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First introduced as a concept by Michael S Porter in 1985, the value chain consists of every activity and process used within a company that adds value to the end product. Primarily, it enables analysis of the flow of value-adding activities, from raw materials suppliers right through to the customer.
In today's highly competitive business landscape, your company must continuously assess the value that you create, both for yourself and your consumers. This is why value chain analysis is an incredibly valuable tool, as it breaks down each business process and creates opportunities for innovation.
One of the key aims of value chain analysis is to place the product in customers' hands in the most seamless way imaginable, allowing them to feel confident and trusting of your business. The result is a more competitive, efficient model, with an increase in the value of your product or service.
What is the Value Chain?
Value chains integrate a variety of supply chain activities throughout your product or service's lifecycle, such as determining customer needs, production, distribution, marketing and after-sales service.
While supply chains and value chains are similar in nature, there are, however, several critical differences.
For instance, your value chain takes into consideration the full range of activities undertaken to bring a product or service from conception to delivery. These include the specific materials involved in product design, research and development, where the product is manufactured, transportation logistics as well as advertising. Even the work of IT experts, accountants and lawyers, who help make a product possible, are taken into consideration.
A Breakdown of Porter's Value Chain
In his book, Competitive Advantage, Porter states that: "competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and support its product."
Porter's Value Chain focuses on systems and how inputs are changed into outputs. Using this viewpoint, he describes a chain of activities that are common to all businesses, dividing them into two types of activities: primary activities and support activities, as outlined below:
Primary activities are related to the physical creation, sale, maintenance and support of a product or service. They consist of inbound logistics, operations, outbound logistics, marketing and sales, and service.
As the name suggests, support activities assist the primary activities. They include firm infrastructure, human resource management, technology and procurement (purchasing), all of which play a role in the primary activities mentioned above. For instance, procurement supports operations with certain activities; however, it also supports marketing and sales with others.
How to Conduct a Value Chain Analysis
To conduct a value chain analysis, you should begin by identifying these primary and support activities, noting any steps that can be eliminated and improved. Ask yourself: what are the cost drivers for each activity? What are the links between them? Can you reduce costs in one area?
For example, you might find that a particular product can be manufactured at a lower cost by a subsidiary company. In this case, your company could outsource the production of this product to the subsidiary firm, meaning the cost of the product is lowered for the consumer.
Performing an analysis like this can enable you to determine where the best value lies for your customers, allowing you to then expand and further improve that value. This will result in overall cost savings or enhanced production, while your customers will benefit from higher quality products at lower prices.
For a business to see a notable change, it should:
- Achieve the best or lowest costs for the entire supply chain.
- Pursue an optimal cycle time performance.
- Identify and implement "best in class" practices for each of the core activities, sub-processes and processes.
Value Chain Examples
One prime example of a company that creates value for customers in this way is the coffee giant, Starbucks. Indeed, the brand is world-renowned for generating global connections, guaranteeing high-quality coffee beans and working with providers to build a sustainable future.
Starbucks is able to achieve this by taking an in-depth and sophisticated approach to its value chain, a process that begins with the sampling of a variety of beans from across Africa, Latin America, Arabia, Asia and the Pacific (the 'inbound logistics' activity). Representatives then spend time visiting coffee growers and generating enduring relationships with them, creating worldwide partnerships that ensure the best quality ingredients for their customers.
The resulting products are sold across all of Starbucks' worldwide stores (the 'operations' and 'outbound logistics' activities), while customers can also enjoy the highest quality flavours at home.
The brand also interacts with customers and provides exceptional service, both offline and online. It interacts heavily with clients on social media while delivering themed or periodic twists on its classic beverages, thereby offering a unique experience to customers every time they visit (the 'marketing', 'sales' and 'service' activities).
Finally, Starbucks maintains HR, technology development, finances and other support operations alongside these processes.
The Benefits of Value Chain Analysis for Businesses
As the Starbucks model illustrates, the value chain can help your business in many ways, from creating change and improving products or services to generating a profit margin. It helps to break down all the activities involved in producing your goods or services while attempting to understand areas of cost savings and differentiation better. By assessing product or service quality and effectiveness, as well as the cost, your business will be able to implement strategies to improve.
This approach also enables your business to optimise its efforts and eliminate waste. It allows you to provide exceptional customer service, as well as the highest quality products at competitive costs. This, of course, brings greater value to your customers, thereby improving your company's client relationships and your overall profitability.
Remember: today's business landscape is incredibly competitive, and as such, it's vital that you identify which areas can be optimised in order to achieve maximum efficiency and profitability. This will help to differentiate your product or service in the market, which will, in turn, enable your business to gain a significant competitive advantage.
In the meantime, take a look at our breakdown of why supply chains are so invaluable for small businesses!
What do you think? Are you making the most out of your value chain? Let us know your thoughts and experiences in the comment section below!