How Value Chain Analysis Makes a Business Better Than its Competition

Understanding the value chain analysis is akin to unlocking a business's DNA. It delves into the intricate web of activities, from raw materials to final product delivery, spotlighting areas ripe for enhancement. By dissecting each step's value addition, businesses gain insights into cost-saving opportunities, competitive advantage, and customer satisfaction improvements. This analysis isn't just about dissecting operations. It's a strategic compass steering towards efficiency, innovation, and sustained growth in today's dynamic market landscape.

A company thrives by creating value and sustaining itself in the dynamic market. The challenge is that it has to set itself apart to generate the most revenue. 

The solution to it can be creating a business strategy with an approach that helps the company position itself better and improve its profit margin. Today, you will know about this analytical framework in management, known as, value chain analysis. 

Value chain analysis takes into account the interrelated business activities across various stages in creating a product. It gives a clear picture of how value can be optimised through each stage of the value chain. 

Explore: What are the Objectives of Strategic Management?

To know more, click on the links below. 

1. What is a value chain?
2. What is value chain analysis?

What is a Value Chain?

Any business activity that goes into creating a product or service is part of a value chain. 

Some examples of such activities are product research, development and design, marketing, manufacturing, distribution, and customer service, among others.

Michael Porter’s Value Chain

The concept of the value chain was introduced in The Competitive Advantage: Creating and Sustaining Superior Performance (1985) by Michael Porter. He explains the value chain by classifying processes into two categories – primary and support activities. 

Some processes include labour, suppliers, manufacturers, administration, and management, among others. These aspects have costs associated with them, and together they affect the final revenue of a business. 

Primary Activities

The primary activities in the value chain are those that are responsible for creating a product. According to the author, these activities are crucial for businesses in any industry.

Related: What is supply chain management? 

• Inbound Logistics

Inbound logistics refer to the flow of raw materials into a company. (Also, refer to logistics management). It plays a crucial role as far as the quality, transportation, storage, and delivery of goods/supplies are concerned. 

Good inbound logistics can help prevent supply chain inefficiencies. It helps a business stock supplies that are in most demand, adequately. That means, it ensures that supplies are ready to be assembled into the final product, so that it is delivered to the end consumer on time. 

But think about it in today’s supply-demand scenario. Inbound logistics has become far more challenging in recent times than this book, Competitive Advantage, was written. The most recent disruptions in inbound logistics are the pandemic, and dependence on online delivery and its increasing volume. 

Nowadays, companies who take care of inbound logistics rely on warehouse management software (WMS) so that too many simultaneous deliveries do not cause confusion, Likewise, businesses use transportation management software (TWS) that schedule and track deliveries accurately. 

Related: Logistics management courses

• Operations

The process of operations is to transform the raw materials into a finished good. Some activities include packaging, and testing, among others. 

Now, operations managers have to ensure the internal processes within the organisation are running smoothly through the entire production process. Maximising team productivity and reducing operational costs are also day-to-day goals for these professionals. 

Related: Operations management courses 

• Outbound Logistics

Once the process of converting the raw materials into a finished product is complete, businesses have to consider distributing it. The finished product is stored in a warehouse, which is then packed and ready to be distributed to the end consumer. 

You can say that the main goal of outbound logistics is meeting consumer demand. But there are challenges to consider. If the demand fluctuates, the quantity of finished product, which is stored in a large quantity, is affected. In this scenario, inventory management is required. 

Similarly, there are transportation costs and delivery-related inefficiencies. Businesses nowadays automate the routes and offer customers real-time data on ETAs (estimated time of arrival). These are some modern ways to improve customer satisfaction.  

• Marketing and Sales

On the marketing side of things, businesses generally focus on leveraging the marketing mix so that the consumer ends up buying the product instead of the competition. 

In today’s market scenario, consumers purchase online more than ever. No business can afford to ignore digital marketing. 

Through the digital medium, marketing becomes even more competitive to stand apart. Marketers constantly leverage tactics such as SEO, social media marketing, and email marketing among others. All these types of digital marketing are necessary. 

Related: eCommerce digital marketing strategy

As the prospects decide to move down the stages of the marketing funnel through inbound marketing tactics, companies further deploy sales strategies. 

These strategies are based on personalised communication and are often referred to as value-based selling. This kind of selling approach identifies the unique pain points a consumer may have, based on which, sales reps would offer solutions for the product. 

Related: Difference between marketing and selling

• After Sales

This value chain activity is for improving customer satisfaction and loyalty, and it is vital for any business. After a transaction is complete, there are other aspects such as installing hardware, on-time repair, and so on. 

Secondary/Supporting Activities

The secondary activities in the value chain are meant to support the primary activities. 

• Infrastructure of the Firm

It is how the organisation works. Important aspects that define it are strategy and leadership, general management, accounting, and so on. All of these activities work in tandem and help in providing value. 

• Procurement

It refers to how the raw materials are purchased. The purchased inputs should be able to help the primary activities as mentioned above. 

Related: Free supply chain management courses

• Human Resources Management

HR management is a vital activity in the value chain. Human resources can help hire and retain the best talent required for all internal logistics. Apart from hiring, HRM also involves training the personnel and motivating them. 

• Technological Development

Technology plays a broad role in the supply chain and beyond. It is not only required for stages such as research and development, but also for primary activities such as marketing. For instance, marketing automation, email marketing tools and so on require firms to train personnel who can use them effectively. The choice of software and upgrades is done on an organisational level. 

What is Value Chain Analysis?

Now that you know each of the activities in the value chain, it’s time to conduct a value chain analysis. Value chain analysis is all about assessing these activities, figuring out which steps can be improved or eliminated, know how the company can reduce costs and still offer the high-quality product to the customer. 

So, how do businesses approach value chain analysis?

There are two fundamental approaches to it. 

Cost Advantage

After you evaluate the activities in the value chain, you can consider the costs associated with each activity. Some examples are the cost of raw materials, transportation, work hours, and so on. So in all activities, there are cost drivers associated, and the goal is to improve efficiency across all of them. 

1. Economies of scale
2. Linkages
3. Learning
4. Spillovers
5. Interrelationships
6. Policies of the organisation
7. Timing

Differentiation Advantage

Differentiation advantage is achieved when businesses look into making internal processes efficient. Some examples are research and development, meeting customer expectations and so on. 

Parting Thoughts

So these are the basics of a value chain analysis. And as you can tell, its benefits are endless. You can find out the bottlenecks in the processes, work around the inefficiencies, find the best alternatives, use technology and ultimately drive value for your business.