Value Chain Analysis¶
Overview¶
Value Chain Analysis (VCA) is a strategic tool used to identify the activities within an organization that create value and analyze the costs associated with these activities. The concept, introduced by Michael Porter, divides an organization’s operations into primary and support activities. The primary activities are directly involved in the production and delivery of goods or services, while support activities assist the primary activities and do not directly add value.
Organizational Activities¶
An organization’s activities can be described as a value chain, where each activity contributes to the overall value delivered to the customer. The value chain typically includes:
- Raw material purchase
- Production process
- Distribution to warehouses
- Sales and marketing
- Customer service
- Managing these activities
The value chain starts from purchasing raw materials, proceeds through manufacturing, and ends with marketing and servicing the final product.
Value Chain Analysis (VCA)¶
VCA refers to the process where a firm determines the costs associated with its organizational activities. This analysis helps in identifying where low-cost advantages or disadvantages exist across the value chain, from raw material procurement to customer service. Conducting a VCA allows a firm to better understand its strengths and weaknesses, particularly when compared to competitors’ value chains or its own historical data.
Key Concepts in Value Chain¶
- Value Chain: The chain of activities that result in the final value of a business's products.
- Value Added (Margin): Indicated by sales revenue minus costs. Value is calculated as:
[ \text{Value} = \text{Total Revenue} - \text{Total Costs} ]
Primary and Support Activities¶
Porter categorizes the internal activities of an organization into primary and support activities:
- Primary Activities: Directly contribute to the production of goods or services and their delivery to customers. These include:
- Inbound Logistics: Receiving, storing, and distributing raw materials.
- Operations: Transforming inputs into the final product.
- Outbound Logistics: Distributing the finished product to customers.
- Marketing and Sales: Promoting and selling the product.
-
Service: After-sales services such as installation, repair, and customer support.
-
Support Activities: Aid the primary activities and include:
- Firm Infrastructure: Management, finance, legal, and planning activities.
- Human Resource Management: Recruiting, training, and developing employees.
- Technology Development: Research and development, product design, and process improvement.
- Procurement: Purchasing raw materials and other inputs.
Core Activities¶
Certain activities, known as core activities, are closely related to the organization’s core competencies. Core activities:
- Add the greatest value.
- Provide more value than the same activities in competitors’ value chains.
- Reinforce the organization’s core competencies.
Other activities may relate to capabilities but do not add greater value than competitors and therefore do not relate to core competencies.
Steps in Conducting Value Chain Analysis¶
Step 1: Divide Operations into Specific Activities¶
- Break down the firm’s operations into discrete activities or business processes.
Step 2: Attach Costs to Each Activity¶
- Assign costs to each activity, considering both time and money.
Step 3: Analyze Competitive Cost Strengths and Weaknesses¶
- Convert cost data into actionable information by identifying competitive cost strengths and weaknesses that may yield a competitive advantage or disadvantage.
Conducting a VCA is also supportive of the Resource-Based View (RBV) of a firm, which examines a firm’s assets and capabilities as sources of distinctive competence.
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