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. The value chain analysis was invented by Michael Porter and since then evolved and updated over the years to fit current market standards.
What is a value chain?
A value chain refers to all organizational activities that occur for the delivery of a product or service to the marketplace. These activities range from design and marketing to production and distribution. Value chain management is the process by which a business organizes all these activities in a manner so that a high quality product is offered to the customer.
Porter’ value chain analysis
According to Porter, in order to understand competitive advantage you need to look into all the discrete activities that a business performs including design, production, marketing and so on. For this reason, Porter has distinguished these activities into two categories: primary and support.
These are the actions that are directly related to the conversion of input into output and distribution
- Inbound logistics include activities concerned with raw materials to be used for producing the end product
- Operations include any activities that transform raw materials into the final product like assembling and packaging.
- Outbound logistics are the operations that aid in the collection, storage and delivery of a product to the end client.
- Marketing and sales are all activities that aid in product awareness such as advertising, promotions and PR events.
- Service includes all activities that improve or maintain the value of the product such as sales training, after-sales service and guarantees.
These are actions that assist primary activities.
- Infrastructure refers to the firm’s structure including planning, accounting, quality control, legal, finance and other departments.
- Human resource management refers to all activities that are concerned with the selection, transfer, promotion and dismissal of the workforce.
- Procurement includes activities that ensure that all necessary inputs, such as raw materials and machinery, are being supplied.
- Technology development refers to the activities related to technology such as in research and development in order to develop new products
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. Yet, one of the limitations of the model is that itis heavily oriented to a manufacturing business and the language can be off-putting for other types of business. Also, it is advised that Porter’s value chain analysis is used in conjunction with other models in order to form a more objective and comprehensive picture of where your competitive advantage lies.