One of the most powerful tools in the managerial toolkit is known as value chain analysis. Value chain analysis has the power to help every kind of company gain a competitive advantage in some form or another.
The concept of the value chain Value Chain Analysis derives from Harvard Business School professor Michael E. Porter’s 1985 book, The Competitive Advantage: Creating and Sustaining Superior Performance. That book is credited with codifying some of the primary ways any company gains an advantage, whether they’ve deliberately understood themselves to be performing value chain analysis or not.
In this article we’ll take a look at the definition of value chain analysis, some advantages and disadvantages, several examples, and further guidelines for how you can apply value chain analysis to your own company.
What Is Value Chain Analysis?
First let’s start with the obvious question: what is value chain analysis?
To answer that, we first need to start with the concept of the value chain. The value chain represents every activity or process that’s involved in a company’s creation of a particular product or performance of a particular service. A properly represented value chain includes every stage of the life cycle, from inspiration and design to manufacturing/production to distribution.
The value chain can be divided into two different categories of activity: primary and secondary (aka support). Primary activities include: inbound logistics, operations, outbound logistics, marketing & sales, and service. Secondary/support activities include: firm infrastructure, procurement, human resource management, and technology. It’s important to note, however, that “primary” activities are not necessarily the most important drivers of a firm’s success. For some firms, so-called secondary activities like research and development can be integral to their competitiveness.
Now that we’ve established what a value chain is, let’s return to our question: what is value chain analysis? Simply put, value chain analysis is a process of examining every activity in a company’s value chain and identifying areas of possible improvement. Generally speaking, there are two ways of improving a firm’s competitiveness—either by reducing cost (thus creating cost advantage) or by improving customer value (thus creating differentiation advantage). In other words, successful firms gain a competitive advantage either by performing the activities in their advantage more cheaply, or by performing them better.
What Is the Goal of Value Chain Analysis
So what is the goal of value chain analysis, exactly? One way of putting it is that the goal is to gain an advantage against your competitors. Another way of describing the goal is of identifying opportunities for improvement in every aspect of a company’s operation.
Advantages and Disadvantages of Value Chain Analysis
There are both advantages and disadvantages to value chain analysis. The advantages are that it’s an extremely systematic and comprehensive way of simplifying the process of gaining an advantage relative to your competitors. Value chain analysis considers every relevant activity a company performs in order to market its products and services. So in a sense, it leaves no stone unturned. Value chain analysis takes the complex task of competing against other companies and offers a reliable method for achieving greater competitiveness.
The disadvantages of value chain analysis also relate to its systematic nature. By examining a company’s operations in such a granular way, management runs the risk of missing the forest for the trees and forgetting about their big picture strategies and goals.
Value Chain Analysis Examples
Now that you know what value chain analysis is, let’s look at some value chain analysis examples.
Amazon Value Chain Analysis
For our Amazon value chain analysis example, we’ll focus on the company’s primary activities.
Generally speaking, Amazon does not produce its own products but sells them through Fulfillment by Amazon, which makes up most of the company’s inbound logistics. Amazon’s ability to handle logistics with maximum efficiency and minimal cost is what makes it so dominant in the marketplace.
Amazon’s operations encompass three segments: North America, international, and Amazon Web Services. It’s worth highlighting Amazon Web Services here—which include cloud storage, computing, and other professional services Amazon sells to other companies. Most of these capabilities were developed in-house for Amazon’s internal use, but the company discovered it could monetize these services by selling them to external companies and customers. This innovation is an excellent application of value chain analysis.
Amazon’s outbound logistics include its nearly 200 fulfillment centers, outsourced delivery, digital delivery, and physical stores. The unparalleled efficiency of Amazon’s fulfillment centers make up a huge component of the company’s overall value. By utilizing automated technology and logistical excellence at such a scale, Amazon is able to offer value in this area that no other company can match.
Marketing and Sales
While Amazon’s astronomical sales make it the world’s biggest retailer, those sales are upheld by the company’s massive marketing investment, which included nearly $17 billion in advertisements in 2021. Amazon utilizes a mixture of marketing communication, including print and media, events, public relations, and direct marketing. These ads typically highlight the company’s limitless selection of products and services, its rapid delivery services, its low prices, and it’s extremely reliable customer service.
Amazon’s famous customer service is driven by an ethos the company calls “customer obsession.” The company does everything possible to streamline the buying process and to resolve disputes to 100% satisfaction. Further, the company offers extensive services to help sellers succeed.
Starbucks Value Chain Analysis
For our Starbucks value chain analysis example, we’ll focus on the company’s secondary/support activities.
Starbucks’s infrastructure goes further than other companies by hiring and training store managers who do everything possible to maintain the company’s stellar reputation in a perfectly cohesive way. By managing the store’s aesthetics, products, and customer service to exacting detail, these store managers ensure every customer experience is satisfactory and consistent with the expectations people associate with the Starbucks brand.
Starbucks’s massive buying power allows it to handle the procurement of all its own coffee beans directly, which enables superior product quality and cost control.
Human Resource Management
Compared to other fast-food chains, Starbucks is well known for providing excellent compensation and benefits to its employees, which generally ensures they are competent, satisfied, and friendly to customers. This sets the Starbucks experience apart in terms of value.
Starbucks is an industry leader in using technology to interface with its customers. Starbucks has long offered reliable WiFi, which attracts customers who use it as a workplace. Further, Starbucks enables its customers to place their orders in advance and receive notifications when they’re ready via its mobile app. This entices customers who are attracted to reliability and helps mitigate concerns about waiting times.
Nike Value Chain Analysis
For our Nike value chain analysis example, we’ll look at both primary and secondary/support activities.
The inbound logistics of Nike’s value chain include suppliers, transportation, delivery, and quality control. As a company, Nike emphasizes sustainability, efficiency, and quality—and Nike requires every aspect of its inbound logistics to operate in line with these values.
One of Nike’s main sources of value add is its R&D and innovation function. This primarily occurs in the U.S., after which designs for apparel, shoes, and more are then turned into actual items offshore at factories across the globe.
Nike’s total manufacturing operation includes outsourcing to nearly 600 different factories spread across over 40 countries, and the company works to ensure each of those factories maintains the company’s standards of sustainability and quality. There are many manufacturers of athletic goods and apparel on the market. In order to remain competitive, Nike uses its global scale to ensure a combination of maximal efficiency and sufficient quality in all its manufacturing operations, so it can deliver goods whose quality and affordability are in line with the brand’s reputation.
Nike’s outbound logistics include distributing all its products to market through stores and regional distribution centers. Many of Nike’s new product launches include a considerable amount of hype and anticipation. Hence, the company’s outbound logistics need to operate with timeliness and reliability in order to meet consumer demand.
Marketing and Sales
Nike maintains its popularity—and thus, its revenue—not only through its reputation and customer loyalty, but through extensive marketing through advertisements in multiple mediums, as well as special promotions and marketing events. Nike is particularly well known for associating its products with celebrities, especially famous athletes and fashion icons. In essence, perhaps the activity at which Nike excels the most is continuously increasing the value of its brand.
One of Nike’s most effective services is its customer loyalty program, which includes over 100 million subscribers. These subscribers are offered special deals and promotions, as well as targeted marketing. Loyalty program subscribers spend over three times as much as non-subscribers, making the loyalty program one of its most successful endeavors in creating and retaining value.
Nike’s infrastructure needs are vast and on par with a global company, encompassing legal, management, finance/accounting, and more. These parts all work together to maintain the company’s overall profitability even as it groups together so many moving parts across the global supply chain.
Nike’s dedicated Global Procurement team leverages the company’s buying power to acquire raw materials, manufacturing equipment, and more for optimally low prices and high quality. This value feeds back into the quality and price point the company is able to achieve in its products.
Human Resource Management
Nike’s global operations include over 70,000 employees. Nike works hard to cultivate an environment that celebrates the diversity of its workforce. Further, through corporate culture and employee rewards programs, Nike incentivizes its employees to identify with the company, which increases employee motivation, loyalty, and satisfaction.
Nike is recognized as a leading innovator in the realm of sportswear and athletic equipment. The company invests extensively in research & development, which improves the company’s manufacturing equipment and practices, its waste control, and its products.
How to Do a Value Chain Analysis
So now that you have a sense of what there is to be gained through value chain analysis, you’re probably wondering how to do a value chain analysis. The process can be broken down into five steps.
- Identify every activity in the value chain
- Determine the costs associated with each activity
- Analyze what your company’s customers experience as the value
- Compare your value chain with your competitors’
- Figure out a competitive advantage
Value Chain Analysis Template
Below, we’ve provided a value chain analysis template, which you can use to conduct your own value chain analysis.
There are many ways that running a successful and competitive business can seem extremely complex. The value chain analysis is a powerful tool for simplifying the whole game. By breaking down all of a business’s activities into a value chain and examining every step for how to eliminate costs & create extra value, the value chain analysis enables companies to visualize every opportunity for gaining a competitive advantage.
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