What Goes Into a Value Chain Analysis?

What is your competitive advantage?

If you hesitate when asked, then take cold comfort in the fact that you’re not alone. Too many businesses haven’t performed an adequate value chain analysis, which means they can’t know precisely what value they’re generating and which areas to target for gain.

If you want to know what sets you apart from your competitors, or what could set you apart, then you have to perform a rigorous value chain analysis.

What is a value chain analysis?

The term value chain refers to every business activity required to create a product or service from beginning to end. Research and development, production, distribution, sales – it’s a complete breakdown of all processes involved, allowing businesses to analyse everything they do to create their product.

The primary goal of conducting a value chain analysis is to gain an advantage over your competition. This is done not only by improving operational efficiency, but by identifying the area in which you can mark your point of difference.

Let’s take a deeper look at the components of a value chain analysis.

The components of a value chain

Michael Porter, a Harvard Business School professor, developed a value chain analysis that involves splitting your business activities in to two groups: primary and secondary (sometimes known as support).

Primary activities

Primary activities are those that are directly involved in the creation of a product or service. They include:

  • Inbound logistics. All activities related to sourcing and warehousing supplies before the product or service can begin development.
  • Operations: This encompasses all activities involved in turning those supplies into the final product or service.
  • Outbound logistics. This is about distribution, and covers areas such as packaging, sorting and shipping.
  • Marketing & Sales. This concerns how your product or service is marketed and sold, encompassing promotion, advertising and pricing strategy.
  • Services. Anything that takes place after a sale has been completed, such as installation, training if required, repair, warrantees, guarantees and customer service.

Secondary activities

Secondary services help the primary activities be more efficient. This is, essentially, the area in which you can find your true competitive advantage. Here’s what to look at:

  • Procurement. How you source and supply and materials or resources for your product or service. This activity has a profound impact on your competitive advantage.
  • Infrastructure. All management, financial and legal systems in place that help a business run effectively.  
  • Human resources management. All activities to do with employee management, such as recruitment, training, development, retention and compensation.
  • Technology development. All things R&D, such as product design, market research and process development.

How to perform a value chain analysis

1. Figure out your primary and secondary activities

The first step in a value chain analysis is obvious: sort every activity that relates to your products or services into the primary and secondary categories. If your company offers a suite of products and services, then this step has to be performed for each one.

2. Determine the value and cost of all activities.

Now it’s time to identify the value of each of these activities. Value, in this case, relates to both the customer and the business. How is this process increasing satisfaction for the customer? How is this process adding value to the business?

In terms of cost, think about the expense of each process. Are any particularly labour intensive? Is a certain raw material relatively expensive? If so, is this extra expense related to higher quality and better performance in the final product? If not, why are you using it?

3. Identify competitive advantage opportunities.

Once a solid value chain analysis has been completed, stakeholders should be able to identify where the business is doing well and where it could improve – and there’s no business in existence that has no room for improvement. Sometimes, the most appropriate first step is to start with something small that can provide an easy win.

It’s also important to remind yourself why you’re doing a value chain analysis. Is it simply to reduce costs? Is to create a better experience for the customer? These questions can help guide you towards the areas that have the most potential to give you a competitive advantage.

Procurement provides massive competitive advantage opportunities

A value chain analysis can be overwhelming because it takes into account all aspects of a business. If you want to give yourself a smaller target yet still achieve massive gains, focus on procurement. Procurement not only provides huge opportunities to reduce cost, but it can also create brand loyalty.

Where are your materials and resources coming from? Are they sustainable? Are there opportunities to work with local or minority-owned suppliers? These are the concerns of the modern-day consumer, and a rich area to target in search of a competitive advantage.

Comprara are your procurement consultant experts. We have the technology and expertise to completely map your procurement function and identify the areas where you can seek drastic improvement. This isn’t only about where your materials come from, but the contingencies you have in place and the software you use to predict future events – now that’s a competitive advantage.

Talk to Comprara today about conducting a value chain analysis.