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What is a value chain?

Coined by Michael E. Porter of Harvard Business School, the concept of the “value chain” has become an increasingly influential way for businesses to add value and, ultimately, maintain a competitive advantage. But what is a value chain? Let’s get started with our value chain definition.

Value chain definition

In short, a value chain is a term that describes every business activity that is involved in the creation of a product or service. For example, if your company manufactures products, conception, design, production, and distribution would all be represented in your value chain. Value chain analysis provides businesses with a way to visualise these activities. Using value chain analysis, you can increase the efficiency of your production so that you can maximise value and minimise cost.

Why is value chain analysis important?

Value chain analysis can help companies break down their global value chain into smaller pieces, giving them a much more insightful view of the associated costs. Consequently, it’s easier to identify activities that are especially inefficient. Using information from your global value chain, you can alter your production processes to minimise inefficiencies, benefit from economies of scale, cut down on waste, and boost profitability. With greater levels of competition than ever before, gaining a competitive advantage is increasingly difficult, but value chain analysis is one way of ensuring that your production mechanics are as efficient and streamlined as possible.

Value chain analysis: step by step

Now that you know a little more about the importance of value chain analysis, let’s explore how this useful tool works in practice.

  1. Determine primary and support activities. Firstly, you’ll need to work out your company’s primary and support activities. There are five main primary activities: inbound logistics, operations, outbound logistics, marketing and sales, and service. By contrast, support activities are activities that help to make your primary activities more efficient. Support activities fall into the following buckets: procurement, technological development, human resources management, and infrastructure.

  2. Analyse the value and cost of your company’s activities. Next, you should analyse the value/cost of these activities. Think about how each activity provides value, both to customers and the business at large. You also need to think about cost and determine which activities are cost-effective and which aren’t.

  3. Identify opportunities for maximising efficiency. The final part of your value chain analysis should identify opportunities where your business can gain a competitive advantage. Think about easy wins (i.e., minor changes that can produce significant results), as well as the larger, structural challenges that may be hampering the efficiency of your company’s production processes.

Value chain example

Now, let’s take a look at a value chain example to see how you would go about benefiting from a global value chain. Imagine that Company A, a SaaS business, wants to identify areas for improvement and, ultimately, reduce their operational costs. When running a value chain analysis, Company A would look at the five primary activities and four support activities, work out the value and cost associated with each of them, and then identify any areas for potential improvement.

For example, when it comes to service, Company A may have a limited customer service department. Upon conducting a value chain analysis, you may decide that the customer service team tat you do have – while not being especially costly – isn’t providing much value to the customer, and may in fact be a driver for increased customer churn. As such, Company A may see an opportunity to boost value by increasing their customer service capabilities.

Of course, there are plenty of online value chain analysis templates – based on Porter’s original conception of the value chain – that you can use to help conduct your global value chain analysis.

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