Value chain analysis is a model developed by Michael Porter (Porter, 1985). The analysis is based on the idea that the activities of an organisation are a sequence of events. When we were looking at how an organisation operates, there are inputs and outputs – and in between, the activities of the organisation. So, we have a series of activities, such as:
Inbound logistics (deliveries, storage, etc.);
Operations;
Outbound logistics (warehousing, wholesalers, deliveries, etc.);
Marketing and sales;
Service.
As well as the primary activities, there are also support activities. Although they might not be making the actual product or service, they are very important because the inputs and outputs cannot occur without their support. They are:
The firm’s infrastructure;
Human resource management;
Technology development;
Procurement (purchasing, raising capital, recruitment).
Porter suggests that all of these activities should be seen as a chain: the whole chain is only as strong as its weakest link. Hence, it is important to identify any areas of weakness and address those, because they are pulling down the strength of the whole organisation. In addition, the strengths need to be built upon – to make the organisation even stronger.
For example, the primary part of the chain might be strong, but the organisation might have problems caused by high turnover of staff. The strategic choice here would be to concentrate on improving staff turnover using HR techniques. Alternatively, the product might be strong, but its reputation is let down by poor after-sales service. After digging deeper, it might be discovered that the IT systems supporting service are inadequate. These would then need to be addressed.
If an activity does not add value to what the organisation does, then there are three options:
To improve by investing in the activity (as discussed above).
To cease the activity if the management of the company believes that no further improvement is possible.
To outsource the activity to a company that specialises in that field and can be more efficient and effective doing so.
The strength of the value chain technique is that it forces an analysis of how the organisation actually functions, and it avoids over-concentration on some of the more obvious strategic possibilities, like merger or takeover. The weakness is that it is exclusively inward-looking. It should be combined with a rigorous analysis of fit with the environment.
Value chain analysis is a strategic tool used to examine the activities within an organisation and identify opportunities for creating value and gaining a competitive advantage. It involves breaking down company's operations into primary and supportive activities to understand how they contribute to the overall value creation process.
Primary activities
* Inbound logistics. Activities related to receiving, storing and distributing inputs or raw materials for production. For example, a smartphone manufacturer procuring electronic components from suppliers.
* Operations. The core production activities that transform inputs into final products and services. This includes assembly, manufacturing and quality control processes.
* Outbound logistics. Activities involved in storing, packaging and delivering the finished products to customers. For instance, a clothing retailer shipping garments to retail stores or directly to customers.
* Marketing and sales. Activities related to promoting products, generating sales, and managing customer relationships. This includes advertising, pricing, sales channels and customer support.
* Service. Activities aimed at providing customer support and after-sales services. This can include warranty repairs, maintenance and customer helplines. For example, a software company offering technical support for its products.
Support activities
* Procurement. Activities associated with sourcing and purchasing inputs required for the organisation's operations. This involves supplier selection, negotiation and relationship management.
* Technology development. Activities focusing on research and development, innovation and technological advancements. This can include designing new products, improving manufacturing processes or developing proprietary software.
* Human resources. Activities related to managing and developing the organisation's workforce. This includes recruitment, training, performance management and employee engagement initiatives.
* Infrastructure. The support systems and functions that enable the organisations operations. This includes IT infrastructure, facilities, financial management and legal compliance.
Value chain analysis aims to identify areas where a company can add value or reduce costs at each stage of the value chain. By understanding the interdependencies and linkages between activities, organisations can identify opportunities for differentiation, cost efficacy and process improvements.
For example, a fast food chain may analyse its value and identify opportunities for competitive advantage:
* Inbound logistics. The company could negotiate better deals with suppliers to lower the costs of ingredients without compromising quality.
* Operations. Implement efficient cooking processes and optimising kitchen layout to reduce production time and improve service speed.
Marketing and sales. Launching targeted advertising campaigns and leveraging digital marketing channels to reach a wider audience and increase sales.
* service. Enhancing the customer experience through personalised service, efficient order delivery, and loyalty programs.
By analysing the value chain, the company can identify areas where it can diffrentiate itself from competitors, reduce costs, or enhance the overall customer experience, thus gaining a strategic advantage in the market.
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