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What Is A Value Chain?
If you are looking for a useful way to successfully analyze your business, the value chain analysis is the method you should go with. A value chain shows every process and every activity for a product or service. These activities actually start from the initiation of an idea for a product to the selling to the initial customer.
While the value chain outlines these activities such as the brainstorming of an idea, designing, planning and the production; the value chain analysis shows the visual aspect of these processes. To put it in simple words, the value chain deals with every action, interaction and decision the company takes or makes. And it would be best to note here and for you to consider, not every step of a value chain and its analysis is impactful for the company. Some of these activities add value (whether it is financial or material); however, on the other hand, some are not valuable and progressive as others.
The difference of these activities would come to light with your value chain analysis. By examining a product every step of the way from start to finish, you will be choosing the most efficient and crucial steps for your company. In addition to that, you will be eliminating or changing the activities that are somewhat ‘non-essential’. These ‘non-essential’ activities will come up to the surface with your value chain analysis and show you that they do not add any value to your business. And that is where the ‘value’ of ‘value chain’ comes from.
The Importance and Benefits of A Value Chain
Other than identifying the activities that offer more than the others, you can also examine what the target market values more as well. You can clearly detect what the market values in order to adjust your business to gain an advantage against your competitors. An example for this situation can be something like this:
Let’s say you (or your company) invested a large sum of your budget to the design of the product. But the value chain analysis showed you that not enough people bought the product to make it a profit for the business. This indicates that the budget of your design process in your company’s value chain should be diminished. This adjustment can lead to improvement on your budgeting, less cost and more profit.
Value chain’s aim is to remove the wasteful elements and improve the valuable ones. This strategy will not only help to better structure the internal workings of your company but also the external factors that can affect your business as well. By connecting the leaders of every step, you can form a better and an improved product. Your value chain analysis can help to establish a more efficient connection between the heads of different departments. Therefore, by also improving individual products, it can also boost the sales and the profits of your company overall.
The Difference Between A Supply Chain and A Value Chain
Even though both concepts, in fact, utilize the same functions and take on similar actions, the core strategy of the two is different. Value chain can be considered as the demonstration of intertwined activities of a company. The analysis of the value chain shows the customers’ requests, therefore, the ‘value line’ can be traced from the customer to the producer. However, the chain of supply is the exact opposite of this.
Supply chain deals with fulfilling the product’s requirements in order to achieve customer satisfaction. It focuses on operation management. Additionally, other than the value chain’s goal of ‘value addition to the product’, it aims to accomplish successful conveyance. Product development, operation processes and distribution are the key steps of a supply chain.
This indicates that the line of process can be traced from the initial material supplier of the product to the customer who is looking to be satisfied with the product.
What Is Value Chain Analysis?
The Inventor of the Concept
Michael Eugene Porter, born in 1947, is an American academic and a scholar. Other than the value chain concept, he has actually numerous theories in regards to economics.
The value chain concept was introduced in Porter’s 1985 book called Competitive Advantage: Creating and Sustaining Superior Performance. As you can see by the title of the book, Porter and the concept of value chain in general was focused on ‘competitive advantage against the competitors in the market’. He states also in the book that ‘it is not possible to fully understand and realize a company as a whole, and only by the analysis of multiple activities’.
Porter’s Value Chain Components
Porter indicates that his concept of value chain and its subsequent analysis can be divided into five primary activities. As with the main goal of the value chain, competitive advantage is the key to these primary activities. These help to increase the value of the product that can go far beyond the cost of it. And what happens when the value surpasses the cost of production? The company gains more profit. That is why Porter’s primary activities are increasingly and timelessly essential for businesses. You can find the detailed definitions, explanations and functions of the primary activities below:
What Are the Primary Activities of a Value Chain?
The first of the primary activities is inbound logistics. This action handles the delivery and storage of the raw materials that are shipped from the suppliers. All the resources and raw materials which come from the manufacturer are stored and kept in the company’s warehouses. Logistics are used in these operations, but also inbound logistics are used for dealing with the suppliers as well. This means the relationship and the financial satisfaction of the manufacturers are considered in this step.
The second activity is the operations. This step includes taking the delivered raw materials and transforming them into the finished product. Thus, making every input available an output. The operations consist of producing, adding labels, branding and packaging the product. This is the last step of manufacturing due to the fact that the final product is ready.
The third step is the outbound logistics. Now that you produced the product, you need to ship to the necessary markets and customers. Every stage from the factory to the customer is dealt in the outbound logistics activity. These include storing and managing the distribution systems as well as the deliveries themselves.
Marketing and Sales
The fourth stage is the marketing and sales section. By utilizing successful marketing strategies, you can efficiently sell your product to your target market. With advertising, you can make your product more visible. With marketing, you can reach more people. And with promotion and correct pricing, you can sell more products.
The fifth and the last primary activity is the services. You cannot just sell your product and do nothing to improve customer satisfaction. There should be a well-organized customer service line reachable via phone or a digital device with an internet connection. You also should be focused on repairs and maintenance of your sold products. Every element to enhance a customer’s experience with your product and your company such as refund and warranty is also included in this stage.
What Are the Support (Secondary) Activities of a Value Chain?
Porter also details some supporting activities for the primary ones as well. These secondary activities role is to aid the primary ones in order to make them more efficient. Every one of these support activities help and benefit at least one of the primary activities in the value chain. They are not hundred percent necessary such as the primary activities. However, every notable company which favorably uses value chain analysis also utilizes these support activities as well.
This action consists of locating the necessary raw materials and then, negotiating with the suppliers and manufacturers on the right price. As it was mentioned above, this activity affects the inbound logistics of the company which is one of the primary activities. The procurement stage can be considered as the initiation of the production. Because the transactions are made and acquisition of materials and resources are completed.
This infrastructure in itself includes all the accounting operations, legal and administrative systems in the company. A company without a proper infrastructure which efficiently maintains the core management cannot function. That is why this secondary activity is required and should be used with all of the primary activities.
The third action to take is technological developments. Innovation in technology is what advances a business. These technological developments can help during the design, manufacture and delivery processes. No matter the development is in the equipment used, the hardware or the software of the product, it is always crucial. Plus, technological improvements can also help to diminish the production costs, in the meantime, can boost the efficiency of the workflow. This secondary activity can be used in all of the primary activities, but it is especially critical in the operations stage.
Human Resource (HR) Management
The fourth and the last supporting activity according to Porter is human resource (HR) management. This action deals with the hiring, assigning and managing all the employees in the company. Every company needs creative and productive employees to design, manufacture, market and sell various products and services. Hiring able, talented and hardworking people is especially important for businesses that serve their customers in person. As it can be clearly seen, this activity affects and helps the primary activities in the value chain.
How Do You Do A Value Chain Analysis?
A Step by Step Explanation
Identify your business’ primary and support activities
If you do not specifically determine every primary and secondary activity your business takes from the raw materials to the customer service, your analysis will not be accurate. That is why it is crucial to be as detailed and comprehensive as you can in this step of your value chain analysis.
It should also be noted that you need to identify primary and secondary activities. It can be a complex research process and there can be a lot of data to sort through. Assemble a team in order to manage this step because it is too large of a project to conduct on your own. And also, on the topic of working with a team, consider gathering up employees from various departments.
The Benefit of Gantt Charts
Similar to every process in the value chain analysis, the identification of all the activities also relies on management. Gantt charts are incredible tools for you to track your team members’ workflow and developments. And the advantage of a Gantt chart is that it will give you and your team a visual illustration on how much you have accomplished in the project.
If you think that Gantt charts are a little bit hard to create from scratch, you can always use an Excel template! You can download Someka’s Excel Gantt Chart Maker and with the click of a button, your Gantt chart will be created in a matter of seconds! The automatically generated Gantt chart with the colorful customization is one of the useful and helpful tools for you to identify the activities for your value chain.
Evaluate every business decision, engagement and transaction
In this step, you need to calculate the cost of each of the activities and stages in your value chain. It can be hard and time consuming, but it is absolutely necessary. If you want to consider the ‘value’ of every activity your company does, that means you have to go through every business decision your company makes. Because business means business.
You can achieve this step by, firstly, getting the documents for every financial encounter the business got into. Then, going one by one and determining the cost of every stage along the way. And after that, you can clearly see the ones who are costing you a significant amount of money and the ones who generate revenue for you.
Not Every Stage Is Equally Important
Yes, it can be hard to hear and acknowledge but unfortunately, it is true. Not every stage of your value chain contributes to the finished product the same amount. That is why you should take into consideration prioritizing these stages.
Determine what is the real cost of these stages and what is the perceived cost. Figure out and sort what can you get rid of or adjust accordingly. To do that, you can use an Eisenhower matrix to list them. If you are looking to create your own Eisenhower matrix in Microsoft Excel, you can use Someka’s Eisenhower Matrix Template!
You can easily organize your ‘do, decide, delegate and delete’ processes. Sort every stage of your value chain and the activities in order to get the most out of the analysis. By asking two questions as ‘Is it important?’ and ‘Is it urgent?’, you can sort the steps and activities in your value chain. And the Someka template is completely free to use!
Pinpoint the potential opportunities
For the last step of your value chain analysis, you need to figure out the opportunities you can jump to. No matter whether your advantage is the cost or the differentiation, you need to pinpoint the places you can get a competitive advantage.
You can also analyze your competitor’s business strategies and value chains as well. Assess what your competitors are doing and how they are doing it and compare your strategies with theirs. By using Someka’s Competitive Analysis Template for comparison, you can easily see the contrast between the businesses. And with its colorful design and easy to use sections, it becomes easier to separate the strategies of different companies other than yours! And also, it is free, download it now and start using it!
Value Chain Analysis Approaches for Competitive Advantage
Even though the customer chooses whether they want to ‘take the cheaper phone’ or ‘the one with different function’, at first, this decision is for the company to make. The company chooses what type of competitive advantage it gets against its competitors. And every step of the way of the value chain, the company confirms and continues with its decision.
The Cost Advantage
The cost advantage approach relies on decreasing the cost and maximizing the profit. The goal for this approach is to take business away from your competitors but in the meantime maintaining average prices of the industry.
This approach also focuses on raising the market share. This is done by lowering the prices of products in order to challenge competitors while also making a profit. However, accomplishing a competitive cost advantage also the needs with it. The business has to have modern technological equipment and perpetual development in order to bring the costs down. Without an initial investment, these cannot be achieved.
Companies look at the average market prices and their competitors’ prices. They adjust their product (of its cost and price) in order to take the advantage against them. Some examples of companies which are using cost advantage approaches can be Walmart, McDonald’s and Ford.
The strategy of cost advantage can consider adopting ‘Kaizen’. This is a Japanese philosophy that is bound in ever growing, continuous improvement. You can find a lot more information in a different blog post detailing the Kaizen Methodology here.
The Differentiation Advantage
If you create a product and market it in a different way other than your competitors, you can stand out among them. Making your product or service more intriguing and special will attract more customers.
Your product or service can be differentiated in terms of various features. Unique functionalities and eccentric characteristics of your company can move you to the top. You need to conduct comprehensive research and get to know your target audience. If you dare to innovate and deliver something different than others, you better keep that promise and deliver your unprecedented product. You can also try different approaches with your marketing in order to see what stands out and what interests your customers.
Some examples for the companies which use the differentiation advantage method can be Apple (with its own ecosystem), Samsung (with its own marketing strategies and advertisements) and Tesla (with leading the electric car sector).
The Focus Advantage
There are some companies who do not lean on the cost or the differentiating methods, they focus on niche markets.
These companies are not interested in broad and mainstream products and marketing strategies. They know their target audience and target market and they solely make and market their products for them. And generally, these companies’ customer number and sales do not change radically.
Examples for these companies can be local shops and small businesses that focus on their residents and companies that produce somewhat ‘weird’ and unique products and services for their loyal customers.
Who Uses Value Chain Analysis?
Well… nearly everyone! Porter’s value chain plan and steps are so useful because they are easy to follow for companies. Every step of the way is constructed very generally and that is why this analysis technique is used worldwide.
How can anyone not use this method in these ever changing and developing markets? While the management becomes harder because the world keeps inventing new technologies and approaches to customers, the number of products gets larger and larger. Newly developed technologies bring new consumer techniques with it. And consumers also bring new and fresh demands with every new product, service or establishment.
If you want your company to succeed financially and in terms of sustainability, you are bound to use the value chain analysis. Because the current state of the world is almost always keeping the consumer in charge. Consumer’s demands shape the way companies operate and present new products and services. Of course, there are still some companies that create new products no matter what their customers are saying (Apple, for example).
But that does not take away from the millions of applications and programs that keep updating and adjusting their features. The biggest companies in the tech world and other areas more than ever choose to listen to their customers, their demands and their criticisms. That is why value chain analysis is crucial in order to be successful and, perhaps more importantly, to remain successful.
Value Chain Analysis Examples by Industry
Retail Value Chain Analysis
The value chain of a retail store begins with its suppliers. Let’s take a clothes store which has multiple shops across the country for example. The retail store negotiates with the vendors and suppliers of clothes in order to establish the best and cost-effective deals.
The next step is the delivery of the products (clothes) to the stores across the country. If the company is a huge conglomerate similar to Walmart, it can deliver the goods to its distribution centers first. In these distribution centers, the products are checked for their quality, sorted and then packed into trucks in order to deliver them to the stores.
In the stores, the products are given to the employees in order to place them in their respective shelves or displays. One of the support activities human resources management is used here. The employees hired should be efficient with their work and productive in order not to delay any of these steps. And that is how a retail store operates its value chain.
Pharmaceutical Value Chain Analysis
The first primary activity of inbound logistics for a pharmaceutical company starts with the drug discovery or the new finding of a drug formation. This step also includes the ingredient and material sourcing for the drug in question as well.
And then, the operations stage takes place. A lot of pharma companies produce a large amount of any drug. That is why in the operations stage a batch of the same drug is produced. After the testing and inspection processes, storage and order processes take place.
Majority of the pharmaceutical companies deliver the drugs via orders of representatives. The delivery and management of these orders can be included in the outbound logistics in the value chain. All of the necessary documents of expiry dates and information about the drugs are also shipped to the pharmacies and hospitals.
The service activity comes into place after the drugs are sold to customers. The returns of the drug are carefully noted and examined. The pharmaceutical industry deals with their customers’ health, that is why every complaint is taken into consideration. Following complaints, recalls of the drug can occur as well. This is how pharmaceutical companies plan and execute their value chain in brief.
Value Chain Analysis of Some of the Biggest Companies
Primary Activities of Apple
The sourcing of raw materials for Apple’s various devices are gathered from resources in the United States, China, various countries in Asia and Europe. Apple uses its massive power of bargaining as it is the lead technology company in the world.
The actual manufacturing processes are done in China because it is much cheaper to employ and operate there. That is how Apple makes so much profit. For example, the manufacturing cost of iPhone 11 Pro Max is $490.50 in total. The price for the product is $1099. Although not every dollar it makes goes to its profits, it is still one of the factors in order to be the biggest technology company.
Apple then, ships its finished products to its warehouses around the world. The products are then delivered to Apple Stores located in the places and malls with the most visitors.
Due to the fact that a large percentage of its sales come from its website, Apple stores a number of its products in its warehouse located in California. And from there, the products are shipped to the customers with the help of UPS, FedEx or Amazon deliveries.
Marketing and Sales
Other than its retail and online stores, Apple also provides its products (especially iPhones) to third party cellular networks as well. This way the company increases its sales channels and can make more profit.
On the marketing side, Apple (almost every year) holds an event in order to introduce its new devices, products and services to the world. It also works with filmmakers and photographers to showcase iPhones’ cameras. The advertisement videos also garner millions of views. The Apple event becomes the ‘thing’ people talk about that week.
Apple has incredible customer service. During the ‘pre-purchase’ period, a ‘genius’ in the Apple Store helps you to select the right device for your needs. Then, the purchase is done by that employee in a matter of a couple of minutes.
The customer service after you purchased an Apple device is also exceptional. You can get a phone call on the date and the time you decide. You can talk to Apple employees who are trained, polite and can elevate your experience.
Support Activities of Apple
Apple has one of the biggest and professional teams of employees around the world. From their software engineers to their business managers, they always strive to operate in the most functional and professional way.
The raw materials of their devices are gathered all around the world. This helps them to lower the cost and work with different suppliers.
It is perhaps somewhat irrelevant to talk about the technological developments Apple makes. Apple has always been challenging and developing the current state of technology. It continues to deliver the newest and best features on their devices. iPhone cameras are always looking at the most modern design and the latest technology to include on a smartphone.
The software they use on their devices and the iOS operating system that is built into their iPhones are constantly updated to fix errors and introduce new features for its users.
Human Resources Management
As you watch their events, you can see the people they hire for their administrative and leading roles in the company. Tim Cook, CEO of the company, is among the most successful people around the world as well as one of the leading pioneers in the technology industry
Primary Activities of Amazon
This stage includes suppliers getting contact with Amazon and providing them the product they want to sell. Other than being a retail store which sells third party products, Amazon also manufactures its own line of products as well.
They are getting the products from the suppliers, doing quality control on them and then transferring them into their factories and warehouses for operations.
All of the packaging of the products is done here and in their enormous warehouses located across the United States. The technological and digital devices they have such as Amazon Kindle and Amazon Fire are also created from scratch.
Also, the software developments on all these devices and the operation for their website are also done in this step.
No matter where in the United States (and most of the countries around the world) the product you want is and which warehouse it is in, it is delivered very quickly. The management of these deliveries and the deliveries itself are accomplished in this stage.
Marketing and Sales
Amazon carefully decides on the prices of their products and services. Most of the services they provide are free or low priced due to the fact that they already make their profits from the third-party sellers on their website.
Amazon Prime subscription method is an incredible feature for its customers and also, a brilliant marketing tool. You pay a certain monthly fee and no matter what you buy from the website, it is delivered to you the next day.
The warranty for the products is always detailed in the descriptions or on the products themselves. The customer service is reachable via phone or online via live chat with an actual employee.
Support Activities of Amazon
Without a successful operation and management of thousands of people, maintaining the quality and consistency of Amazon’s service would be impossible. The planning and the application of business and practical strategies keeps the ‘Amazon cycle of business’ alive.
Amazon has an incredible amount of vertically integrated suppliers. This means that Amazon mostly owns the suppliers of its raw materials and resources. It is the more expensive integration method but it has its advantages as well. It allows the company to have more control over the manufacturing and production processes and improve the speed and the efficiency. Buying the suppliers can be costly in the short term, but in the long term, it is actually profitable.
Amazon has a product or a service for literally everything.
And even if you think you do not use any of the Amazon products and services, Amazon Web Services actually controls 40% of the cloud storages and internet websites in total. This means 40% of the Internet itself is on Amazon’s web services. So, you use one of Amazon’s products whether you know it or not.
The Advantages and the Disadvantages of Value Chain Analysis
- It helps the company detect organizational, managerial, and strategic issues.
- It allows companies to get a competitive advantage.
- No matter what the industry of the company is, the strategy always works.
- The framework can and will work regardless of the size of the company.
- It supports the company to improve planning, research, and development.
- Among the departments, platforms, and teams, it creates a definitive connection.
- It measures the metrics of the business of the company.
- It established a standardization of processes throughout the different departments of a company.
- The separation of primary and support activities cannot be clearly seen in real life.
- Business operations can be complex and putting them into ‘clear cut’ rules and stages can be harmful to these processes.
- The comprehensive research and analysis period can be time consuming.
- A proper analysis needs a lot of information from various sources, people and organizations.
- The team of members and employees who are conducting the value chain analysis can be underqualified for the job.
Someka Excel Templates for Value Chain Analysis
In addition to the Competitive Analysis Template, you can also utilize the PESTLE Analysis Template by Someka. This template focuses on creating a business framework that recognizes and analyzes nearly every factor that can be affected with.
The Political, Economic, Social, Technological, Legal and Environmental factors that you put in provides an overview with different aspects of managing a business. This free template also helps you to make decisions by evaluating every visible feature that can be impactful.
The Political factors can include every decision and legislation that comes from the government.
The Economic factors consist of exchange rates, the economic growth of the country, customer demands and consumer trends.
The Social factors can include the percentage of different education levels, age, gender and lifestyles.
The Technological factors contain the effects of technological developments, improvements or on the contrary, the lack of them.
The Legal factors can sometimes align with the factors in the Political section as well. They include laws and various bans on different issues.
The Environmental factors consist of the state of the weather and climate, the impact of climate change and natural disasters.
All of the factors combined can help you to establish your business strategies and analyze your company’s value chain.
Value chain analysis not only optimizes the effectiveness and impact of each stage of every product but also helps to reduce and adjust the costs of each of the activities. Now you’ve got the general idea about the concepts so let’s start to improve the workflow of every activity in the value chain!