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Definition
Value chain analysis (VCA)
is a process where a firm identifies its primary and support activities
that add value to its final product and then analyze these activities to
reduce costs or increase differentiation.
Value chain
represents the internal activities a firm engages in when
transforming inputs into outputs.
M. Porter introduced the generic value chain model in 1985. Value chain
represents all the internal activities a firm engages in to produce goods
and services. VC is formed of primary activities that add value to the final
product directly and support activities that add value indirectly.
Support Activities
Cost advantage
Step 1. Identify the firmʼs primary and support activities. All the
activities (from receiving and storing materials to marketing, selling and
after sales support) that are undertaken to produce goods or services
have to be clearly identified and separated from each other. This requires
an adequate knowledge of companyʼs operations because value chain
activities are not organized in the same way as the company itself. The
managers who identify value chain activities have to look into how work is
done to deliver customer value.
Differentiation advantage
Example
This example is partially adopted from R. M. Grantʼs book ‘Contemporary
Strategy Analysisʼ p.241. It illustrates the basic VCA for an automobile
manufacturing company that competes on cost advantage. This analysis
doesnʼt include support activities that are essential to any firmʼs value
chain, thus the analysis itself is not complete.
Sources
`. Grant, R.M. (2010). Contemporary Strategy Analysis. 7th ed. John
Wiley & Sons, p. 239-241
d. Wikipedia (2013). Value Chain. Available at:
http://en.wikipedia.org/wiki/Value_chain
g. NetMBA (2010). Value Chain. Available at:
http://www.netmba.com/strategy/value-chain/
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Ovidijus is the founder of SM Insight and the lead writer since 2013. His
interest and studies in strategic management turned into SM Insight
project, the No.1 source on the subject online.