Jun 10, 2013 · 2 min read
What is it?
Practice
According to CIMA Official Terminology, the value chain is a sequence of business activities by which, in the perspective of the end-user, value is added to (or costs incurred by) the products or services produced by an entity.
Value chain analysis is based on the principle that organisations exist to create value for their customers. In the analysis, the organisation’s activities are divided into separate sets of activities that add value.
The organisation can more effectively evaluate its internal capabilities by identifying and examining each of these activities. Each value-adding activity is considered to be a potential source of competitive advantage.
The three steps for conducting a value chain analysis are:
1. Separate the organisation’s operations into primary and support activities
Primary activities are those that physically create a product, as well as market the product, deliver the product to the customer and provide after-sales support. Support activities are those that facilitate the primary activities, for example, HR.
2. Allocate cost to each activity
Activity cost information provides managers with valuable insight into the internal capabilities of an organisation.
3. Identify the activities critical to customer satisfaction and market success
There are three important considerations in evaluating the role of each activity in the value chain:
Company mission, influencing the choice of activities undertaken
Industry type, which influences the relative importance of activities. The value chain for a service industry, for example, will look very different from that of a manufacturing industry
Value system, including the value chains of an organisation’s upstream and downstream partners in providing products to end-customers.
What benefits does Value Chain Analysis provide?
Value chain analysis can help organisations to gain better understanding of key capabilities and identify areas for improvement. It can help them to understand how competitors create value; and help organisations to decide whether to extend or outsource particular activities.
Questions to consider when implementing Value Chain Analysis
Can we identify our areas of activity easily?
Can we identify the costs and benefits of each activity easily?
How will we turn this analysis into competitive advantage?
In practice:
Value Chain Analysis
The Nestlé Cocoa Plan
(Nestle, 2013)
As part of their Creating Shared Value initiative Nestlé carried out a value chain analysis to identify the areas of greatest potential for joint value optimisation with society. These activities (Nutrition, Water and Rural Development) are seen as core to business strategy and operations, and vital to the welfare of the people in the countries where they operate.
In October 2009 the £67m ‘Cocoa Plan’ was launched in the Côte d’Ivoire, with planned investment of £67m over a 10-year period. The initiative aims to help cocoa farmers to run profitable farms and improve quality of life for their families, while ensuring a sustainable and high quality supply of cocoa in the long term. A focus on training, buying from co-operatives, eliminating child labour and working with the Fairtrade programme creates value, both for Nestlé and the farmers who supply them.
Related and similar practices
FAQs
Value chain analysis is a means of evaluating each of the activities in a company's value chain to understand where opportunities for improvement lie. Conducting a value chain analysis prompts you to consider how each step adds or subtracts value from your final product or service.
What are the 5 value chains? ›
The value chain framework encompasses five primary activities -- inbound operations, operations, outbound logistics, marketing and sales, and service -- and four secondary activities -- procurement and purchasing, human resource management (HRM), technological development and company infrastructure.
What are the 5 primary activities of the value chain analysis? ›
The primary activities of the value chain include inbound logistics, operation outbound logistics, marketing and sales, and service. Secondary activities or the support activities include firm infrastructure, human resources management, and procurement.
What are the three steps in value chain analysis? ›
Three main steps can be distinguished in value chain analysis: (1) Identify the main functions and types of firms in the value chain; (2) Analyze structural connections; and (3) Analyze dynamics.
What is an example of a value chain analysis approach? ›
Value Chain Analysis Example #1: Apple Inc.
For example, in inbound logistics, Apple focuses on efficient supplier management to ensure the timely delivery of components for its products. In operations, the company emphasizes quality control and innovative manufacturing processes.
What are the 6 steps in the value chain? ›
How to Perform a Value Chain Analysis in 6 steps
- Identify primary and support activities. ...
- Evaluate the cost of each activity. ...
- Identify which activities create value for your customers. ...
- Analyze the relationship between different activities. ...
- Identify your best opportunities for competitive advantage. ...
- Execute your strategy.
Starbucks Corporation
Starbucks (SBUX) offers one of the most popular examples of a company that understands and successfully implements the value-chain concept.
What are the six 6 value chain activities? ›
Key Service Value Chain Activities. The six key activities of the Service Value Chain are Plan, Improve, Engage, Design and Transition, Obtain/Build, and Deliver and Support. Each of these contributes to value creation by transforming various inputs into specific outputs.
What is Porter's value chain model? ›
Porter's value chain involves five primary activities: inbound logistics, operations, outbound logistics, marketing and sales, and service.
What is the Porter's value chain? ›
What is Porter's Value Chain? Porter's Value Chain is a way to map out how your business creates value for the market. In simple terms every organisation takes a collection of inputs and produces output. The output has more value to their audience than the inputs.
1. Identify Value Chain Activities. The first step in conducting a value chain analysis is to understand all of the primary and secondary activities that go into your product or service's creation. If your company sells multiple products or services, it's important to perform this process for each one.
How do you break down a value chain? ›
The primary activities in a value chain include inbound and outbound logistics, operations, marketing, sales, and services. Primary value chain activities include every step in the physical creation, sale, maintenance, and support of a product. It's the entire production process of creating a new product.
What are the value chain techniques? ›
A company's value chain can be divided into primary activities and secondary (or support) activities. Value chain analysis is the process of examining each of those activities in terms of what they cost, the value they deliver, and how they might be optimized in keeping with the company's competitive strategy.
What is the value chain structure? ›
“The value chain describes the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use.
What are the four 4 brand value chains? ›
There are 4 brand value chain stages (marketing program investment, customer mindset, market performance, and shareholder value.)
What is the basic value chain? ›
A value chain refers to the full lifecycle of a product or process, including material sourcing, production, consumption and disposal/recycling processes.”
What is the value chain model? ›
The value chain is a business model used to examine all company activities involved in taking a product or service from idea to sellable item. Ideally, companies can use the value chain model to strengthen their point of view and widen their profit margin—more efficiency and fewer costs.
