Companies need tools that allow them to analyze complex systems involving many people, costs, and variables. Value chain analysis or value chain analysis is one of these tools, and it allows decision-makers to analyze each business factor separately.
Learning more about value chain analysis and how to use it can help you find ways to streamline processes and increase profits. In this article, we describe the components of value chain analysis and review examples of how this tool can be used.
What is value chain analysis?
Value chain analysis or value chain analysis is a special way to analyze costs and business departments and make them more efficient. Michael E. Porter, an economist and scholar, developed this concept and wrote about it in his 1985 book “Competitive Advantage: Creating and Maintaining Superior Performance.”
Companies in every industry can use value chain analysis to improve their business processes, making it a valuable tool to consider using.
What to include in a value chain analysis
Value chain analysis includes two types of activities:
Main activities
These are the main activities in value chain analysis:
- Inbound logistics: Inbound logistics refers to the process of all inventory arriving and being stored until needed.
- Operations: Operations are the part of the process that involves whatever the core business objective is, whether it includes manufacturing a product, performing a service, or repackaging bulk goods.
- Outbound logistics: Outbound logistics refers to the part of the process by which products are shipped to customers, wholesalers or retailers.
- Marketing and sales: Marketing and sales processes, including advertising and communications, are also key activities.
- Service: This is a category of company involvement with the product after it is sold or shipped. Maintenance, installation, recall, training and customer service all fall under the service category.
Support activities
The following are supporting activities in value chain analysis:
- Enterprise infrastructure: Enterprise infrastructure includes corporate planning and accounting, as well as legal and quality management departments.
- Human resource management: This category includes hiring, recruiting, training, and paying employees.
- Technology: Technology includes the research and development of new technologies and methods.
- Procurement: This includes all physical and digital purchases, but also includes any outsourcing.
How to make value chain analysis in business
Here are the steps for applying value chain analysis to your own business:
1. Identify the main and supporting activities in your company
The first step is to identify the appropriate elements in each value chain analysis activity. If your business doesn’t manufacture a specific product, you may have to carefully consider what the different activities mean for your business.
For example, if you provide creative services or resell antiques, the technology activity could be your specific creative process or a list of suppliers you choose.
2. Determine the value and cost of each component
After you have categorized all the activities in your business, determine the cost and value of each component. Costs for some factors, such as customer service, maybe in terms of time rather than dollars.
3. Find a place to create a competitive advantage
Take a look at the costs and value you have accumulated and see if there is a place where you can make your own business more efficient. This efficiency can create a competitive advantage in your market so that you perform better when compared to similar businesses.
A good approach is to consider whether the cost and value are proportional to each item. If the task costs more than it provides, you may be able to streamline it. In areas where the business is performing well, you may be able to allocate more company resources.
It is important to remember that each activity in value chain analysis has a specific role required for the business to function. While placing more focus on sales can increase your profit margins, human resource management also requires resources to ensure employees remain satisfied.
Benefits of doing value chain analysis
Value chain analysis can help businesses in a number of ways:
- Gains in efficiency: Can make a business more efficient by showing where the business can save money.
- Strategic planning aid: This analysis helps the company plan for the future as it shows which areas provide the most value to the company.
- Create or enhance a competitive advantage: Because it allows comparisons in specific areas, this analysis helps show performance differences between a business and its competitors. It can also indicate areas for improvement.
- Articulate the specific value the company creates: This analysis can show where the company is creating value and where it is losing money so that decision-makers can gauge the most valuable parts of the process.
Contoh analisis value chain
Here’s an example of a value chain analysis to help you get a better understanding of the process:
A company called “Writing on the Wall” creates typographic artwork that is commissioned for clients. These are some of the processes they break down into Porter’s different main and support activities:
- Inbound logistics: Receive, store paint and supplies
- Operation: Painting and artwork packaging
- Outbound logistics: Delivery of finished artwork
- Marketing and sales: Social media marketing and email lists
- Service: Arranging repeat orders and occasionally repairing artwork damaged in transit
- Enterprise infrastructure: Accounting services, payroll and a set of six-month, one-year and five-year strategic plans for businesses
- Human resource management: Training for two studio assistants, maintaining employee and payroll handbooks
- Technology: Experiment with new media, designs, sizes and materials for artwork
- Procurement: Create orders for new supplies and communicate them to the nearest art supply store
Because Writing on the Wall is a small business, they find that some logistics functions take up more of their employees’ time. They added software to automate tax and payroll records and worked with talent services to recruit seasonal employees for busy times. This reduces the cost of human resource management and the company’s infrastructure area.
Since their customers value the quality and innovation of their unique products the most, the company decided to spend some of the saved resources on developing new techniques and spend more time on each painting, increasing costs for the area of operation and technology. This allows them to provide more value to their customers without increasing the price of their art.