Value Chain Analysis
Value chain analysis is a tool which businesses can use to identify their current competitive advantage and how they can devise greater competitive advantage and resources. This tool was pioneered by Michael Porter. The value chain analysis is a way of analyzing to determine the sources of competitive advantage of an organization in particular industry. It can determine the strength of the organization, as well as its weaknesses. Value-chain analysis is a tool used to identify primary and support activities that a business can do to add value to its products and services. It has become integral for businesses to analyze their value chain and resources regularly in order to remain competitive in the market.
The value chain analysis model is based on three primary activities, referred to as primary activities, which refer to activities that create and deliver value to customers. These activities are:
• Inbound Logistics – Inbound logistics includes the process of managing and controlling the flow of goods from suppliers to the organization, i.e. the procurement and storage of raw materials, purchasing, inventory management and warehousing. It is also responsible for the management of inbound shipments of goods, and associated activities such as scheduling, material handling and order picking.
• Operations – Operations refer to the activities that actually produce the products and services a business offers. These activities, such as production, manufacturing, and service delivery, create value for customers, and usually involve a combination of physical (plant and machinery) and human resources.
• Outbound Logistics – Outbound logistics includes the process of managing and controlling the flow of goods from the organization to its customers. This includes activities such as order processing and preparation for delivery, transportation, inventory management and warehousing. It also includes activities related to customer service and after-sales support.
Each of these activities must be managed and coordinated to function efficiently and effectively. The performance of each of these activities determines a business’s ability to deliver value to its customers.
Alongside this primary set of activities are four additional activities, known as ‘support activities’. These activities help to facilitate and improve the performance of the primary activities and include the following:
• Technology Development – Technology development is any activity or process related to the research and development of systems, applications, processes and products. In business, this could be to create a new product or process, to improve existing products and services, or to increase efficiency in the manufacturing process.
• Human Resource Management – Human resource management is any activity or process related to the management of a company’s employees. This includes recruiting, retaining, motivating, and developing employees, and managing their performance.
• Procurement – Procurement is the act of procuring goods and services for the purpose of carrying out the operations of an organization. This includes activities such as purchasing, vendor selection and negotiation, and inventory control.
• Firm Infrastructure – Firm infrastructure includes any activities related to the management of an organization’s resources, such as its finances, legal issues, general administration and support services.
These support activities are necessary in order to provide the resources necessary to successfully carry out and manage the primary activities.
The three primary activities and four support activities are linked together, forming a chain of activities that a business must manage and coordinate in order to deliver value to its customers. The analysis of this chain of activities helps to identify areas that can be improved and strategies that can be implemented to make the business more competitive and efficient.
For instance, if a business discovers that its inbound logistics are inefficient, then it can prioritize the development and implementation of strategies to improve this activity. It is through this type of analysis that businesses can identify sources of competitive advantage, such as new products and services, cost savings, and improved efficiency.
Value chain analysis is a powerful tool for businesses seeking to achieve and maintain competitive advantage. By analyzing the primary and support activities, businesses can identify areas for improvement, develop strategies to gain greater advantage, and build a stronger and more successful business.
