As a business, you use many metrics to evaluate performance, such as revenue, growth, and conversion rates. But how do you determine the actual value you provide to customers versus that of your competitors?
One way is to identify your company’s value chain. In this article, we’ll explore what a value chain is, how to identify the elements that comprise it, and how to use value chain analysis to gain a competitive advantage in the market.
What is a value chain?
The term value chain was coined by Dr. Michael E. Porter in his 1985 book, The Competitive Advantage: Creating and Sustaining Superior Performance. An economist and professor at the Harvard School of Business, Porter’s concept of the value chain helps business leaders understand how the activities within a company influence its profit margin. helps business leaders understand how the activities within a company influence its profit margin.
Porter’s value chain model is built on a combination of primary and support activities. Primary activities are those that add value directly to the production process, while support activities add value indirectly by supporting the primary processes. Let’s take a closer look at each.
Primary value chain activities
When evaluating your company’s value chain, there are five primary activities you should analyze to ensure that the value you create exceeds the cost associated with developing the product or service:
- Inbound logistics. All components of receiving, warehousing, and inventory management of the raw materials needed to create a product or deliver a service. This also applies to your company’s relationship with vendors and suppliers.
- Operations. All processes involved in the conversion of raw materials into a finished product or service.
- Outbound logistics. Any activity concerning the distribution of a product or service to consumers, distributors, and retailers. This includes packaging, shipping, and storage of products.
- Marketing and sales strategies. Any and all activities required to market and sell a product or service (such as promotions, advertisements, and pricing strategies).
- Services. Activities that enhance the consumer’s experience, such as product installation, delivery of a service, maintenance, repairs, refunds, exchange options, and customer service.
Secondary value chain activities
Secondary activities can help improve the efficiency of the primary activities in the value chain. The following four support activities typically play a role in each primary activity: typically play a role in each primary activity:
- Firm infrastructure. Support systems and functions that maintain operations, such as planning, accounting, finance, legal, and administrative functions.
- Human resources (HR) management. Encompasses all employee-related activities, such as recruitment, hiring, and training. HR management ensures your organization can deliver on all five primary activities.
- Technological development. Research and development activities such as automating processes and developing efficient manufacturing processes.
- Procurement. The process of sourcing and acquiring raw materials, resources, and equipment needed to produce your company’s products and services. Procurement is related closely to inbound logistics.
Primary and support activities in a value chain analysis (Source: Bizagi)
What is value chain analysis?
Evaluating the activities involved in creating, marketing, and distributing products or service offerings is known as value chain analysis. It’s a type of internal analysis that gives you a dynamic view of how your activities form a successful business system.
This differs from SWOT analysis, which identifies your organization’s strengths, weaknesses, opportunities, and threats.
Both analyses are beneficial for improving your business outcomes, but a value chain analysis is a visual model of these activities, which helps you identify ways to improve operational efficiency using one of the following strategies:
- Cost advantage. Using low-cost materials and resources to offer the lowest-cost products or services in your industry or market.
- Differentiation. Offering a unique or specialized product or service allows you to increase the price based on a higher perceived value.
What are 5 steps to conduct a value chain analysis?
The internal and external data collected when conducting a value chain analysis will help you determine the best value chain analysis strategy to boost your competitive advantage.
There are five primary steps in conducting a value chain analysis:
- Identify your primary and support value chain activities. This is a time-intensive task that requires identifying each activity in detail. You should encourage feedback from a cross-functional team of key stakeholders within your company to obtain a clear picture of your value chain activities.
- Evaluate the value and cost of the activities. This includes identifying the activities that contribute the most to your revenue, as well as calculating your contribution margin, which is connected to the profitability of a particular product.
- Analyze your customers’ value perceptions. Your customers’ perception has a significant impact on product margins. Collect qualitative and quantitative data to help you identify patterns in their buying behaviors.
- Assess your competition’s value chains. Market analysis using competitive benchmarking can help you understand how your value chain compares to a competitor’s. This enables you to evaluate company strategies, process structures, operations, and performance outcomes to make comparisons and determine value.
- Determine your potential competitive advantage. Now that you have identified all value chain activities, evaluated their value and cost, analyzed your customers, and assessed the competition, you are well-equipped to decide if a cost advantage or differentiation strategy best meets your needs will best meet your needs.
Cost advantage strategy
The cost advantage strategy finds ways to optimize and reduce the cost of primary and support value chain activities. The goal is to save money without impacting the quality of products and services.
IKEA, the Swedish furniture retailer, is a key example of using a cost advantage strategy to gain a competitive edge. They produce large volumes of standardized products and seek low-cost suppliers.
The company ships products unassembled, which means they do not need internal resources to build the products. This helps keep IKEA’s prices low.
Implementing a cost advantage strategy may include the following processes:
- Automate functions related to production and distribution (e.g., implementing software to speed up the completion of manual tasks).
- Seek out low-cost suppliers for raw materials.
- Leverage economies of scale (producing more units of goods or services with fewer input costs) to reduce product and service prices.
Since all aspects of your business are connected, cutting costs for one activity could also decrease costs in other areas. For example, automated processes won’t just cut down on labor costs—they’ll also free up personnel to focus on more impactful tasks.
Differentiation advantage strategy
The differentiation advantage strategy is based on creating superior products or services, which could entail offering additional product or service features to meet a greater number of customer needs.
Analyzing your customers’ value perceptions will help inform your differentiation strategy. You must identify what––in the eyes of your customers––will deliver the most value.
For example, Starbucks has invested heavily in the “Starbucks Experience,” a marketing and sales effort that builds a loyal customer base. This starts with how Starbucks stores are designed: focusing on ambience, accessibility, and comfort, which ensures that people enjoy their visit.
Starbucks prioritizes customer service, from writing customer names on their coffee cups to offering incentives like the Starbucks Rewards Card and the Starbucks Customer Experience Survey. The Starbucks app boosts engagement and brand loyalty with features such as a trackable rewards system, free perks, and GPS notification of nearby Starbucks locations.
You can increase product and service differentiation to drive customer value through the following strategies:
- Add additional product features to set you apart from your competitors.
- Improve customer service and responsiveness to help build brand loyalty and trust.
- Increase product customization to better meet the specific needs of your customers.
- Offer complementary products, such as accessories or additional services that may appeal to your customers.
How to use MindManager to model value chain analysis
Value chain analysis is a data-intensive process that breaks down and analyzes each activity that contributes to your finished product or service.
One way to simplify this process is by using a visual planning tool such as MindManager®. This solution enables you to leverage templates such as Gantt charts, which can be an ideal way to capture and visualize all primary and secondary activities that comprise your value chain analysis.
Gantt chart in MindManager
Once you’ve identified your value chain activities, you may discover processes that involve more than one team (e.g., a product moving from design to production to marketing).
In such instances, using a swim lane diagram can help you document the processes associated with your product or service and identify who is responsible for each step in the process.
Swim lane diagram in MindManager
You can also use MindManager to create a product development roadmap to strategize your competitive advantage.
Product roadmap diagram in MindManager