Value chain analysis is an essential strategic tool that deconstructs a company into its strategically relevant activities. By examining individual activities, firms can identify competitive advantages and disadvantages within their operations.
This article offers a short step-by-step guide on how to effectively perform value chain analysis:
Understanding Value Chain Analysis
At its core, the value chain illustrates how a company generates value through a series of interrelated activities. These encompass inbound logistics, operations, outbound logistics, marketing, sales, service, and more.
The primary goals of value chain analysis are to:
- Understand the flow of products, information, and capital through value-adding activities
- Analyze each activity’s role in driving differentiation or impacting costs.
- Identify high-impact activities that are central to gaining competitive advantage.
Conducting value chain analysis helps companies tailor their operations for enhanced efficiency and uniqueness, creating a solid foundation for strategy formulation and execution.
Steps in Value Chain Analysis
To carry out a thorough value chain analysis, follow these six essential steps:
- Map the industry value chain
- Document and understand all strategically pertinent activities in a typical industry value chain, from the initial acquisition of raw materials to their final consumption by customers.
- Examine the interrelations, dependencies, and the interconnected nature of these activities.
- Assess variations in the value chain to gain insights into the strategies of different industry players.
- Define your company’s value chain
- List all the discrete activities that span your company’s operations, including functions such as marketing, services, human resources, technology, and support functions
- Leverage tools like process mapping to systematically detail these critical activities.
- Differentiate between primary activities, which directly create customer value, and support activities.
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- Diagnose cost drivers
- Investigate the factors that lead to cost fluctuations for each activity, including scale, capacity utilization, variability, overhead, and personnel efficiency.
- Pinpoint activities that present potential cost advantages or those that are causing cost escalations.
- Focus on price drivers
- Identify which factors can bolster an activity’s uniqueness and enhance customers’ willingness to pay more for your product or service.
- Consider how these activities could be executed more effectively or distinctively compared to your competition.
- Identify activities that are a source of differentiation and those detracting from it.
- Quantify financial performance impact
- Approximate the revenues, costs, and assets tied to each activity.
- Determine the contribution of each activity to profit margins, return on investment, and asset turnover.
- Identiy high-impact activities with the strongest financial impact.
- Reconfigure your company’s value chain
- Consider changes to the value chain that could strengthen the company’s competitive position.
- Improve cost efficiency and enhance differentiation drivers for activities with significant impact.
- Identiy high-impact activities with the strongest financial impact.
- Reconfigure the connections and strategic fit between activities to achieve a greater competitive advantage.
Conclusion
By following these structured steps, companies can gain valuable insights into how to optimize their value chain for improved efficiency and uniqueness, setting them apart from their industry counterparts. Value chain analysis is not merely an exercise—it’s a critical element in strategic development and decision-making.
ABOUT THE AUTHOR(s)
Roland Tannous is managing partner and lead strategy and digital transformation consultant at GravityThink.
Roland Tannous is managing partner and lead strategy and digital transformation consultant at GravityThink.
