Value Chain Analysis

An NSC2 Ini*a*ve

Pranshu Gupta

Michael Porter

In his 1985 book

Compe99ve advantage cannot be understood by looking at a rm as a

whole. It stems from the many discrete ac9vi9es a rm performs in
designing, producing, marke9ng, delivering and suppor9ng its product.
Each of these ac9vi9es can contribute to a rm's rela9ve cost posi9on
and create a basis for dieren9a9on.
- Michael Porter

Value Chain
Value Chain Analysis
Industry VC v/s Firm Level VC
Value Chain Analysis 2 Approaches
Cost Advantage
Dieren?a?on Advantage
Example Automobile Manufacturer
References & Further Reading

Value Chain
A Value Chain is a chain of ac9vi9es that a rm opera*ng in a specic
industry performs in order to deliver a valuable product or service for
the market
The idea of the value chain is based on the process view of
organiza*ons, the idea of seeing a manufacturing (or service)
organiza*on as a system, made up of subsystems each with inputs,
transforma*on processes and outputs
Inputs, transforma*on processes, and outputs involve the acquisi*on
and consump*on of resources - money, labour, materials,
equipment, buildings, land, administra*on and management
How value chain ac*vi*es are carried out determines costs and
aects prots

Value Chain
Value Chain of Crude Oil
Explora*on

Produc*on

Transport
Bulk
Carriers,
Pipelines

Crude
Oil
Upstream

Intermediate
Storage
Downstream

Consumers
Retail,
Commerci
al,
Industrial

Rening

Marke*ng Co

Intermediate
Storage

Petrol
Diesel
Lubes
Chemicals,
etc.

Value Chain Analysis

Value chain analysis (VCA) is a process where a rm iden*es its
primary and support ac*vi*es that add value to its nal product and
then analyze these ac*vi*es to reduce costs or increase
dieren*a*on
VCA is a strategy tool used to analyze internal rm ac*vi*es
Goal is to recognize, which ac*vi*es are the most valuable (i.e. are
the source of cost or dieren*a*on advantage) to the rm and which
ones could be improved to provide compe**ve advantage
The analysis reveals where a rms compe**ve advantages or
disadvantages are

Value Chain Analysis

Value chain represents all the internal ac*vi*es a rm engages in to produce
goods and services
VC is formed of
primary ac?vi?es that add value to the nal product directly and
support ac?vi?es that add value indirectly
PRIMARY

SECONDARY

Value Chain Analysis

Primary ac*vi*es add value directly to the produc*on process, they
are not necessarily more important than support ac*vi*es
Dieren9a9on advantage
Secondary - compe**ve advantage mainly derives from technological
improvements or innova*ons in business models or processes
e.g. informa*on systems, R&D, general management
Cost advantage
Primary - where costs can be easily iden*ed for each ac*vity and
properly managed

Industry VC v/s Firm Level VC

Firms VC is a part of a larger industry VC.
The more ac*vi*es a company undertakes compared to industry VC,
the more ver*cally integrated it is

An industry value chain and its rela?on to a rm level VC

Value Chain Analysis 2 Approaches

There are two dierent approaches on how to perform the analysis,
which depend on what type of compe**ve advantage a company
wants to create cost or dieren*a*on advantage
Cost Advantage

Dieren?a?on Advantage

This approach is used when organiza*ons try to

compete on costs and want to understand the
sources of their cost advantage or disadvantage
and what factors drive those costs.

The rms that strive to create superior products

or services use dieren*a*on advantage
approach.

Step 1. Iden*fy the rms primary and support

ac*vi*es.
Step 2. Establish the rela*ve importance of each
ac*vity in the total cost of the product.
Step 3. Iden*fy cost drivers for each ac*vity.
Step 4. Iden*fy links between ac*vi*es.
Step 5. Iden*fy opportuni*es for reducing costs.

Step 1. Iden*fy the customers value-crea*ng

ac*vi*es.
Step 2. Evaluate the dieren*a*on strategies for
improving customer value.
Step 3. Iden*fy the best sustainable
dieren*a*on.

Cost Advantage
Step 1

Iden?fy the rms primary and support ac?vi?es

All the ac*vi*es that are undertaken to produce goods or services have to be clearly iden*ed and
separated from each other
Establish the rela?ve importance of each ac?vity in the total cost of the
Step 2
product
The total costs of producing a product or service must be broken down and assigned to each ac*vity /
process

Step 3

Iden?fy cost drivers for each ac?vity

Cost Drivers: Factors that drive or have an impact on the cost for each ac*vity / process

Step 4

Iden?fy links between ac?vi?es

Reduc*on of costs in one ac*vity may lead to further cost reduc*ons in subsequent ac*vi*es
E.g. Fewer components in design phase, procuring raw material from dierent sources, outsourcing
labor intensive jobs, etc.

Step 5

Iden?fy opportuni?es for reducing costs

When the inecient ac*vi*es and cost drivers are known; improvement plan can be designed and
implemented

Example Automobile Manufacturer

Step 1

Design &
Engg

Purchasing

Assembly

QA / QC

Sales /
Marke*ng

Distribu*on
& Support

$ 410 M V Imp

$ 524M V Imp

$ 10 M Not Imp

$ 384 M Imp

$ 230 M Less Imp

Level of quality
targets, Frequency
of defects

Size of adver*sing
budget, Strength of
exis*ng reputa*on,
Sales Volume

Number of dealers,
Sales per dealer,
Frequency of
defects requiring
repair recalls

Step 2

$ 164 M
Less Imp

Step 3

Number and
frequency of new
models, Sales per
model

Step 4

1. High-quality assembling process reduces defects and costs in quality control and dealer support ac*vi*es
2. Loca*ng plants near the cluster of suppliers or dealers reduces purchasing and distribu*on costs
3. Fewer model designs reduce assembling costs
4. Higher order sizes increase warehousing costs

Step 5

1. Create just one model design for dierent regions to cut costs in designing and engineering, to increase order
sizes of the same materials, to simplify assembling and quality control processes and to lower marke*ng costs.
2. Manufacture components inside the company to eliminate transac*on costs of buying them in the market and to
op*mize plant u*liza*on. This would also lead to greater economies of scale

Order size, Average

value of purchases
per supplier,
Loca*on of
suppliers

Scale of plants,
Capacity u*liza*on,
Loca*on of plants

Dieren?a?on Advantage

Step 1

Iden?fy the customers value-crea?ng ac?vi?es

Iden*fy most customer Value adding ac*vi*es

E.g. Design phase in Automobile products, Flying *me in avia*on, etc.

Step 2

Evaluate the dieren?a?on strategies for

improving customer value

Use variety of strategies at varied ac*vity levels in order to create dieren*a*on

E.g. Add more product feature, focus on customer service, customiza*on, etc.

Step 3

Iden?fy the best sustainable dieren?a?on

Superior dieren*a*on and customer value will be the result of many interrelated ac*vi*es and strategies
used. The best combina*on of them should be used to pursue sustainable dieren*a*on advantage

References & Further Reading

Wikipedia, hjp://en.wikipedia.org/wiki/Value_chain
hjp://www.strategicmanagemen*nsight.com/tools/value-chain-analysis.html
hjp://www.mindtools.com/pages/ar*cle/newTMC_10.htm
hjp://www.mindtools.com/pages/ar*cle/newSTR_66.htm

Thank You