The value chain analysis system is one of the most important Strategic Management Models for analyzing a company situation. Value chain analysis in strategic management is undertaken to evaluate a company’s value chain elements. In this article, we analyze the value chain as a tool for a business firm’s situation analysis. However, it would help if you remembered that value chain analysis helps identify each element of the firm’s value chain’s strengths and weaknesses. It cannot be used to identify external opportunities and threats.
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Value Chain Analysis in Strategic Management:
The concept of value chain analysis has been polarized by Michael Porter (his most popular five forces model). He has termed it a useful tool for analyzing a business unit and assessing the unit’s competencies. The value chain analysis makes available a disaggregated view of a firm. When you have a disaggregated view of your firm, you can diagnose the firm’s strengths and weaknesses for each element of the firm’s value chain. Michael Porter’s Value chain analysis is a methodical way of inspecting the sequence of activities a firm performs to provide a product to its customers. Every factory can be watched as a collection of value events that are executed to produce, design, market, and deliver its activities. The value chain of a firm consists of the firm’s primary and support activities. A firm’s value chain identities the primary activities that create value for customers and the related support activities that enhance primary activities’ performance. In a manufacturing firm, the chain of value-creating activities starts with the procurement of raw materials. It continues through manufacturing, assembly, wholesale distribution, and retailing to the ultimate end-users of the product or service.
Read more: What is SWOT Analysis?
Primary Activities in Value Chain Analysis:
The value chain analysis’s primary activities are involved in the physical creation of a product, its distribution and marketing, and the after-sales service related to the product. The primary activities are inbound logistics, operations/production, outbound logistics, marketing, and services. Such as:-
- Inbound logistics are those that are associated with receiving, storing, and handling inputs to the production process. These include material handling, storing products in the warehouse, scheduling vehicles for the transport of materials/products, and returns to suppliers.
- Operations comprise packaging, machining, testing, equipment maintenance, assembly, and other activities associated with transforming inputs into the ultimate products. This is the physical process of making, testing, and packaging the product.
- Outbound logistics are those performed to collect, store, and physically distribute products to customers. Material handling, delivery vehicles, order processing, and scheduling are included in outbound logistics.
- Marketing is an element of primary activities in value chain analysis. It is concerned with providing the buyer with information, inducement, and opportunities to buy the product. It includes promotional activities such as advertising, sales promotion, public relations, personal selling, salesforce, selection of distribution channel, pricing of products, and other activities related to providing a means by which customers can buy the products.
- Service concerns itself with activities associated with enhancing and maintaining the products’ value to customers, such as repair of machines, installation of machinery, training to customer’s supply of parts, prompt response to customer’s query, etc. All these primary activities are present in varying degrees in each firm and, therefore, deserve attention in the firm’s internal analysis.
Supportive Activities in Value Chain Analysis:
The support activities in the value chain analysis are necessary for supporting the primary activities to take place. The support activities in the value chain analysis have indicators. Such as:-
- Firm’s infrastructure
- Human resource management
- Technological development
- Procurement of resources, finance, inventory, etc.
Collectively, all these support activities and primary activities create the value chain. The chain comprises an earnings margin because a markup over the cost of perming value-creating activities is customarily part of the price borne by buyers.
The usefulness of Value Chain Analysis:
Large manufacturing companies often conduct value chain analysis to understand their internal cost structure and evaluate their strengths and weaknesses. The value chain assumes that a firm’s basic economic purpose is to create value. The strategy-constructing lesson of value chain analysis is that enlarged company competitiveness pivots on managerial efforts to essence company resources and talent on those skills and activities where the company can improve dominating expertise to assist its mark consumers.
Value chain analysis is a powerful managerial tool for identifying which chain activities have competitive advantage potential. The maximum significant claim value chain analysis depicts how a specific company’s cost situation compares with the cost positions of its rivals. What is needed are competitor-versus-competitor estimates for supplying a product to a market segment. Data derived from the value chain analysis can be used to compare a firm’s costs activity-by-activity against those of the competitors. Managers can also learn about the sources of cost advantages and cost disadvantages.
When a manager understands the firm’s value chain, he/she can identify strategic options based on the strengths and weaknesses of each value-chain element. In value chain analysis, the most important learning is the linkages between value activities that contribute to competitive advantage. This has implications for strategy-making and implementation. Competitors cannot copy this aspect of the value chain because these are unique to the firm.
Under the value chain analysis, cost-competitiveness depresses a company in the costs of on the inside executed happenings and on cost in the value chains of its suppliers and forward channel allies. A company’s relative cost position and overall competitiveness are linked with the entire industry value chain analysis system. A typical single industry value chain incorporates the ‘supplier-Related Value Chains,’ ‘company Value Chains’ and ‘Forward Channel value Chains.’