Value Chain Analysis

Procurement
Human Resource Management
Technology Development
Procurement

Ma
r
g
in

e
vic

Primary Activities

r
Se

ns

g
in
et
rk s
Ma Sale
&

tio

nd
ou
tb ics
Ou gist
Lo

a
er
Op

d
un s
bo tic
In gis
Lo
Figure 3

in
rg
Ma

SS
U
U
PP
PP
O
O
RR
TT

AA
CC
TT
II
VV
II
TT
II
EE
SS

Value Chain Analysis

Importance of value-chain
analysis is that

it provides a

82

A value chain identifies and isolates the various economic value adding
activities of the firm such as differentiating a product, lowering cost,
meeting customer needs quickly.

Primary activities
Inbound logistics
Operations
Outbound logistics
Marketing and sales
Service

Support activities
Firms infrastructure
Human resource management
Technological development

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).

Components of value chain

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 firms 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 aftersales 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 companys 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).

How to write a value chain analysis

The first step in conducting the value chain analysis is to break down the key
activities of the company according to the activities entailed in the
framework. The next step is to assess the potential for adding value through
the means of cost advantage or differentiation. Finally, it is imperative for the
analyst to determine strategies that focus on those activities that would
enable the company to attain sustainable competitive advantage.
It is important for analysts to remember to use the value chain as a simple
checklist to analyse each activity in the business with some depth (Pearson,
1999). The value chain should be analysed with the core competence of the
company at its very heart (Macmillan et al, 2003). The value chain framework
is a handy tool for analysing the activities in which the firm can pursue its
distinctive core competencies, in the form of a low cost strategy or a
differentiation strategy. It is to be noted that the value chain analysis, when
used appropriately, makes the implementation of competitive strategies
more systematic overall. Analysts should use the value chain analysis to
identify how each business activity contributes to a particular competitive
strategy. A company may benefit from cost advantages if it either reduces
the cost of individual activities in the value chain or the value chain is
essentially reconfigured, through structural changes in the activities. One of
the problematic areas of the value chain model, however, is that the costs of
the different activities of the value chain need to be attributed to an activity.