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Value Chain Analysis

The value chain encompasses the various business activities involved in creating a product or service, as defined by Michael Porter. It consists of primary activities, such as inbound logistics and marketing, and support activities, like procurement and human resources management, which enhance efficiency and competitive advantage. Conducting a value chain analysis helps businesses identify opportunities for improvement, optimize operations, and enhance customer satisfaction.

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Sara Zafar
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18 views

Value Chain Analysis

The value chain encompasses the various business activities involved in creating a product or service, as defined by Michael Porter. It consists of primary activities, such as inbound logistics and marketing, and support activities, like procurement and human resources management, which enhance efficiency and competitive advantage. Conducting a value chain analysis helps businesses identify opportunities for improvement, optimize operations, and enhance customer satisfaction.

Uploaded by

Sara Zafar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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UNDERSTANDING THE VALUE CHAIN

The term value chain refers to the various business activities and processes
involved in creating a product or performing a service. A value chain can consist
of multiple stages of a product or service’s lifecycle, including research and
development, sales, and everything in between. The concept was conceived by
Harvard Business School Professor Michael Porter in his book The Competitive
Advantage: Creating and Sustaining Superior Performance.

Taking stock of the processes that comprise your company’s value chain can
help you gain insight into what goes into each of its transactions. By maximizing
the value created at each point in the chain, your company can be better
positioned to share more value with customers while capturing a greater share
for itself. Similarly, knowing how your firm creates value can enable you to
develop a greater understanding of its competitive advantage.

COMPONENTS OF A VALUE CHAIN


According to Porter’s definition, all of the activities that make up a firm's value
chain can be split into two categories that contribute to its margin: primary
activities and support activities.
Primary activities are those that go directly into the creation of a product or the
execution of a service, including:

• Inbound logistics: Activities related to receiving, warehousing, and inventory


management of source materials and components
• Operations: Activities related to turning raw materials and components into a
finished product
• Outbound logistics: Activities related to distribution, including packaging,
sorting, and shipping
• Marketing and sales: Activities related to the marketing and sale of a product
or service, including promotion, advertising, and pricing strategy
• After-sales services: Activities that take place after a sale has been finalized,
including installation, training, quality assurance, repair, and customer service
Secondary activities help primary activities become more efficient—effectively
creating a competitive advantage—and are broken down into:
• Procurement: Activities related to the sourcing of raw materials, components,
equipment, and services
• Technological development: Activities related to research and development,
including product design, market research, and process development
• Human resources management: Activities related to the recruitment, hiring,
training, development, retention, and compensation of employees
• Infrastructure: Activities related to the company’s overhead and management,
including financing and planning

WHAT IS VALUE CHAIN ANALYSIS?


Value chain analysis is a means of evaluating each of the activities in a
company’s value chain to understand where opportunities for improvement lie.

Conducting a value chain analysis prompts you to consider how each step adds
or subtracts value from your final product or service. This, in turn, can help you
realize some form of competitive advantage, such as:

• Cost reduction, by making each activity in the value chain more efficient and,
therefore, less expensive
• Product differentiation, by investing more time and resources into activities like
research and development, design, or marketing that can help your product
stand out
Typically, increasing the performance of one of the four secondary activities can
benefit at least one of the primary activities.

WHY IS VALUE CHAIN ANALYSIS IMPORTANT?


Value chain analysis is essential for businesses to understand the sequence of
activities required to deliver a product or service.

In addition to optimizing budgets and establishing competitive advantage,


businesses can also use value chain analysis for:

• Supply chain management: Value chain analysis provides insights into how
each component of the supply chain adds value to the final product or service,
which can lead to better supplier coordination and logistics management.
• Strategic decision-making: Because the value chain provides an overview of
the company's operations and interactions with external stakeholders, you can
use it to help inform strategic decisions regarding partnerships, outsourcing,
product development, and market expansion strategies.
• Improving customer satisfaction: Insights gained from conducting a value
chain analysis can be used to enhance the quality of your product and
customer service, which can lead to higher customer satisfaction and loyalty.
• Innovation and development: The value chain can also highlight opportunities
for innovation like improving existing processes or identifying new ways in
which your product can provide value to the consumer.
• Environmental and social impact: Additionally, value chain analysis can be
used to assess a company's operations' environmental and social impacts,
which can help businesses adopt more sustainable practices and reduce their
environmental footprint.

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