Value chain analysis is a strategic analytical and decision-support tool that highlights the bases where businesses can create value for their customers. The framework can also be applied to identify sources of competitive advantage for businesses. Value chain is a set of consequent activities that businesses perform in order to achieve their primary objective of profit maximization.
Most sources explain the essence and application of value chain analysis assuming their audience is businesses aiming to increase the level of their competitiveness. Here, we adopt an alternative approach. Below is an explanation of value chain analysis for business students who have been assigned to apply this strategic analytical tool as part of assignment given by their educational institution.
The concept value chain analysis was introduced by Michael Porter in 1985 and its significance and relevance to strategic management and marketing has not diminished during 30 years of its existence.
The framework divides activities that generate value into two categories – primary activities and support activities. Primary activities comprise a set of activities that contribute to the creation of value in a direct manner. Support activities consist of functions and tasks that are intended to support primary activities.
It is important to clarify that the relevance of value chain analysis is not limited to manufacturing businesses and the framework can be applied towards service firms as well.
Inbound logistics involve receiving and storing raw materials and their usage in manufacturing as the necessity arises.
Operations relate to the processes of transforming raw materials into finished goods. For businesses operating in services sector operations relate to the process of providing the service.
Outbound logistics is associated with warehousing and distribution of finished products.
Marketing and sales refer to the choice and implementation of marketing strategy to communicate the marketing message
Value chain analysis is a tool that business owners use to break down each process their business uses. This analysis can be used to improve the business’s individual processes, enhancing the company’s efficiency and establishing a competitive advantage.
Value chain analysis is used by businesses of all sizes, ranging from sole proprietors to enterprise-level companies. Every business uses various processes to accomplish its work, and they all can use value chain analysis to study and improve these processes.
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