In today’s accounting blog article, our attention would be shifted to providing a feasible step by step tutorial on how to perform a value chain analysis. I will be sharing some real life value chain analysis experience that I gained working in a manufacturing company. Before we delve into explaining how to perform a value chain analysis, let us quickly remind ourselves of what a value chain analysis is.
What is value chain analysis?
One of the fundamental steps in improving your process is to truly understand tasks that add value to the end product of what you do as a business.
Value chain analysis is one of management accounting tools that can be applied to various industries and sectors. It helps organizations make informed economic decisions and adapt to the dynamic business environment by continuously seeking ways to enhance their competitive position and create value for customers.
Value chain analysis is a strategic management framework that helps organizations identify and understand the various activities or processes that create value within their business. It involves breaking down the different functions or activities of a company into primary and support activities, then analyzing how these activities contribute to the overall value delivered to customers which in turn translate into positive bottom line figures.
Primary Parts of Value Chain (primary activities)
Inbound Logistics: No organization can survive without getting resources of all kind into the organization. Activities related to sourcing, receiving, and storing inputs or raw materials.
Operations: These are actions that actually attempt to bring the purpose of setting up a business to life. In other words, they are activities involved in the actual production or service delivery.
Outbound Logistics: Here, we talk about the acts of sending value add packages to the outside world. The processes that distribute the finished product or service to customers.
Marketing and Sales: Activities associated with promoting and selling the product or service.
Follow up Service: Post-sale activities such as customer support, maintenance, and warranties.
Secondary Parts of Value Chain (support activities)
Procurement: Activities related to sourcing materials, supplies, and other resources.
Technology Development: Research and development, process improvement, and technology support.
Human Resource Management: Recruiting, training, and managing employees.
Infrastructure: Activities such as general management, finance, and organizational structure.
Value chain analysis involves examining each of these activities to determine how they impact the cost structure and the perceived value of the product or service in the eyes of customers. The goal is to identify opportunities for cost reduction/ cost management, differentiation, or competitive advantage.
By understanding the value chain, a company can make informed decisions about where to focus its resources, optimize its processes, and develop strategies for sustainable competitive advantage. It can also help identify areas for potential outsourcing, partnerships, or innovation.
Michael Porter, a prominent management scholar, introduced the concept of the value chain in his book “Competitive Advantage: Creating and Sustaining Superior Performance.” Since then, it has become a widely used tool in business strategy and operations management.
Features and Characteristics of Value Chain Analysis
Holistic Perspective: Value chain analysis takes a holistic view of a business by examining all of its activities and processes, both primary and support functions. This comprehensive approach helps in understanding how every part of the business contributes to the overall value delivered to customers.
Customer-Centric: It places a strong emphasis on understanding and meeting customer needs and preferences. By focusing on value from the customer’s perspective, companies can tailor their strategies to deliver what customers want.
Identification of Value-Adding Activities: Value chain analysis helps identify activities that directly contribute to product or service value in the eyes of the customer. This knowledge can guide decisions on where to invest resources and efforts for maximum impact.
Cost Analysis: It also considers the cost structure of the organization, helping identify cost drivers and areas where cost reduction is possible. This is crucial for maintaining competitiveness.
Competitive Advantage: Value chain analysis is instrumental in identifying sources of competitive advantage. By understanding how a company’s activities compare to competitors and the industry standard, a company can make informed strategic decisions.
Continuous Improvement: It is an ongoing process. Companies revisit and update their value chain analysis regularly to adapt to changing market conditions, technology advancements, and customer preferences.
Strategic Decision-Making: Value chain analysis provides the foundation for strategic planning. It helps in setting goals, defining objectives, and making informed decisions about resource allocation.
Flexibility and Adaptability: Value chain analysis can be applied to various industries and sectors, making it a versatile tool for organizations of all types. It can be customized to fit the specific needs and goals of a company.
Integration with Other Models: It can be used in conjunction with other strategic frameworks and models, such as SWOT analysis, Porter’s Five Forces, and the Balanced Scorecard, to provide a more comprehensive view of a company’s strategic position.
Benchmarking: It often involves comparing an organization’s activities and performance with those of competitors or industry benchmarks. This benchmarking can reveal areas where the company excels or lags.
Identification of Non-Value-Adding Activities: Alongside value-adding activities, value chain analysis helps pinpoint non-value-adding or redundant activities. Eliminating or minimizing these activities can lead to cost savings and efficiency gains.
Cross-Functional Collaboration: Value chain analysis encourages collaboration between different functions within an organization. Departments like procurement, marketing, and operations can work together to optimize the entire value chain.
Customer Retention and Loyalty: By understanding the complete customer journey and post-sale service (service and support activities), value chain analysis can lead to strategies that enhance customer retention and loyalty.
Putting it all together, value chain analysis is a veritable customer-focused tool that helps organizations identify opportunities for improving their competitive position, reducing costs, and creating value for customers. It provides a framework for strategic planning and continuous improvement.
Steps involved in value chain analysis
Value chain analysis involves several steps to assess the internal operations of a company and identify opportunities for creating value and improving competitive advantage. These steps typically include:
Identify Primary and Support Activities: The first step is to identify and categorize the primary and support activities within your organization. Primary activities are those directly involved in creating, delivering, and supporting a product or service. Support activities are those that enable and facilitate the primary activities.
Analyze Primary Activities: a. Inbound Logistics: Examine the processes related to sourcing, receiving, and storing materials or inputs. b. Operations: Analyze the core production or service delivery processes. c. Outbound Logistics: Assess the distribution and delivery of the finished product or service. d. Marketing and Sales: Evaluate how the product is marketed, sold, and the customer acquisition process. e. Service: Analyze post-sale activities, including customer support, maintenance, and warranties.
Analyze Support Activities: a. Procurement: Examine how materials and resources are sourced and managed. b. Technology Development: Assess research and development, technology support, and innovation. c. Human Resource Management: Evaluate recruiting, training, and employee management. d. Infrastructure: Analyze activities like general management, finance, and organizational structure.
Identify Value-Adding and Non-Value-Adding Activities: Within each activity, distinguish between those that directly contribute value to the product or service and those that don’t. Non-value-adding activities should be minimized or eliminated.
Cost Analysis: Determine the costs associated with each activity and its contribution to the overall cost structure of the business. This can help identify cost reduction opportunities.
Value Analysis: Assess how each activity contributes to the perceived value of the product or service in the eyes of the customer. Identify areas where you can differentiate your product or service to create more value.
Benchmarking: Compare your value chain analysis with competitors or industry benchmarks to identify areas where you may lag or excel.
Strategic Implications: Consider the strategic implications of your analysis. Determine where you can gain a competitive advantage, reduce costs, or differentiate your product or service.
Action Plan: Develop an action plan based on your findings. This may involve process improvements, cost reduction strategies, innovation initiatives, partnerships, or other strategic decisions.
Implementation: Execute the action plan, monitoring progress and adjusting as situation warrants.
Continuous Improvement: Value chain analysis is an ongoing process. Regularly revisit and update your analysis to ensure that your organization remains competitive and responsive to changing market conditions.