The value chain is the end-to-end system in your organization that delivers something of worth (your product) to your customers. The goal is to understand where your business can reduce cost and increase value – but where do you get started with analyzing it? Read on for our ultimate guide to a value chain analysis.
First introduced by Michael Porter’s 1985 “Competitive Advantage: Creating and Sustaining Superior Performance,” the value chain analysis is a staple across strategy creation exercises across the world.
One of several tools available to turn towards your internal environment to gauge the art of the possible, the value chain analysis is used to identify the activities and processes that create value in a business, from the raw materials to the final product or service delivery.
Crucially, this strategic process allows you to grasp what’s helping your business to create value for your customers. Simple in input but powerful in its output, this guide is written to help you understand all the elements that go into the model.
Below, you’ll find the step-by-step value chain analysis process, examples across industry, and advice on how to continuously monitor your results and feed this invaluable strategic data back into your strategy reviews.
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Read on or click below to jump to the part of this value chain analysis guide you're interested in:
- What is a value chain?
- What is a value chain analysis?
- Supply chain v value chain
- How to conduct a value chain analysis
- How a value chain analysis can be used
- Examples of value chain analyses
- Value chain tools and techniques
- Best practices for assessing your value chain
- How often to review your results
- How has the value chain analysis adapted with change?
What is a value chain?
The value chain includes all the activities that add value to your product or service, from the initial sourcing of raw materials to its final delivery to the end customer.
The value chain is divided into two main types of activities: primary activities and support activities.
These are the activities directly involved in the creation of a product or service.
Primary activities are the core activities involved in creating and delivering a product or service.
- Inbound logistics
- Outbound logistics
Inbound logistics involve the receipt, handling, and warehousing of raw materials and other inputs.
Operations refer to the transformation of these inputs into finished products or services.
Outbound logistics involve the distribution of these finished products or services to customers.
Marketing and sales refer to the promotion and sales of these products or services.
Service activities involve the provision of after-sales service to customers.
These activities provide the infrastructure and support necessary for the primary activities to take place.
Support activities include:
- Technology development
- Human resources
Procurement refers to the acquisition of goods and services necessary for the business to function.
Technology development involves the research and development of new technologies to support the business.
Human resource management involves the recruitment, training, and development of employees.
Infrastructure includes activities such as finance, accounting, and legal services.
The value chain concept applies to all types of industries, including manufacturing, services, and retail.
For example, in the manufacturing industry:
- Inbound logistics, e.g. sourcing raw materials
- Operations, e.g. manufacturing the product
- Outbound logistics, e.g. shipping the product
- Marketing and sales, e.g. promoting the product
- Service, e.g. after-sales service
- Procurement, e.g. purchasing raw materials
- Technology development, e.g. researching and developing new manufacturing processes,
- Human resource management, e.g. hiring and training employees
- Infrastructure, e.g. financial and legal services.
What is a value chain analysis?
A value chain analysis is a strategic tool that helps businesses to identify and analyze their core activities, with the aim of improving their competitive advantage and profitability.
The concept of the value chain was first introduced by Michael Porter in his book "Competitive Advantage: Creating and Sustaining Superior Performance" in 1985.
Porter described the value chain as a series of activities that businesses engage in to create value for their customers.
Since then, the value chain analysis concept has become a widely used tool in creating strategies, helping organizations to understand their operations and identify ways to improve their competitive position.
Value v supply chains
While supply chain and value chain are related concepts, they are not interchangeable. The difference is important to know.
The supply chain refers to the series of activities involved in getting a product or service from the manufacturer to the customer.
In contrast, the value chain includes all activities involved in creating a product or service, from raw materials to the final product, and then delivering it to the customer.
As discussed, the value chain includes both primary and support activities.
In contrast, the supply chain focuses primarily on the physical movement of goods and services from the manufacturer to the customer.
This includes activities such as:
- Sourcing raw materials
While both are important in achieving a successful business, the value chain is broader and considers the entire process of creating and delivering a product or service.
Understanding the value chain can help you identify opportunities for improvement and cost reduction, which can ultimately lead to a more efficient and profitable operation.
But with the supply chain, solely focus on this may limit the potential for improvements and cost savings you’ll find.
How do you conduct a value chain analysis?
Conducting a value chain analysis involves the following steps:
- Identify the value chain
The first step in conducting a value chain analysis is to identify the value chain of the business.
This involves identifying the primary and support activities that are involved in creating and delivering the product or service.
It’s important to understand how each activity is linked and how they contribute to the overall value of the business.
- Map the activities
Once the value chain has been identified, the next step is to map the activities involved in each stage.
This involves breaking down each activity into its individual components and analyzing how they contribute to the overall value of the business.
You must identify any areas where improvements can be made to reduce costs or increase value.
- Analyze costs and value
The third step in conducting a value chain analysis is to analyze the costs and value of each activity.
This involves identifying the costs associated with each activity, such as labor, materials, and overhead, and analyzing how they contribute to the overall cost of the product or service.
It's key that you analyze the value that each activity adds to the final product or service, such as quality, functionality, and customer service.
- Identify opportunities for improvement
The final step in conducting a value chain analysis is to identify opportunities for improvement.
This involves identifying any areas where costs can be reduced or value can be added and developing strategies to achieve these improvements.
For example, you may look to improve the efficiency of your operations, reduce the costs of materials, or enhance the quality of customer service.
For advice on how you can integrate these improvement priorities into your wider strategy, tying this back to your strategic goals, download a copy of our Hoshin Kanri eBook.
How can a value chain analysis be used?
With the results of your value chain analysis, there are several ways you can apply the findings.
Some of the key applications of value chain analysis are:
- Cost reduction
One of the primary applications of value chain analysis is to identify areas where costs can be reduced.
By analyzing the different activities in the value chain, you’ll be in a great position to identify, capture, and then assess your opportunities to streamline operations and reduce costs.
For example, you may look to reduce the costs of raw materials, optimize your supply chain, or improve the efficiency of your production processes.
- Product quality improvement
Another application of value chain analysis is to improve the quality of the products or services you’re offering.
By analyzing the different stages of the value chain, you’ll identify areas where quality can be enhanced.
For example, you may look to improve product design, enhance quality control processes, or improve your customer service experience.
- Competitive advantage
Value chain analysis can also be used to gain a competitive advantage over other businesses in your industry.
By analyzing the different stages of the value chain, you can identify areas where to differentiate yourself from the competition.
For example, you could look to offer a unique product or service, provide faster delivery times, or offer better customer support.
- Strategic planning
Value chain analysis can also be used as part of the strategic planning process.
By analyzing the value chain, you’ll surface opportunities for growth and expansion.
For example, your results may indicate a path to expand into new markets or develop new products or services.
Example value chain analyses
There’s nothing like an example to help bring to life the value chain analysis. We’ve got three examples to show you what this all means:
Financial services company
For a financial services company, a value chain analysis could be used to identify areas where costs can be reduced and customer service can be improved.
For example, the primary activities in a financial services value chain might include acquiring customers, managing customer accounts, processing transactions, and managing risk.
By analyzing each of these activities, our example company could identify opportunities to streamline its operations and improve its customer service.
From the analysis, they might identify ways to reduce the costs of customer acquisition, improve their customer onboarding process, or develop new products that better meet the needs of their customers.
For a manufacturer, a value chain analysis could be used to identify areas where product quality can be improved, and costs reduced.
For example, the primary activities in a manufacturing value chain might include sourcing raw materials, manufacturing products, and distributing products to customers.
By analyzing each of these activities, the example manufacturer could identify opportunities to improve product quality and reduce costs.
From the analysis, they might identify ways to reduce the costs of raw materials, optimize their manufacturing processes, or improve their logistics and distribution networks.
Supply chain manager
For a supply chain manager, a value chain analysis could be used to identify areas where logistics costs can be reduced, and customer service can be improved.
For example, the primary activities in a supply chain value chain might include sourcing raw materials, manufacturing products, warehousing products, and distributing products to customers.
By analyzing each of these activities, the supply chain manager could identify opportunities to reduce logistics costs and improve customer service.
From the analysis, they might identify ways to reduce the costs of raw materials, optimize their inventory management processes, or improve their logistics and distribution networks.
Value chain analysis tools and techniques
When analyzing your value chain, you would typically find a set list of tools and techniques to help you gather and process the information gleaned:
A SWOT a strategic planning tool that helps your organization to identify its strengths, weaknesses, opportunities, and threats.
It can be used to assess the company's internal and external environment and develop strategies for improving performance.
This involves mapping out the steps involved in a particular process to identify areas for improvement.
It can be useful for identifying inefficiencies or bottlenecks in a process and developing solutions to improve performance.
Porter’s five forces
The five forces in the framework include the bargaining power of suppliers, the bargaining power of buyers, the threat of new entrants, the threat of substitutes, and the intensity of competitive rivalry.
It can be useful to gain insights into the potential risks and opportunities in your market, and make informed strategic decisions.
This involves comparing your performance with that of other organizations in the same industry.
It can be useful for identifying areas where you’re lagging your competitors and developing strategies to improve performance.
This is a performance management tool that will help your organization measure progress towards its strategic objectives.
The balanced scorecard be used to align organizational objectives with key performance indicators and track progress towards achieving these goals.
This involves comparing the costs of implementing a particular initiative with the benefits it is expected to deliver.
It can be useful for assessing the feasibility of different improvement initiatives and prioritizing them based on their potential impact.
Best practices for assessing your value chain
Completing your analysis is, on paper, easy. But look deeper, and the constant is the need to manage stakeholders and focus your efforts.
The best practices for assessing your value chain include:
- Involve all relevant stakeholders
To ensure the value chain analysis is comprehensive and accurate, it is important to involve all relevant stakeholders, including employees, suppliers, customers, and partners.
This will ensure that all perspectives are considered, and that the analysis is informed by a broad range of expertise and experience.
- Use data to inform decisions
To make informed decisions about where to focus resources and make improvements, it is important to use data to inform your analysis.
This may include data on costs, performance metrics, customer feedback, and industry trends.
By using data to inform decisions, you can ensure that your analysis is grounded in evidence and that you’re making data-driven decisions.
- Revisit the analysis regularly
As your business environment evolves, it is important to revisit the value chain analysis regularly to ensure that it remains relevant and up-to-date.
This may involve revisiting the analysis every few months or years to identify new opportunities for improvement and to ensure that the company is responding effectively to changes in the market.
Prioritize areas for improvement
Once the value chain analysis is complete, it is important to prioritize areas for improvement based on their potential impact and feasibility.
This may involve identifying low-hanging fruit that can be addressed quickly and easily, as well as longer-term initiatives that may require more resources and planning.
Monitor and evaluate progress
Finally, it is important to monitor and evaluate progress on an ongoing basis to ensure that the value chain improvements are delivering the desired results.
This may involve tracking performance metrics, soliciting customer feedback, and conducting periodic reviews to ensure that the company is on track to achieve its goals.
For more on how you can execute your improvement priorities, download a copy of our key to strategy execution eBook.
How often should you review your analysis?
While briefly touched upon in the best practices section, it is worth exploring the importance of keeping the value chain analysis fresh.
It’s important that you regularly review and update the results of a value chain analysis to ensure that the organization is continuing to operate efficiently and effectively.
The frequency of these reviews will depend on the organization's goals, industry, and the pace of change in the marketplace.
And while a general rule of thumb is to review the analysis at least once a year, as more business apply an always-on, continuous approach to strategy, it’s best practice to review the results on a quarterly basis.
To ensure that the process of regularly reviewing and updating the analysis is in place, the following steps can be taken:
- Assign ownership
Identify a person or team who will be responsible for conducting the review and updating the analysis.
- Schedule regular reviews
Establish a schedule for reviewing the analysis, such as once a year or once every six months.
- Update the analysis
Conduct an updated analysis using the same methodology as the initial analysis, considering any changes in the organization's operations or external market factors.
- Compare results
Compare the results of the updated analysis with the initial analysis to identify any changes or areas that require attention.
- Implement changes
Based on the results of the updated analysis, implement changes to the organization's operations or strategy as necessary.
- Communicate results
Communicate the results of the updated analysis and any changes made to relevant stakeholders within the organization.
To learn more about how you can introduce agility into your strategy creation (and continuous review) processes, watch our on-demand webinar on adaptive strategy.
How has the value chain analysis concept evolved?
The value chain analysis has evolved significantly in recent years to keep up with the changing business environment and emerging technologies.
Some of the key changes in the value chain analysis for the 2020s include:
- Increased focus on sustainability
In the current business climate, there is a growing emphasis on sustainability and reducing the impact of business activities on the environment.
As a result, companies are increasingly using the value chain analysis to identify ways to reduce their carbon footprint and promote sustainable practices throughout the supply chain.
- Greater use of digital technology
Advances in digital technology have revolutionized the way that businesses operate, and the value chain analysis is no exception.
The use of digital technologies, such as i-nexus, has also enabled companies to leverage data to optimize their value chains.
For example, by analyzing customer data, companies can gain insights into customer preferences and behaviors, allowing them to better tailor their products and services to meet customer needs.
- Digital transformation
Digital transformation has also had a significant impact on the value chain.
The use of digital technologies such as the internet of things (IoT), artificial intelligence (AI), and blockchain has enabled greater transparency, efficiency, and collaboration across the value chain.
Companies are now able to track products and processes in real-time, reducing the risk of errors and improving customer satisfaction.
- Greater focus on customer experience
In the digital age, customers have greater power and influence than ever before, and companies are increasingly using the value chain analysis to improve the customer experience.
By examining each step of the value chain, businesses can identify opportunities to improve the quality of their products and services and enhance the overall customer experience.
- Emphasis on collaboration
The value chain analysis has traditionally been focused on identifying areas for improvement within a single company's operations.
However, as businesses become increasingly interconnected and supply chains become more complex, there is a growing emphasis on collaboration and partnerships.
Companies are now using the value chain analysis to identify ways to work more closely with suppliers, customers, and other partners to improve efficiency and reduce costs.
One of the main impacts of COVID-19 on the value chain is the increased focus on resilience and risk management.
Companies have realized the importance of having diversified and flexible supply chains to mitigate the impact of future disruptions.
As a result, value chain analysis now includes a greater emphasis on identifying and managing risks in the supply chain.
How i-nexus supports your value chain
Software solutions like i-nexus strategy software play a critical role in taking the results of your value chain analyses and creating portfolios of projects dedicated to delivering improvement priorities.
While typical project management software is focused on managing individual projects and tasks, solutions like i-nexus are designed to provide a holistic view of how these priorities filter into your strategy.
This alignment ensures that every time a value chain analysis is conducted, the work that results will feed strategic success - be that by reducing costs, improving supplier management, process improvement, or transforming departments.
Talk to our Solutions team today to see how i-nexus solutions can help you with delivering this change.
Learn more about strategy execution
Take the next steps in your journey by exploring our strategy execution resource hub or any of the below:
- Key to strategy execution eBook: Read how companies like Danaher and HP have mastered strategy execution and what you can learn from them.
- What roles does a Strategy Realization Office play in your strategy execution?: Learn how you can govern your strategy execution with the emerging concept of the Strategy Realization Office (SRO)
- 13 ways to make your team care about goals: Try these 13 ideas for getting your team to buy into your goals, and create real accountability for delivering targets.
About the author
Sam Ancliff is the Demand and Lead Generation Manager at i-nexus.
In his role, his drive is to provide leaders with the tools and insights they need to make next-level decisions in their businesses and organizations.