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What Is Value Chain Analysis?

What Is Value Chain Analysis?
Credit: Aila Images / Shutterstock
  • A supply chain and value chain are similar in nature, but the value chain takes a few more things into consideration, like product design, research and development, and advertising.
  • One of the goals of value chain analysis is to ensure the product is placed in the customers' hands as seamlessly as possible.
  • The final result of a value chain analysis should be a more competitive, efficient business.

As competition increases for high-quality products, low costs and excellent customer service, businesses must continually assess the value they create. One of the most valuable tools, the value chain analysis, breaks down each process of a business and creates opportunities for innovation.

Value chain analysis can help companies in various ways. It can create change within a business, the products and services it offers, and its connections with other businesses and their customers or clients. The United States Postal Service (USPS) explains that 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."

The USPS also lists three goals that should take priority during an analysis for you to see change:

  • Achieve the best/lowest costs, including process, transactional and handling costs for the entire supply chain.
  • Pursue the fastest cycle time performance.
  • Identify and implement "best-in-class" practices for each core activity, subprocess, or process.

To conduct a value chain analysis, a business should begin by identifying each part of its production process, noting steps that can be eliminated and other possible improvements. In doing so, businesses can determine where the best value lies with customers, and expand or improve said value, resulting in either cost savings or enhanced production. At the end of the process, customers can enjoy high-quality products at lower costs.

A value chain is the full range of activities – including design, production, marketing and distribution – 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 their products, and consists of everything added before the product is sold to consumers.

A supply chain and value chain are similar in nature, 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 consideration contributions such as product design, research and development, advertising and other marketing. Even the work of lawyers, bankers, accountants and IT experts who help make a product possible is taken into consideration."

Harvard Business School's Michael E. Porter was the first to introduce the concept of a value chain. Porter, who also developed the Five Forces Model to show businesses where they rank in competition in the current marketplace, discussed the value chain concept in his book Competitive Advantage: Creating and Sustaining Superior Performance (Free Press, 1998).

"Competitive advantage cannot be understood by looking at a firm as a whole," Porter wrote. "It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm's relative cost position and create a basis for differentiation."

In his book, Porter splits a business's activities into two categories: primary and support. Primary activities include the following:

  • Inbound logistics includes the receiving, storing and distributing of raw materials used in the production process.
  • Operations is the stage at which the raw materials are turned into the final product.
  • Outbound logistics is the distribution of the final product to consumers.
  • Marketing and sales involve advertising, promotions, sales-force organization, distribution channels, and pricing and managing the final product to ensure it targets the appropriate consumer groups.
  • Service is the activities needed to maintain the product's performance after it has been produced, including installation, training, maintenance, repair, warranty and after-sale services.

The support activities help the primary functions and comprise the following:

  • Procurement is how the raw materials for the product are obtained.
  • Technology development can be used in the research and development stage, in how new products are developed and designed, and in process automation.
  • Human resource management includes the activities involved in hiring and retaining the proper employees to help design, build and market the product.
  • Firm infrastructure refers to an organization's structure and its management, planning, accounting, finance and quality-control mechanisms.

A prime example of creating value for customers is Starbucks. Through its operations, it creates connections throughout the world, guarantees high-quality flavors and works to build a sustainable future.

"Starbucks ... invests in coffee communities, sharing agronomy practices and our coffee knowledge," the company stated in its 2018 Global Social Impact Report. "We leverage technology to develop new approaches to ensure the future of high-quality coffee, including a new traceability pilot project announced in 2018."

Starbucks' value chain, like many others, is complex, but ensures value that will impress customers and keep them invested in the company. Starbucks begins by tasting a variety of coffees that use beans from locations such as Latin America, Africa, Arabia, Asia and the Pacific (inbound logistics). The company spends time visiting coffee growers and building lifelong relationships. Starbucks creates partnerships all over the world to ensure the best coffee for its customers. Its coffee is sold in stores worldwide (operations, outbound logistics) and allows customers to enjoy high-quality flavors at home or in a local Starbucks.

Another part of Starbucks' value chain is interacting with customers and ensuring it provides an excellent service. Its social media accounts are a prime spot for interaction, where Starbucks offers twists on its classic drinks to provide a unique experience to customers each time they visit (marketing and sales, service). Alongside these processes, Starbucks maintains HR, technology development, finances and other operations.

Starbucks presents its coffee as "the end of a long journey – from the land, to the farmer, to the roaster, to your eagerly waiting hands. Each step is important in defining what that coffee will taste like."

Value chain management is the process of organizing all activities to properly analyze them. The goal is to establish communication between the leaders of each stage to ensure the product is placed in the customers' hands as seamlessly as possible.

Managing these activities may involve reworking various systems, structures, processes, etc. The key is to find areas of potential innovation. Creating a strategy to develop processes is key to maintaining company value. It helps businesses to see exactly what areas they need to strengthen and how they can reduce costs. It also allows businesses to decide what is most important when thinking about the value they want to create. Mapping out a value chain can be a great way to visualize all processes and see how they're impacting both the company and customers.

"To begin, the item manager and the selected suppliers map the complete steps of providing a material or service, proceeding from the supplier to the end user, including the delivery and use of the material or service," states USPS. "What emerges is a picture of the intricate interlocking steps that span the supplier/purchaser relationship."

According to Strategic Management Insight, there are two approaches to the value chain analysis: cost and differentiation advantage.

After identifying the primary and support activities, businesses should identify the cost drivers for each activity. A cost driver is something that affects the cost of an activity or process. Cost drivers can include the following:

  • Work hours
  • Machine use and setup
  • Wage rates
  • Materials used to make products
  • Shipping

Your business should then identify links between activities, knowing that if costs are reduced in one area, they can be reduced in another. You can then identify opportunities to reduce overall costs.

Identifying the activities that create the most value to customers is the priority. These can include the following:

  • Using relative marketing strategies
  • Knowing about products and systems
  • Answering phones faster
  • Meeting customer expectations

The next step is evaluating these strategies to improve the value. Focusing on customer service, increasing options to customize products or services, offering incentives, and adding product features are some of the ways to improve activity value. Lastly, businesses should identify differentiation that can be maintained, and which adds the most value.

Free templates are available online to help you determine and analyze your business's value chains.

According to Investopedia, the primary goal of the value chain analysis is to create or strengthen your business's competitive advantage.

"If a company can create an advantage ... through a value chain analysis, it captures a competitive advantage and increases its overall profit," the article explains. "To capture a competitive advantage, a company maps out its specific activities within the five generic value chain activities and looks for ways to create efficiencies."

Ideally, value chain analysis will help you identify areas that can be optimized for maximum efficiency and profitability. It is important, along with the mechanics of it all, to keep customers feeling confident and secure enough to remain loyal to your business. By analyzing and evaluating product quality and effectiveness of services, along with cost, your business can find and implement strategies to improve.

Additional reporting by Katherine Arline.

Kayla Harrison

Kayla Harrison is a current Writing Arts graduate student at Rowan University and editor at The Urban Howl. She began freelancing during her junior year of college and fell in love with it. You can learn more on her blog, insearchofthewritedirection.weebly.com