What is Value Chain Analysis?

In this article, we will show you the value chain model definition, model and examples. We will also answer a simple question - “What is value chain analysis?”

What is Value Chain Analysis?

"It can be defined as a strategic planning tool and it's used to analyze the value chain of the focal company. Value chain is how internal functions create value for customers. Value system is the way each value chain is structured and it spans across multiple companies"

What is Value Chain Model?

Value Chain Model is mentioned extensively in the first half of the book "Competitive Advantage" in 1985 by Michael E. Porter. The Value Chain Model represents various functions under "one" company and how they should work together to create "Competitive Advantage".

What is Competitive Advantage?

Competitive Advantage is the ability for a firm to put "generic strategy" into practice, the generic strategy includes,

Cost Leadership: aiming to offer the lowest price to customers

Differentiation: selecting the important attributes that buyers want so the company can get a premium price

Focus: doing each strategy according to each market segment

What is Value System?

Another related concept is "Value System", it's simply how each value chain (company) is connected with each other. As you can see, the "Value System" looks like "Supply Chain".

What is NOT Value Chain Analysis?

We know for the fact that many people, ranging from practitioners in academia, don't really understand this concept. Then we conduct a quick literature review in this area. Convenient sampling has been carried out to determine the current practice, 20 scholarly articles available via Google Scholar are examined and the results are as below,

The results are surprisingly shocking! Only 9 out of 20 articles cite Porter as the source of the concept (only 3 of them explain the concept appropriately, the rest of them do a value system analysis using the unknown methodology). Five articles (mainly from an economic and international business perspective) mistakenly use the term to present an unrelated concept called "Global Commodity Chain" by  Gereffi, G. and Korzeniewicz, G. (Ed) (1994) Commodity Chains and Global Capitalism.

The surprise doesn't end there, 5 articles present the concept without citing any source, it seems they invented their own methodology. One paper cites many lean manufacturing articles instead of Porter's so a conclusion can be drawn that it's Value Stream Mapping project.

How to Conduct Value Chain Analysis?

According to a literature review, articles related to this concept are extremely unreliable. Then, Original Porter's Competitive Advantage is used as a source.

1. Defining Value Chain: Identify business units/products, determine key functions and include all relevant activities of each function

2. Capturing Cost Data: Estimate costs and assign them to various activities in your value chain. Then, select stronger competitors and determine how they allocate costs to each activity and why.

According to Porter, the cost analysis part doesn't need to be very precise, just the estimate is OK. But, a company needs to compare its cost profile against its competitors to reveal the competitor's strategy.

3. Controlling Costs: Find cost drivers and control them such as,

- Scale: expand product lines/facilities
- Linkage: control supplier scheduling, the location of warehouse and inventory, payment policies
- Timing: Wait until the technology is getting less expensive than acquiring them
- Investment: focus on technology that cut costs
- Procurement: reduce SKUs and the supply base for better volume negotiation

4. Cutting Purchasing Cost: Follow these simple guidelines,

- Lower setup cost/time
- Decrease financing cost
- Improve quality/reduce inspection through a program like lean or six sigma
- Reduce the required maintenance
- Speed up the processing time of the operations
- Reduce required monitoring/control

5. Determining Purchasing Criteria: Try to figure out the key criteria and try to provide favorable delivery timing or improve product features, packaging and appearance or improve after sales and customer service

6. Reconfiguring Value Chain: Change the way each activity is performed to support the strategy

Do you like Value Chain Analysis and why?

- Porter, M. E. (1985). Competitive advantage: creating and sustaining superior performance. 1985. New York: FreePress, 43, 214.

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Last review and update: December 11, 2021
All contents are written by Ben Benjabutr unless marked as [Guest Commentary]

About the Author and Editor:
Ben Benjabutr is the author and editor of SupplyChainOpz. He holds an M.Sc. in Logistics Management with 10+ years of experience in supply chain management. You can contact him via e-mail.