Value Chain Analysis - Definition, Benefits & Examples
Since the late 20th century, the widespread flow of goods & services, technology, and financial capital internationally have helped the nations become more interdependent, thus giving rise to economic globalization. But still, the distribution of the gains of such economic globalization is uneven, both within and between societies.
As technology continues to advance, newer methods of analyzing this globalization have come up. One such is the perspective of value chains. They have a very significant role to play in this distribution of gains.
Our article today will focus on what is value chain, value chain management, and its analysis.
What is a Value Chain?
The most astute definition of a value chain would be:
“It is an array of processes or activities that allows a company to add value to their articles or products and includes the production, marketing as well as provisions for after-sales services to its customers.”
But what does this mean? In simple words, a Value chain is nothing but a business model that depicts the full series of activities necessary for creating a product. It is a step-by-step guide for how to transform a concept into distribution. A value chain specifies what product needs production, what steps are involved in the production process, and who will do what task.
What is Value Chain Analysis?
“A process, following which a company or firm can identify its primary and support activities that adds value to its products and services.”
While some say that it is a strategy tool, others believe it is a way to visualize the activities of the firm. The primary purpose, however, remains the same: to analyze various activities and determine which of them are crucial to the firm and which ones need to be improved so that the firm can create a competitive advantage.
To understand value chain analysis properly, you need to understand Porter’s Concept first. Michael E. Porter was the first to introduce the value chain in 1985, in his book named Competitive Advantage: Creating and Sustaining Superior Performance.
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In this concept, he suggested that the activity of any organization get divided into two broad categories: Primary and Support.
Primary activities add value and create a competitive advantage, thereby satisfying external demands. Support activities are more focused on meeting internal requirements, providing support to primary businesses. We will talk in detail about Porter’s Concept later on.
What is a Competitive Advantage?
We have seen how Value chain Analysis aims to improve the competitive advantage of a firm in its niche. But what is this competitive advantage? We need to understand this before we move further.
It is a specific condition that allows a firm to produce goods and services of equal value but at a much lower price and in a more desirable manner. In simple words, it is what makes a firm’s products superior to all the other choices of its customer(s).
Although the term gets used concerning businesses, it can be generalized for any organization, country, even individuals in a competitive scenario. Improved competitive advantage helps to generate more sales of a firm in comparison to its market rivals. But this can only happen when all of its conditions get achieved: Comparative or Cost Advantage and Differential Advantage.
In its simplest terms, this means that firms generally tend to provide products of reasonable value but at a lower cost. Any rational consumer will opt for the cheaper of two perfect substitutes, and firms like to use this rationality to their advantage.
A differential advantage refers to the condition when a firm’s products differ from its rivals and are superior to them in its applications. It means that the product deemed superior is the one that provides more benefits to its users.
Basic Concepts of Value Chain Analysis
As I was saying earlier, Michael Porter was the first to put forward this concept, and that is why it is often called Porter’s value chain model.
This model categorizes the various activities of a firm in two broad categories: Primary and Support Activities.
The principal activities of a firm are directly related to creating a competitive advantage for the firm by adding value to a product. There are five Primary Activities:
- Inbound Logistics: Includes receiving goods from suppliers, storing, material handling, stock control and distribution of raw materials to production units;
- Operations: A sequence of activities like machining, assembling, packaging, etc. of final products manufactured from natural materials and thereby adding value to products;
- Outbound Logistics: Includes a collection of finished products, their storage, and distribution to wholesalers, retailers and customers;
- Marketing & Sales: Activities like advertising, promoting the final products, public relations, etc., to spread awareness among the target audience for creating a demand for the product;
- Service: This refers to after-sales services like maintenance, warranty etc., to maintain the product value.
Support activities assist the above primary ones so that the firm can achieve its competitive advantage. There are four main support activities:
- Firm Infrastructure: This refers to the various management activities undertaken in every firm including planning, financing, quality control, legal and governmental issues, etc.;
- Human Resources Management: Includes management of employees and staffs like, recruitment, retention, training, promotion, and transfer of employees;
- Technology Development: The Research & Development (R&D) department where technology is used to understand the current statistics and trends of the market and apply them to add value to the products;
- Procurement: Involves creating a supply chain of all the necessary consumable inputs like man, material, and machinery within the stipulated budget of the firm.
As we saw, primary activities add value to the products directly during the production process. However, they cannot achieve competitive advantage without the support activities. Since competitive strength is mainly derived from technology nowadays, support activities like R&D and general management activities become very important for creating a differential advantage. Primary activities, on the other hand, contribute towards cost advantage, thus achieving an overall competitive advantage.
Why is the Value Chain important?
Value chain analysis is often called the value chain management since it encompasses the monitoring and control of all the underlying activities to create a competitive advantage. As such, we can gain lots of benefits from it. Some of the benefits of effective value chain management are:
- Better product-planning, research & development by creating cross-platform teams;
- Standardization of processes by measuring the metrics of the business;
- Reduction in cost by optimizing the value chain components or activities;
- Improved flow of materials and products through accurate forecasting of sales as well as demands;
- Improvement in after-sales services and customer support through coordinated operations.
Examples of Value Chain Analysis
Now, let’s take a look at some cases of the value chain analysis.
1. Financial Acquisitions Value chain Model
This example portrays the general process of business acquisitions and mergers. It mostly among enterprise-level businesses.
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- Corporate strategies with merger metrics and integration analysis;
- Information technology in organizational processes;
- Transformation and other assessments;
- Audits, shares, and stock;
- Market analysis;
- Time Management;
- Synergy Management;
- Risk Management;
- Transition Management;
The organizational framework, financing products, and the eternal environment play a significant role in the overall process.
2. Academic Research Value chain Model
It relates to the general operations and strategies undertaken by researchers. You can find these sorts of VCA among universities and research groups. Here the primary activities are the applications, whereas the support activities are the various theories associated with the research defining the forms.
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- Research & development: Identify > Monitor > Explore;
- Methodology: Basic concepts and data;
- Resources: Equipment and external parties;
- Information sharing: Meetings & group discussions;
These theories get guided by various factors like database management and practical examples.
- Commercial uses;
- Non-profit uses;
These applications get impacted by various factors like Engineering, law, and order, etc.
How to Conduct a Value Chain Analysis with Edraw Max Online?
Conducting an astute value chain analysis can become somewhat tricky if you are doing it for the first time. You can consider various diagramming tools available in the market. Edraw Max Online, being one of the best online tools, does not require any installation on your computer. It is excellent for beginners and professionals alike. It has a wide range of diagramming options and cool features.
Before we start conducting a value chain analysis, there are a few things to consider first.
- Acquaint yourself with the interface and positioning of the various feature-tools. Knowing which symbols are present in the library and understanding their applications is always appreciable.
- Understand the concept and study some examples before you venture on to conduct your very own analysis.
Nonetheless, we are going to look at the steps to conduct a value chain analysis. We are using the Edraw Max Online tool.
Limitations of Value Chain Analysis
While there may be several benefits of a value chain analysis, there is one major limitation.
It can break down an organization’s operations into segments that can lead to the firm losing its overall business strategy and vision. It is because sometimes it is not possible to understand how the activities relate to each other.