Value Chain Analysis

Introduction

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings:

(1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and

(2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.

Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced").

Linking Value Chain Analysis to Competitive Advantage

What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used.

Primary Activities

Primary value chain activities include:

Primary Activity Description

Inbound logistics All those activities concerned with receiving and storing externally sourced materials

Operations The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products)

Outbound logistics All those activities associated with getting finished goods and services to buyers

Marketing and sales Essentially an information activity - informing buyers and consumers about products and services (benefits, use, price etc.)

Service All those activities associated with maintaining product performance after the