Meaning of Value Chain
A value chain is used to describe all the activities it takes to create a product, from start to finish (raw material to finished product) for example, design, production, distribution, etc.
Meaning of Value Chain Analysis
Value chain analysis is the way for business to analyze the activities they perform to create a product. Once the activities are analyzed a business can use the result to evaluate ways to improve its advantage.
The following steps below illustrate the general steps that are taken to conduct a Value chain study/analysis:
A. Determine the business’ primary and support activities.
Together, the primary and support activities make up the value chain. And they include each action required in the development of a product or service, from raw material to final product.
Primary and Support Activities
Identifying the primary and support activities is the first step in creating a value chain analysis. These are the key processes and systems a business uses to develop is product or service.
Primary Activities
There are five primary activities and they include all the actions that go into the creation of a business’ offering.
1. Inbound Logistics
This is how materials and resources are gained from suppliers before the final product or service can be developed.
2. Operations
Operations are how the materials and resources are produced, resulting in a final product or service.
3. Outbound Logistics
Once a product or service is finished, it needs to be distributed. Outbound logistics describes this delivery process.
4. Marketing and Sales
This is how your product or service is presented and sold to your ideal target market.
5. Services
This is the support a business provides for the customer which can include support and training for the product, warranties, and guarantees.
Support Activities
Support activities help the primary activities in creating an advantage over competitors, and they include:
1. Firm Infrastructure
This entails all the management, financial, and legal systems a business has in place to make business decisions and effectively manage resources.
2. Human Resource Management
Human resource management encompasses all the processes and systems involved in managing employees and hiring new staff. This is especially important for companies that provide in-person service, and excellent employees can be a competitive advantage.
3. Technology Development
Technology development helps a business innovate. And technology can be used in various steps of the value chain to gain an advantage over competitors by increasing efficiency or decreasing production costs.
4. Procurement
This is how the resources and materials for a product are sourced and suppliers are found. The goal is to find quality supplies that fit the business’ budget.
B. Analyze the value and cost of the activities.
The team tasked with creating the value chain analysis should brainstorm ways each activity provides value to customers and the business as a whole. Compare the activity to the competitive advantage you’re trying to achieve (cost leadership or differentiation) and see if it supports the goal.
After the value analysis is complete, take a look at the cost of the activities. Is the activity labor intensive? How much does X raw material cost? Asking questions similar to these will help identify which activities are cost-effective and which are not. This where areas for improvement can be identified.
C. Identify opportunities to gain a competitive advantage.
Once the value chain analysis is complete, the primary stakeholders in the business can see an overview of where the business is excelling and where improvements can be made operationally.
Begin with the improvements that take minor changes and provide high-impact results. After the easy wins are identified and actioned, you and your team can tackle the bigger challenges that might be hindering efficiency.
The value chain analysis gives businesses a clear idea of how to adjust their actions and processes to provide the most value to their target market and increase profit margins for the company.
