Value Chain Analysis

Value Chain Analysis

By Nada Nasri

Copyright © 2025 Nada Nasri MBA,CMA. All rights reserved.

 Value Chain Analysis
Value Chain Analysis (VCA) is the process of identifying a firm's primary and support
Value Chain Analysis

activities that contribute to adding value to its final product. This analysis helps the firm
optimize these activities to either minimize costs or enhance differentiation.

The value chain encompasses the internal processes a company undertakes to transform
inputs into finished outputs.

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 What is Value Chain Analysis?
Value Chain Analysis (VCA) is a strategic tool used to evaluate a firm's internal activities with the aim
Value Chain Analysis

of identifying the most valuable activities that contribute to its cost or differentiation advantage. It also
pinpoints areas for improvement to enhance the firm's competitive position.

By analyzing internal processes, VCA uncovers where a firm's competitive strengths or weaknesses lie.
Firms competing through differentiation advantage focus on performing activities better than their
competitors, while those relying on cost advantage aim to execute these activities at lower costs than
their rivals.

A company achieves profitability by either producing goods at lower costs than the market price or
offering superior products that justify a premium price.

Introduced by Michael Porter in 1985, the Value Chain framework outlines the internal activities a
firm undertakes to produce goods and services. The value chain comprises:
•Primary activities: Directly add value to the final product (e.g., production, marketing, and sales).

•Support activities: Indirectly add value by enabling primary activities (e.g., procurement, technology
development, and human resource management).

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 Porter's Value Chain Model
Primary Activities
Value Chain Analysis

Inbound Outbound Marketing

Operations Service
Logistics Logistics & Sales

PROFIT
Firm Infrastructure Human Resource Management

Procurement Technology

Support Activities
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 What is Value Chain Analysis
While primary activities directly contribute to the production process, they are not inherently more
Value Chain Analysis

important than support activities. In today's business landscape, competitive advantage often stems
from technological advancements, innovative business models, or process improvements. As a result,
support activities such as information systems, research and development (R&D), and general
management frequently serve as critical sources of differentiation advantage.

Conversely, primary activities are typically associated with cost advantages. Since the costs of these
activities can be easily identified and managed, they offer opportunities for cost reduction and
efficiency.

A firm’s value chain (VC) operates within the broader context of an industry value chain. The
degree to which a company performs activities compared to the industry's value chain determines its
level of vertical integration. The more activities a firm handles internally, the higher its vertical
integration.

Understanding this relationship between a firm's VC and the industry's VC highlights opportunities for
differentiation, cost management, and strategic positioning.

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 Industry's Value Chain
Raw Materials
Value Chain Analysis

Intermediate
Goods

Manufacturing

Marketing &
Sales Company's Value Chain in Manufacturing
After-sales
service

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 Using Value Chain Analysis (VCA)
Value Chain Analysis (VCA) enables firms to assess their internal activities and align them with their
Value Chain Analysis

competitive strategy, whether it's cost leadership or differentiation. Below are the two primary
approaches to conducting VCA, each tailored to a specific type of competitive advantage.

Cost Advantage Approach Differentiation Advantage Approach

Goal: Compete on costs by reducing expenses and increasing Goal: Deliver superior products or services that stand out in the
efficiency. market.

Examples: Amazon, Walmart, McDonald’s, Ford, Toyota Examples: Apple, Google, Samsung Electronics, Starbucks

Steps to Achieve Cost Advantage: Steps to Achieve Differentiation Advantage:

1. Identify the firm’s primary and support activities. 1. Identify the customers’ value-creating activities.

2. Establish the relative importance of each activity in the total cost of

2. Evaluate the differentiation strategies for improving customer value.
the product.
3. Identify cost drivers for each activity. 3. Identify the best sustainable differentiation.
4. Identify links between activities.
5. Identify opportunities for reducing costs.

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 Steps to Gain Cost Advantage
To achieve a cost advantage, a firm must systematically analyze its activities and identify areas for
Value Chain Analysis

cost optimization. The process involves five key steps:

1. Identify Primary and Support Activities

•Objective: Clearly distinguish all activities involved in producing goods or services, from material
procurement to after-sales support.
•Action: Managers must analyze how work is done to deliver value, ensuring activities are
separated and understood, regardless of how the organization is structured.
•Requirement: Deep operational knowledge is essential to map the value chain effectively.

2. Establish the Relative Importance of Each Activity

•Objective: Determine the cost contribution of each activity to the overall production cost.
•Action: Use activity-based costing (ABC) to allocate total costs to specific activities.
•Focus: Address activities that are cost-intensive or inefficient, especially those that underperform
compared to competitors.

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 Steps to Gain Cost Advantage
3. Identify Cost Drivers for Each Activity
Value Chain Analysis

•Objective: Understand the factors influencing costs in each activity.

•Examples of Cost Drivers:
• Labor-Intensive Activities: Work hours, wage rates, efficiency.
• Material-Intensive Activities: Procurement costs, transportation, inventory levels.
•Action: Focus efforts on controlling and improving these cost drivers.

4. Identify Links Between Activities

•Objective: Analyze interdependencies between activities to uncover cost-saving opportunities.

•Action: Determine how changes in one activity affect others.
•Example: Simplifying product design may reduce production and service costs.
•Caution: Ensure cost reductions in one area do not unintentionally increase costs elsewhere.

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 Steps to Gain Cost Advantage
5. Identify Opportunities for Cost Reduction
Value Chain Analysis

•Objective: Develop strategies to address inefficiencies and optimize cost drivers.

•Examples of Strategies:
• Increase productivity through automation or process improvements.
• Outsource labor to lower-cost regions.
• Streamline procurement processes or renegotiate supplier contracts.
•Outcome: A comprehensive plan for cost reduction while maintaining or improving quality.

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 Steps to Gain Differentiation Advantage
When competing on differentiation, a firm's strategy focuses on delivering unique, superior
Value Chain Analysis

products or services that fulfill varying customer needs, often resulting in a higher cost
structure. The value chain analysis (VCA) for differentiation follows three key steps:

1. Identify Customers' Value-Creating Activities

•Objective: Pinpoint activities in the value chain that contribute the most to creating value for
customers.
•Action: Focus on activities that differentiate the product or service in the market.
•Example: Apple’s success stems not only from high-quality products but also from
exceptional marketing efforts that create a strong brand identity.

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 Steps to Gain Differentiation Advantage
2. Evaluate Differentiation Strategies for Improving Customer Value
Value Chain Analysis

•Objective: Explore strategies to enhance differentiation and customer satisfaction.

•Potential Strategies:
• Add Product Features: Introduce innovative and useful features to meet customer needs.
• Focus on Customer Service: Ensure excellent responsiveness and support to build loyalty.
• Increase Customization: Offer personalized products or services to cater to specific
preferences.
• Offer Complementary Products: Enhance value by bundling related or complementary
offerings.
3. Identify the Best Sustainable Differentiation

•Objective: Develop a long-term strategy to maintain differentiation advantage.

•Action: Identify the combination of interrelated activities and strategies that deliver the most
sustainable competitive edge.
•Outcome: A holistic approach that integrates multiple activities to consistently create superior
customer value.

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 Value Chain Analysis Example
To achieve a cost advantage, a company must carefully analyze its activities to identify cost-saving
Value Chain Analysis

opportunities. This involves understanding where costs are incurred, what drives those costs, and
how different activities are connected. By streamlining processes, optimizing resources, and
reducing inefficiencies, a firm can lower costs and improve its competitive position. Here's a step-
by-step example of how this analysis can be done.

Step 1 – Firm’s Primary Activities

•Design and Engineering: Developing innovative product designs and ensuring functionality.
•Purchasing Materials and Components: Procuring raw materials and essential components.
•Assembly: Putting together components to create the final product.
•Testing and Quality Control: Ensuring products meet required standards.
•Sales and Marketing: Promoting the product to target customers.
•Distribution and Dealer Support: Delivering the product and providing support to dealers.

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 Steps to Gain Differentiation Advantage
Step 2 – Total Cost and Importance of Each Activity
Value Chain Analysis

Activity Cost ($ Million) Importance Level

Design and Engineering $164 Less important
Purchasing Materials $410 Very important
Assembly $524 Very important
Testing and Quality Control $10 Not important
Sales and Marketing $384 Important
Distribution and Dealer Support $230 Less important

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 Steps to Gain Differentiation Advantage
Step 3 – Key Cost Drivers Step 4 – Links Between Activities
Value Chain Analysis

•Design and Engineering: •High-quality assembly processes reduce defects, lowering

• Number and frequency of new models. costs in quality control and dealer support activities.
• Sales per model. •Locating plants near clusters of suppliers or dealers
•Purchasing Materials and Components: minimizes purchasing and distribution costs.
• Order size and frequency. •Standardizing fewer model designs simplifies assembly
• Average value of purchases per supplier. processes and reduces costs across multiple activities.
• Supplier location and proximity. •Increasing order sizes lowers purchasing costs but may
•Assembly: increase warehousing expenses.
• Scale and capacity utilization of plants.
• Plant location relative to suppliers and markets.
•Testing and Quality Control:
• Level of quality targets.
• Frequency of defects and rework required.
•Sales and Marketing:
• Advertising budget size.
• Strength of the existing brand reputation.
• Sales volume and market share.
•Distribution and Dealer Support:
• Number of dealers.
• Sales per dealer.
• Defects requiring repair or recalls.

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 Steps to Gain Differentiation Advantage
Step 5 – Opportunities for Reducing Costs
Value Chain Analysis

1.Streamline Model Designs:

• Develop a single, versatile model design for multiple regions to reduce costs in design,
engineering, and marketing.
• Simplify assembly and quality control processes, further lowering costs.
2.Optimize Procurement and Production:
• Consolidate orders to increase purchasing power and reduce supplier costs.
• Establish in-house manufacturing of components to eliminate transaction costs and
improve economies of scale.
3.Strategic Plant and Supplier Location:
• Build plants closer to suppliers and key markets to minimize transportation and
distribution expenses.
4.Leverage Economies of Scale:
• Optimize plant utilization and focus on higher production volumes to reduce unit costs.
5.Enhance Quality Control:
• Invest in advanced assembly and testing processes to reduce defect rates, minimizing
warranty claims and dealer support costs.
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 Summary
Value Chain Analysis (VCA) is a strategic tool used to examine a company’s internal activities to identify
sources of competitive advantage, whether through cost efficiency or differentiation. Developed by Michael
Porter, it categorizes business activities into primary activities (e.g., production, marketing, distribution)
and support activities (e.g., procurement, technology, infrastructure). These activities collectively create
value for customers.
For cost advantage, VCA focuses on identifying inefficiencies, understanding cost drivers, and reducing costs
without compromising value. Companies like Walmart and Toyota achieve this by streamlining operations,
optimizing supply chains, and leveraging economies of scale.
For differentiation advantage, VCA emphasizes creating superior products or services that meet unique
customer needs. Firms like Apple and Starbucks use innovation, customization, and customer experience to
stand out in the market.
VCA involves five key steps: identifying activities, assigning costs, analyzing cost drivers, examining links
between activities, and finding opportunities for improvement. Successful application depends on
understanding how activities interconnect and aligning them with the company’s strategy.
By uncovering strengths and weaknesses in internal operations, VCA helps organizations optimize resources,
enhance customer satisfaction, and build sustainable competitive advantages in their industry.

I appreciate your time

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