Value Chain Analysis Article

VALUE CHAIN ANALYSIS ARTICLE

The article focuses on the main aspects of Value chain analysis. The activities entailed in the framework are discussed in detail, with respect to competitive strategies and value to the customer. The article includes tips for students and analysts on how to write a good Value chain analysis for a firm. Moreover, sources of findings information for value chain analysis have been discussed. The limitations of Value Chain analysis as a model have also been discussed.

Introduction

The value chain approach was developed by Michael Porter in the 1980s in his book "Competitive Advantage: Creating and Sustaining Superior Performance" (Porter, 1985). The concept of value added, in the form of the value chain, can be utilised to develop an organisation's sustainable competitive advantage in the business arena of the 21st C. All organisations consist of activities that link together to develop the value of the business, and together these activities form the organisation's value chain. Such activities may include purchasing activities, manufacturing the products, distribution and marketing of the company's products and activities (Lynch, 2003). The value chain framework has been used as a powerful analysis tool for the strategic planning of an organisation for nearly two decades. The aim of the value chain framework is to maximise value creation while minimising costs (www.wikipedia.org).

Main aspects of Value Chain Analysis

Value chain analysis is a powerful tool for managers to identify the key activities within the firm which form the value chain for that organisation, and have the potential of a sustainable competitive advantage for a company. Therein, competitive advantage of an organisation lies in its ability to perform crucial activities along the value chain better than its competitors.

The value chain framework of Porter (1990) is "an interdependent system or network of activities, connected by linkages" (p. 41). When the system is managed carefully, the linkages can be a vital source of competitive advantage (Pathania-Jain, 2001). The value chain analysis essentially entails the linkage of two areas. Firstly, the value chain links the value of the organisations' activities with its main functional parts. Then the assessment of the contribution of each part in the overall added value of the business is made (Lynch, 2003). In order to conduct the value chain analysis, the company is split into primary and support activities (Figure 1). Primary activities are those that are related with production, while support activities are those that provide the background necessary for the effectiveness and efficiency of the firm, such as human resource management. The primary and secondary activities of the firm are discussed in detail below.

Primary activities

The primary activities (Porter, 1985) of the company include the following:

* Inbound logistics

These are the activities concerned with receiving the materials from suppliers, storing these externally sourced materials, and handling them within the firm.

* Operations

These are the activities related to the production of products and services. This area can be split into more departments in certain companies. For example, the operations in case of a hotel would include reception, room service etc.

* Outbound logistics

These are all the activities concerned with distributing the final product and/or service to the customers. For example, in case of a hotel this activity would entail the ways of bringing customers to the hotel.

* Marketing and sales

This functional area essentially analyses the needs and wants of customers and is responsible for creating awareness among the target audience of the company about the firm's products and services. Companies make use of marketing communications tools like advertising, sales promotions etc. to attract customers to their products.

* Service

There is often a need to provide services like pre-installation or after-sales service before or after the sale of the product or service.

Support activities

The support activities of a company include the following:

* Procurement

This function is responsible for purchasing the materials that are necessary for the company's operations. An efficient procurement department should be able to obtain the highest quality goods at the lowest prices.

* Human Resource Management

This is a function concerned with recruiting, training, motivating and rewarding the workforce of the company. Human resources are increasingly becoming an important way of attaining sustainable competitive advantage.

* Technology Development

This is an area that is concerned with technological innovation, training and knowledge that is crucial for most companies today in order to survive.

* Firm Infrastructure

This includes planning and control systems, such as finance, accounting, and corporate strategy etc. (Lynch, 2003).

Figure 1: The Value Chain: Source: Porter (1985)

Porter used the word 'margin' for the difference between the total value and the cost of performing the value activities (Figure 1). Here, value is referred to as the price that the customer is willing to pay for a certain offering (Macmillan et al, 2000). Other scholars have used the word 'added value' instead of margin in order to describe the same (Lynch, 2003). The analysis entails a thorough examination of how each part might contribute towards added value in the company and how this may differ from the competition. In a study of Saudi companies, Ghamdi (2005) found that 22% of the companies in the study used value chain frequently, while 17% reported that they somewhat used it, and 42% did not use the tool at all. An interesting finding of the study was that the manufacturing firms were frequent users of the tool compared to their service counterparts (Ghamdi, 2005).

How to write a Good Value Chain Analysis

The ability of a company to understand its own capabilities and the needs of the customers is crucial for a competitive strategy