Value Chain Analysis
Value chain analysis is a management tool used to analyze the value-creating activities of a business. The purpose of value chain analysis is to identify key activities in a business that bring value to customers in order to develop strategies for improving overall performance. By understanding a business’s activities, it is possible to identify how much it costs to produce a product or service and to identify cost reduction opportunities.
Value chain analysis is an excellent tool for improving the effectiveness and efficiency of an organization. It helps organizations identify areas of improvement and develop strategies to become more competitive in their core markets. By breaking down an organization’s activities into separate components, value chain analysis allows organizations to see how their activities can be improved and become more cost-effective.
Value chain analysis is a concept developed by Michael Porter in the 1990s. It is an analysis of the value-adding activities of a business from the customers perspective. Porter suggested that enterprises have to own, or co-ordinate, the activities which add value to their product or service and use their core competencies to differentiate themselves in the marketplace.
The value chain can be divided into primary activities, support activities and core competencies. Primary activities are activities that directly create value for customers and include inbound logistics, operations, outbound logistics, marketing and sales, and after-sales service. Support activities include the activities that support primary activities and include infrastructure, Human Resources management, procurement, technical activities and customer support. Core competencies are the activities that are considered to be the basis of competitive advantage.
When conducting value chain analysis, organizations perform an internal analysis of their value-adding activities by analyzing their cost structure, staff resources, and technology used. Companies then compare their cost structure and performance with competitors to find cost reduction opportunities and competitive advantage. Organizations will compare the current costs of activities to what they could be by implementing better practices or fining more cost-efficient suppliers. Finally, organizations will develop strategies to improve the value chain, reduce costs and become more competitive in their markets.
Value chain analysis is a powerful tool for business owners and managers to identify areas for cost reduction and improvement. By using value chain analysis to identify core competencies and ways to improve existing value-adding activities, organizations can develop strategies to become more competitive in their core markets. Furthermore, value chain analysis provides insights into the cost structure of a business which is useful for developing plans to reduce costs and remain budget-conscious.
