Value chain analysis is a strategic management tool that business leaders and organizations use to classify the primary and supporting activities that deliver value to their target customer. Once these activities are identified, strategic action can be taken to focus on the activities that increase the perceived value, reevaluate the activities that are costly, and create a competitive advantage that aligns with the company’s objectives or profit goals.
Michael Porter, a Harvard Business School Professor, conceptualized value chain analysis: a company’s profitability would improve when the value gained by their target customer eclipsed the cost of creating their products or services. In other words, better value plus lower costs equals more profit. Value chain analysis separates business activities into two categories: primary and supporting. Primary activities include any core activity that directly affects how your company produces and delivers its product or service. Supporting activities include any activity that helps to execute a primary activity.
Value chain analysis is a critical, in-depth process that can improve profits by reducing operating costs or enhancing value-adds, such as the quality of customer service. This business strategy tool can also create competitive advantages: boost brand awareness for new customers, improve brand loyalty for existing customers, identify where money is better spent or saved, highlight where greater efficiency is needed, uncover what is needed to reach a profit goal, and explain to stakeholders how each activity inhibits or supports the perception of value, the cost of operating, and the opportunities for profit.
Value chain analysis can take companies in two directions: cost leadership (reduce operating expenses and create more efficient processes) or competitive differentiation (increase value so that customers spend more money with your company or choose you over a competitor). Both of these directions, whether they are actioned separately or together, can boost profits. The goal of a value chain analysis template is to create a visual representation of all of the activities that your business performs to create a product or service. Get creative with the framework used or find templates online. The process of detailing each activity can be done with sticky notes, in a brainstorm session, or by sharing an editable document. Regardless of the template chosen, separate your analysis into two levels: primary activities (inbound logistics, outbound logistics, operations, sales and marketing, services) and supporting activities (firm infrastructure, human resources, research and development, technology development, procurement).
Value chain analysis allows leaders to assess their business as a holistic and connected entity. By identifying the primary and supporting activities required to operate the business and deliver customer value, and by analyzing how each activity works together to support profit, leaders can develop competitive advantages that help them to outperform and outlast their competitors.
Classify your value chain activities, both primary and supporting. This step requires detail, such as the size of each department, the type of materials used, or the time and cost required for each activity. This step is best performed by a variety of people so that no important perspectives and specifics are missed. Consider these questions:
What are our primary activities? Include all of the activities related to inbound logistics, outbound logistics, operations, sales and marketing, and service.
What are our supporting activities? Include all of the activities related to firm infrastructure, human resources, research and development, technology development, and procurement.
Assess the cost of each primary and supporting activity. Step two also asks for detail. Once you know where money is spent (and where profit is lost), you can make strategic changes to your value chain. Consider these questions:
Evaluate your customer’s perception of value and the why behind their buying decision. Where your customer finds value is where they are more likely to spend money. This step may require you to host surveys or focus groups, and collect customer data. Consider these questions:
Review the value chains of your competitors. Market analysis can help you to compare your position against competitors. You can conduct a market analysis with the three categories of competitive benchmarking: process benchmarking (compare operational structures, processes, and tasks), strategic benchmarking (compare business strategies), and performance benchmarking (compare outcomes, like traffic, client reviews, and earnings). Consider these questions:
Choose a competitive advantage. With a completed value chain analysis, you can see where the business is performing well, saving on operating costs, or creating value; you can also see where your competitors are succeeding, where expenses are being inefficiently used, or where value gaps exist. Consider these questions:
