Value Chain Analysis can Enhance Competitiveness

Date Added.: Feb 5, 2011;

Value chains are defined in different ways depending on whether you are speaking of a particular firm’s value chain or an industry value chain. In this article, we are concerned with an individual firm’s value chain and its analysis to improve competitiveness.

A firm’s value chain is the series of activities that add value to the inputs, and produce value added outputs. By analyzing the value addition activities, and the costs incurred during each value addition process, a firm can identify ways to increase competitiveness. Such value chain analysis is a more effective way for improving competitive strength than ad-hoc actions based on general feelings.

The Value Chain

Michael E Porter created a diagrammatic representation of the standard value chain.

Porter identified five primary activities and four support activities that together create value.

Primary Activities:

Inbound Logistics: Inward transport of raw materials and supplies, warehousing and material handling, receipt of information for further processing, etc.
Operations: Production operations, material handling, testing, packaging, equipment maintenance, information systems, etc.
Outbound Logistics: Warehousing, material handling, outward transport of finished products, communications, etc.
Marketing & Sales: Media, communications, information systems
Service: After sales support, testing, communications, information systems

By analyzing the way these activities are presently performed, possibilities to reduce costs or increase value addition might become evident. Both cost reduction and increased value can enhance competitiveness.

Support Activities:

Infrastructure: Organizational structure, control systems, etc.
Human Resource Management: Hiring, training, developing and compensating employees.
Technology Development: Developing technologies to improve value-addition activities
Procurement: Purchasing inputs such as equipment, materials and supplies

Analysis of the support activities might reveal possibilities for cost reductions through economies of scale, employee skill development and new technologies among others.

Improvements in primary and supporting activities are usually possible through better logistics management, supply chain management (SCM) and operations management. For example, negotiations with suppliers might get them to locate their production facilities near your production units, resulting in lower transportation costs.

Improved customer relationships management (CRM) might lead to substantially higher volume of orders making cost savings possible though better capacity utilization and bulk purchases of inputs.

The key contribution of value chain analysis is that it provides a total, integrated picture of operations so that you can identify all the options available to you for cost reduction and value addition, the two key competitive strategies. One key concept to bear in mind during the analysis is that “cost” and “value” are different. For example, cutting a diamond is a low cost but high value-addition activity.

The analysis might even highlight activities that incur costs but do not add anything that is of value to the customer. You can then consider eliminating these activities from the value chain.

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