The contemporary concept of a value chain was first described and made popular by Michael Porter in his book Competitive Advantage: Creating and Sustaining Superior Performance.
A value chain consists of a set of activities involved in delivering a final product or service to a companys customers. Value Chain Analysis is used to analyze the value created by a companys current activities. It explores where more value can be added and where value is not being added in the current chain of activities. It is a useful tool for internal analysis of strengths (activities that add value) and weaknesses (activities that do not add value).
Value Chain Analysis is a three-step process.
1. Analyze Activities: This step consists of identifying all key activities of a company that are involved in delivering the final product or service to its customers. A popular way to do this is to classify activities as either primary or support.
Michael Porter identified five primary company activities:
- Inbound Logistics
- Outbound Logistics
- Marketing and Sales
Primary activities are reinforced by support activities such as procurement, human resource development, technological development, and infrastructure. The list of activities and each activity classification may be adjusted by the company, as necessary. For example, inbound and outbound logistics may not be relevant for purely online businesses.
After all activities are identified, the links between the activities need to be specified. For example, the service function, which supports customers, will have links to the operations function, which fulfills customer support requests, and the marketing and sales function, which analyzes customer feedback to improve offerings. The activities, together with the links between them, form the structure of the value chain.
2. Analyze Value Created by Those Activities: This step involves identifying where value is created throughout the chain, and in what form and magnitude. Value always needs to be explored from a customers point of view. A product feature or service component that does not benefit the customer does not add any value. Such an activity represents an opportunity for freeing up resources that could otherwise contribute to adding value through some other activity. For example, in a manufacturing environment, each manufacturing process that is involved in changing raw materials into finished product adds value by ensuring that the final product is functional. Quality assurance activities add value by ensuring that the products meet the standards required by customers. The sales teams efforts add value by encouraging more customers to purchase the products. The customer support activities add value by addressing customer questions and concerns and maintaining a high level of customer satisfaction.
3. Determine How to Create Additional Value: This step involves generating a number of ideas to add additional value to activities across the value chain and evaluating each of them to determine which are feasible and should be implemented. The various teams involved with the activities can hold brainstorming sessions to generate ideas for increasing the value of activities. Both improving an activity and lowering its costs can increase value. Thus, evaluating ideas for activity improvements should involve considering whether these actions represent a trade-off, or whether improving an activity and lowering its cost can be accomplished.