Published On:Tuesday 27 December 2011
Posted by Muhammad Atif Saeed
Value chain analysis
Introduction
Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings:
(1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and
(2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.
Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced").
Linking Value Chain Analysis to Competitive Advantage
What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used.
Primary Activities
Primary value chain activities include:
| Primary Activity | Description |
Inbound logistics | All those activities concerned with receiving and storing externally sourced materials |
Operations | The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products) |
Outbound logistics | All those activities associated with getting finished goods and services to buyers |
Marketing and sales | Essentially an information activity - informing buyers and consumers about products and services (benefits, use, price etc.) |
Service | All those activities associated with maintaining product performance after the product has been sold |
Support Activities
Support activities include:
Secondary Activity | Description |
Procurement | This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers) |
Human Resource Management | Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business |
Technology Development | Activities concerned with managing information processing and the development and protection of "knowledge" in a business |
Infrastructure | Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management |
Steps in Value Chain Analysis
Value chain analysis can be broken down into a three sequential steps:
(1) Break down a market/organisation into its key activities under each of the major headings in the model;
(2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage;
(3) Determine strategies built around focusing on activities where competitive advantage can be sustained
