What Is Value Chain Analysis?

What is value chain analysis?

A value chain is the full range of activities – including design, production, marketing and distribution – that businesses conduct to bring a product or service from conception to delivery. For companies that produce goods, the value chain starts with the raw materials to make the products and consists of everything added before the product is sold to consumers. Value chain analysis finds any deficiencies in these processes and improves them, saving money, improving quality and expediting time to market.

Value chain analysis can create change within a business, improve the products and services it offers, and expand connections with other companies and their customers or clients. The United States Postal Service (USPS) explains the purpose of value chain analysis is “to create value that exceeds the cost of providing the product or service and generates a profit margin.”

Value chain vs. supply chain

A supply chain and value chain are similar, but the value chain takes a few more things into consideration.

“The supply chain generally looks at the parts or materials that go into a product, where a product is manufactured, and the transportation logistics of getting it from the factory to the store,” said Jon Gold, vice president of supply chain and customs policy at the National Retail Federation. 

The value chain “takes into consideration contributions such as product design, research and development, advertising, and other marketing,” he said. “Even the work of lawyers, bankers, accountants and IT experts who help make a product possible is taken into consideration.”

What is Porter’s value chain framework?

Harvard Business School’s Michael E. Porter was the first to introduce the concept of a value chain. Porter, who also developed the Five Forces model to show businesses where they rank amongst their competition in the marketplace, discussed the value chain concept in his book Competitive Advantage: Creating and Sustaining Superior Performance (Free Press, 1998).

“Competitive advantage cannot be understood by looking at a firm as a whole,” Porter wrote. “It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation.” [Learn how to do a competitor analysis.]

In his book, Porter splits a business’s activities into two categories: primary and support. 

Primary activities

These are a company’s primary functions; in other words, all the things needed to create and sell their product:

• Inbound logistics involves the receiving, storing and distributing of raw materials used in the production process.
• Operations is the stage at which the raw materials are turned into the final product.
• Outbound logistics is the distribution of the final product to consumers.
• Marketing and sales involve advertising, promotions, sales-force organization, distribution channels, pricing and managing the final product to ensure it targets the appropriate consumer groups.
• Service comprises the actions needed to maintain the product’s performance after it is produced, including installation, training, maintenance, repair, warranty and after-sale services.

Support activities

Support activities help the primary functions:

• Procurement is how the raw materials for the product are obtained.
• Technology development can be used in the research and development stage, in how new products are developed and designed, and in process automation.
• Human resource management includes the activities involved in hiring and retaining the proper employees to help design, build and market the product. These could be tracked with a human resource information system. 
• Firm infrastructure refers to an organization’s structure as well as its management, planning, accounting, finance and quality-control mechanisms. This can include cloud computing and accounting software.

How do you conduct a value chain analysis?

To conduct a value chain analysis, a business should identify each part of its production process, noting steps that can be eliminated and other possible improvements. This helps companies determine where the best value lies with customers and expand or improve said value, resulting in cost savings or enhanced production. At the end of the process, customers enjoy high-quality products at lower costs, which will lead them to choose you over your competition.

There are two approaches to value chain analysis: cost advantage and differentiation advantage. These are lenses through which you should analyze your business.

Cost advantage

After identifying their primary and support activities, businesses should determine the cost drivers for each activity. A cost driver is something that affects the cost of an activity or process, such as the following:

• Work hours
• Machine use and setup
• Wage rates
• Materials used to make products
• Shipping

Your business should identify the links between activities, understanding that if costs are reduced in one area, they can be reduced in another. You can then identify opportunities to reduce overall costs. [Learn how to save money and boost productivity by upgrading your business technology.]

Differentiation advantage

Identifying the activities that create the most value to customers is the priority here. What activities set your business apart and provide the most value? These activities can include the below:

• Using relative marketing strategies
• Knowing about products and systems
• Answering phones faster
• Meeting customer expectations

The next step is evaluating these strategies to improve the value they provide. For example, you might focus on customer service, increase options to customize products or services, offer incentives or add product features. Consider which of these unique activities can be maintained over the long term and which provide the most value.

What are the goals and outcomes of value chain analysis?

Value chain analysis will help you identify areas in your business that can be optimized for efficiency and profitability. You want to not only ensure your mechanical processes are the best they can be, but you also want to keep customers feeling confident and secure so they remain loyal to your business. By analyzing and evaluating product quality and the effectiveness of your services, along with reducing company costs, your business can find strategies to improve its value proposition and stand out in the marketplace.

What are the benefits of a value chain analysis?

There are multiple benefits to value chain analysis:

• Gain a ground-level understanding of the various processes your business uses and the purpose for each.
• Identify current or potential bottlenecks in workflow and other inefficiencies.
• Find tasks that can be automated, outsourced or redesigned.
• Reduce waste and eliminate or de-prioritize unproductive tasks.

Businesses can use the insights they gain from value chain analysis to identify priority processes, streamline workflow and increase efficiencies. These, in turn, reduce costs and overhead, increasing profit margins for the business.

What are value chain management and mapping?

Value chain management is how you organize all of your businesses’ activities. Managing activities in your value chain may involve reworking various systems, structures and processes. The key is to find areas of potential innovation (some even argue innovation is the key to successful businesses). 

Creating a strategy to develop and refine processes is key to maintaining company value. It helps businesses see precisely which areas they need to strengthen and how they can reduce costs. It also allows businesses to decide what’s most important when considering the value they want to create. 

Mapping out a value chain can be a great way to visualize all your business processes and see how they impact the company and your customers. Then you can make decisions on what to improve and how. In both value chain management and mapping, communication is paramount. Stakeholders across the company’s processes need to remain in contact and open to collaboration. 

What is an example of a successful value chain?

A prime example of a business creating value for its customers and following the value chain framework is Starbucks. Through its operations, the company creates connections worldwide, guarantees high-quality flavors and works to build a sustainable future. This is possible because of its value chain and ongoing analysis.

Starbucks’ value chain, like many others, is complex, but ensures value that will impress customers and keep them invested in the company. Starbucks begins by tasting a variety of coffees that use beans from locations like Latin America, Africa, Arabia, Asia and the Pacific (inbound logistics). The company spends time visiting coffee growers and building lifelong relationships. Starbucks creates partnerships all over the globe to ensure the best coffee for its customers. Its coffee is then sold in stores worldwide (operations, outbound logistics) and allows customers to enjoy high-quality flavors at home or in a local Starbucks.

Another part of Starbucks’ value chain is interacting with customers and ensuring the company provides excellent service. Its social media accounts are a prime spot for interaction, which the company leverages to reinforce its marketing, sales and customer service.

Starbucks presents its coffee as “the end of a long journey – from the land, to the farmer, to the roaster, to your eagerly waiting hands. Each step is important in defining what that coffee will taste like.”

The value chain analysis identifies each step and seeks ways to refine the process so Starbucks continues to remain cost-efficient and the top competitor in the marketplace.

Why does value chain analysis matter?

Value chain analysis is an in-depth examination of all of the steps a business takes, from acquiring materials to producing, distributing and selling its products or services. Conducting this analysis gives business owners and managers deep insights into the major cost and profit centers of their company. With that knowledge, they can reduce waste, identify strategic advantages, and invest in the most successful areas of their business.

Kayla Harrison and Katherine Arline contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.