Value Chain Analysis

Achieving Excellence in the Things That Really Matter

Dr. Shailashree Haridas

 Value chain analysis (VCA) is a process where

a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation. Value chain represents the internal activities a firm engages in when transforming inputs into outputs.

 M. Porter introduced the generic value chain

model in 1985. Value chain represents all the internal activities a firm engages in to produce goods and services. VC is formed of primary activities that add value to the final product directly and support activities that add value indirectly.

Original diagram

Value Chain Model by Given by Michel Porter in 1985

Support Activities
Although, primary activities add value directly to

the production process, they are not necessarily more important than support activities. Competitive advantage mainly derives from technological improvements or innovations in business models or processes. Therefore, such support activities as information systems, R&D or general management are usually the most important source of differentiation advantage. On the other hand, primary activities are usually the source of cost advantage, where costs can be easily identified for each activity and properly managed.

How to Use the VCA

Value Chain Analysis is a three-step process:

Activity Analysis: First, you identify the activities

you undertake to deliver your product or service; Value Analysis: Second, for each activity, you think through what you would do to add the greatest value for your customer; and Evaluation and Planning: Thirdly, you evaluate whether it is worth making changes, and then plan for action.

Step 1 Activity Analysis

( Brain Storming)
How you recruit people with the skills to give the

best service. How you motivate yourself or your team to perform well. How you keep up-to-date with the most efficient and effective techniques. How you select and develop the technologies that give you the edge. How you get feedback from your customer on how you're doing, and how you can improve further?

Step 2 Value Analysis

each activity you've identified, list the "Value

Factors" the things that your customers' value in the way that each activity is conducted.

Step 3 Evaluate Changes and Plan for Action

Example

Example
Lakshmi is a software development manager for

a software house. She and her team handle short software enhancements for many clients. As part of a team development day, she and her team use Value Chain Analysis to think about how they can deliver excellent service to their clients. During the Activity Analysis part of the session, they identify the following activities that create value for clients:

Primary
Order taking

Enhancement specification
Scheduling Software development Programme testing Delivery Support

non-client-facing activities as being important:

Recruitment: Choosing people who will work well

with the team. Training: Helping new team members become effective as quickly as possible, and helping team members learn about new software, techniques and technologies as they are developed.

she and her team focus on the Order Taking process, and identify the factors that will give the greatest value to customers as part of this process. They identify the following Value Factors: 1. Giving a quick answer to incoming phone calls. 2. Having a good knowledge of the customer's business, situation and system, so that they do not waste the customer's time with unnecessary explanation. 3. Asking all the right questions, and getting a full and accurate understanding of the customer's needs. 4. Explaining the development process to the customer and managing his or her expectations as to the likely timetable for delivery.

To develop VCA for small business

Find out action items 1. Action Item (what): Increase small business sales and grow market share by 10% a year over the next 3 years. (The strategic goal was to become a leader in the industry - growing market share is one action this company might take to get to their goal.)

To develop VCA for small business

Find out action items 2. Who's responsible: A team; or the owner; or sales and operational staff (it is not sales' responsibility alone to achieve growth; this must be done in conjunction with the operations group (if a manufacturing company) or with buyers (if a retail store e.g. what's hot, what's not; sales staff can't increase sales if the stock is wrong or outdated); or consider the advantages of outsourcing and identify outside resources who could help and include a budget in this part of the process.

To develop VCA for small business

Find out action items 3. How: This would depend on whether you are growing the market (by adding new products) or whether you are taking away someone else's share. If you add new products, you need to conduct solid market research to make sure that the products are viable, that you understand the product's life-cycle, that you have strong product differentiation and uniqueness, and that you have positioned the product well. If you plan to take away someone else's share of the market you need to have something of higher value than whatever your competitor offers: e.g. significantly better customer service or delivery or product or price or brand or ?

To develop VCA for small business

Find out action items 4. When: Put in place time measures. For example, a market research study to be completed in one month; a new product or service to be launched in 6 months; how long for sales to achieve a good number; etc.

Common mistakes
Most businesses analyze their own internal cost

structures but most do not analyze their competitor's structures. Solution Analyze your value chains for your business and then compare to the competitors in your industry that have (in total) up to 80% of the market share - do not spend a lot of time analyzing the smaller competitors unless you believe they are up and coming.

Subject to availability of data

If you are operating in an industry where most

competitors are publicly traded, you will be able to access most of their financial statements through their mandated public annual reports. If your business and/or industry is populated with privately held companies, your cost analysis does not need to include specific costs it's unlikely your competitor will give you those but by analyzing where in your competitor's process they must incur cost, you can get a very good idea of your competitor's efficiencies and inefficiencies and you should be able to estimate some of their costs.

Take a way
if you are the high value, high quality market

leader, your chain will be quite different than the low cost, high volume competitor. Understand how those differences influence your analysis and make sure that your business strategy is in-tune with your market and with your strategic objectives. Expect your competitors to have a value chain quite different than yours; because their business grew from a different set of circumstances and a different set of operating parameters than your business.

Possible changes in VC
Shifts in value - and hence profit - between tiers or

players in a industry stack New market opportunities from arbitraging between two industries or chains. Impact of saturation of suppliers in a growth market. Implications of unpredicted business success or failure elsewhere in the chain The impact of Global Production Networks on established technology businesses Variations in demand, procurement and routes to market between customer types Implications of cross-subsidies between value chain layers

Steps in Value Chain Analysis

Value chain analysis can be broken down into a

three sequential steps: (1) Break down a market/organisation into its key activities under each of the major headings in the model; (2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage; (3) Determine strategies built around focusing on activities where competitive advantage can be sustained

Key Points VCA as three stage process: Activity Analysis, where you identify the activities that contribute to the delivery of your product or service. Value Analysis, where you identify the things that your customers value in the way you conduct each activity, and then work out the changes that are needed. Evaluation and Planning, where you decide what changes to make and plan how you will make them.

By using Value Chain Analysis and by following it through to action, you can achieve excellence in the things that really matter to your customers.

Steps to achieve the cost advantage or differentiation strategy by using VCA

Competitive advantage
Means superior performance relative to other

competitors in the same industry or superior performance relative to the industry average. It can mean anything that an organization does better compared to its competitors.

 There is no one answer about what is competitive

advantage or one way to measure it, and for the right reason. Nearly everything can be considered as competitive edge, e.g. higher profit margin, greater return on assets, valuable resource such as brand reputation or unique competence in producing jet engines. Every company must have at least one advantage to successfully compete in the market. If a company cant identify one or just doesnt possess it, competitors soon outperform it and force to leave the market.

Competitive advantage.
A company that is able to achieve superiority in

cost or differentiation is able to offer consumers products at lower costs or with higher degree of differentiation and most importantly, is able to compete with its rivals. An organization that is capable of outperforming its competitors over a long period has sustainable competitive advantage.

Competitive advantage model