waste time.
 Improve brand reputation.
 Respond to weaknesses, opportunities, and threats quickly.
 Reduce costs.
 Increase productivity.
 Improve customer satisfaction.
 Streamline service/product delivery.
 Differentiate from the competition and achieve competitive advantage.
 Identify your profit margin. (Identify the value that you deliver to the customer and then
subtract the costs associated with creating that value to get your profit margin.)