Value Chain Analysis

Value chain analysis is a tool for examining a company’s value-adding activities by desegregating the company into strategically important (discrete) activities which have different economics, a high potential impact of differentiation, and represent a significant or growing proportion of cost. Value chain analysis can help evaluate the “how to compete” of a company by studying the entire business system, assigning costs to given processes, determining the value generated, and examining the performance of those processes. The value chain is one step in the supply chain, the relationship among a group of integrated industries that work to transform a set of raw materials into final products. The value chain is embedded in a larger stream of activities called the value system.

Methodology

1. Identify all activities performed. Determine which activities are actually performed by the company and which are completed by suppliers, customers or other third party companies.
2. Categorize the activities. Divide the activities into primary and supporting categories.
3. Structure and order the activities. Position the activities within the value chain framework. Analyze and structure the activities at the appropriate level of detail – break down major activities into their sub-activities. Determine the company’s cost structure.
4. Define linkages within and across the value chain. Define the linkages among various primary and supporting activities. Assess the value derived from each step. Assess the importance of these linkages and whether they are resulting in the desired benefits. Compare client’s value chain with that of competitors.

Application

Identifying the “how to compete” for a company (i.e., cost advantage or differentiation advantage of the company).

Linkages

Within the value chain, e.g., product design to manufacturing. Across the value chains of suppliers and competitors (supplier accounting to firm’s accounting

Strengths

• Defines the process of a company
• Reveals the value/cost of each step in the business
• Can be used to evaluate efficiency and effectiveness of each step in the business
• Through benchmarking, cost advantages/disadvantages can be defined
• Can be useful during a post-merger integration project to help identify the better processes

Weaknesses

• Value chains are often specific to each product
• Drawing a value chain for the business unit might hide key differences among product value chains