Value Chain Analysis

IMPORTANT! See how Critical Success Factors (which arise from a clear understanding of the customer's VALUE CHAIN) can be used to determine competitive position in a broader strategic analysis exercise.

Value Chain Analysis is a well known strategic concept proposed by Michael E. Porter in his 1985 book entitled 'Competitive Advantage'. The aim is to help companies to achieve a sustainable competitive advantage by optimising those aspects of the value chain that have greatest impact in the market.

The business is broken down into key 'Primary' activities which are directly concerned with the production of its products and / or services, and 'Support' activities which help the primary activites to achieve their aims. The underlying 'value drivers' within each activity, and their extensive links (within the organisation, to suppliers and to channels) are then examined further for cost and added value. Extensive 'what if' modelling may take place. Examples include studying the effects of redesigning the production facility, whether bulk purchases could achieve further economies of scale, whether inputs from suppliers should be modified to increase efficiency, and so on. Whilst data may be more difficult to access, the company needs to repeat such studies of cost and efficiency of its key competitors for comparison.

The aim of such analysis is to establish whether further costs can be saved with a view to the company achieving the status of 'lowest cost supplier', or whether it can work towards a unique offer which can command a premium within the market. Porter shows how some companies have been able to achieve a sustainable competitive advantage by concentrating on those aspects of the value chain that have greatest impact in the market.

Market Mapping Software V2 enables a semi-quantitative as well as a qualitative view of this problem. Using the Value Chain template supplied as part of the Market Mapping Software V2 application, individual 'Support' and 'Primary Activities' can be configured for your company as appropriate. Using activity based cost analysis, the resource consumed by each value area in the production of a good or service is then determined. Deducting these monetary values, together with the cost of raw materials from the overall selling price gives an indication of the gross and net margins. The effect of changing the underlying data, for example increasing the cost of raw materials, or reducing production costs can then be seen on overall profitability. Comments about the competitiveness and colour coding can be added in to highlight areas of strength and weakness.