Value Chain Analysis


 

Value Chain Analysis

Figure 1: Porter’s value chain model

Introduction

An Internal Assessment of Competitive Advantage

A company is in essence a collection of activities that are performed to design, produce, market, deliver and support its product (or service). Its goal is to produce the products in such a way that they have a greater value (to customers) than the original cost of creating these products. The added value can be considered the profits and is often indicated as ‘margin’. A systematic way of examining all of these internal activities and how they interact is necessary when analyzing the sources of competitive advantage. A company gains competitive advantage by performing strategically important activities more cheaply or better than its competitors. Michael Porter’s value chain helps disaggregating a company into its strategically relevant activities, thereby creating a clear overview of the internal organization. Based on this overview managers are better able to assess where true value is created and where improvements can be made.

Primary activities

The five primary activities are inbound logistics, operations, outbound logistics, marketing & sales and service. Even though the importance of each category may vary from industry to industry, all of these activities will be present to some degree in each organization and play at least some role in competitive advantage.

Support Activities

The second category is support activities.The support activities can therefore be divided into procurement, technology development (R&D), human resource management and firm infrastructure. The dotted lines reflect the fact that procurement, technology development and human resource management can be associated with specific primary activities as well as support the entire value chain.

Procurement

Procurement refers to the function of purchasing inputs used in the firm’s value chain, not the purchased inputs themselves. Purchased inputs are needed for every value activity, including support activities. Purchased inputs include raw materials, supplies and other consumable items as well as assets such as machinery, laboratory equipment, office equipment and buildings. Procurement is therefore needed to assist multiple value chain activities, not just inbound logistics.

Technology Development (R&D)

Every value activity embodies technology, be it know how, procedures or technology embodied in process equipment. The array of technology used in most companies is very broad. Technology development activities can be grouped into efforts to improve the product and the process.

Human Resource Management

HRM consists of activities involved in the recruiting, hiring (and firing), training, development and compensation of all types of personnel. HRM affects the competitive advantage in any firm through its role in determining the skills and motivation of employees and the cost of hiring and training them. Some companies (especially in the technological and advisory service industry) rely so much on talented employees, that they have devoted an entire Talent Management department within HRM to recruit and train the best of the best university graduates.

Firm Infrastructure

Firm infrastructure consists of a number of activities including general (strategic) management, planning, finance, accounting, legal, government affairs and quality management. Infrastructure usually supports the entire value chain, and not individual activities. In accounting, many firm infrastructure activities are often collectively indicated as ‘overhead’ costs.

Conclusion

In the end, Porter’s Value Chain is a great framework to examine the internal organization. It allows a more structured approach of assessing where in the organization true value is created and where costs can be reduced in order to boost the margins. It also allows to improve communication between departments. Combining the Value Chain with the VRIO Framework is a good starting point for an internal analysis. In case you are interested in the entire supply chain, you could repeat the process by adding the value chains of your company’s suppliers and buyers and place them in front and behind your own company’s value chain.

 

References

Mutua, E. Njuki, J. Waithanji, E. (2014) cgspace.cgiar.orghttps://cgspace.cgiar.org/bitstream/handle/10568/35656/Ilri_manual_10.pdf?sequence=1

Cheung, T. Z Ye,  - Library Hi Tech,(2020) Available at: https://www.emerald.com/insight/content/doi/10.1108/LHT-08-2020-0185/full/html 

[Accessed 23 November 2021]

Hohenstein, N. Feisel, E. Hartmann ,E.- International Journal of Human Resource Management, (2014)- emerald.com. 

Available at:https://www.emerald.com/insight/content/doi/10.1108/IJPDLM-06-2013-0175/full/html [Accessed 23 November 2021]

Ricciotti,F. (2020)- Management Review Quarterly, - Springer.  

Available at:https://link.springer.com/article/10.1007/s11301-019-00164-7 

[Accessed 23 November 2021]


Comments

  1. Nimesha Sundarapperuma4 December 2021 at 05:16

    Value chain mapping is a method that identifies the primary operations related with a company's service or product line, and it is frequently used in corporate planning to discover chances for performance improvement.very useful article and thanks for sharing.

    ReplyDelete
  2. THARANGA864 December 2021 at 10:03

    Through value chain analysis, you can evaluate primary and secondary business functions and identify ways to improve efficiency, increase value and stand out from the crowd. This includes breaking down company logistics, operations and firm infrastructure to reveal the true value of a product or services
    Good article thank s for sharing

    ReplyDelete
  3. Steffni_D4 December 2021 at 23:19

    A value chain analysis (VCA) is a process in which a company identifies and analyzes its core and supporting activities that contribute value to its final product in order to cut costs or differentiate itself.
    The internal actions of a company when converting inputs into outputs are referred to as the value chain.

    ReplyDelete
  4. Varuni Gunasekera11 December 2021 at 08:23

    Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to recognize, which activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the firm and which ones could be improved to provide competitive advantage. In other words, by looking into internal activities, the analysis reveals where a firm’s competitive advantages or disadvantages are. The firm that competes through differentiation advantage will try to perform its activities better than competitors would do. If it competes through cost advantage, it will try to perform internal activities at lower costs than competitors would do. When a company is capable of producing goods at lower costs than the market price or to provide superior products, it earns profits.

    ReplyDelete

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