For analyzing a company situation, value chain analysis system is one of the most important Strategic Management Models. Value chain analysis in strategic management is undertaken to evaluate a company’s value chain elements. In this article, we make an analysis if the value chain as a tool for a business firm’s situation analysis. However, you should remember that value chain analysis helps only in identifying the strengths and weakness of each element of the firm’s value chain. It cannot be used to identify external opportunities and threats.
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 as a useful tool for analyzing a business unit and assessing competencies of the unit. 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 value chain of the firm. 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 single 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 the performance of primary activities. In a manufacturing firm, the chain of value-creating activities starts with the procurement of raw materials and continues on through manufacturing, assembly, wholesale distribution, and retailing to the ultimate end-users of the product or service.
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Primary Activities in Value Chain Analysis:
The primary activities in the value chain analysis are involved in the physical creation of a product, it’s 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 activities of the firm that are associated with receiving, storing, and handling inputs to the production process. These include material handling, storing of products in the warehouse, scheduling of vehicles for 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 activities that are performed for collecting, storing and physically distributing products to customers. Material handling, the operation of 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, and sales force, 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 value of the products 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 internal analysis of the firm.
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 for 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 for the reason that a markup over the cost of perming value-creating activities is customarily part of the price borne by buyers.
Usefulness of Value Chain Analysis:
Large manufacturing companies often conduct value chain analysis to understand their internal cost structure and also evaluate their strengths and weaknesses. 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 activities in the chain have competitive advantage potential. The maximum significant claim value chain analysis is to depict 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 value chain of the firm, he/she can identify strategic options on the basis of the strengths and weaknesses of each value-chain element. In value chain analysis, most important learning is the linkages between value activities which contribute to competitive advantage. This has implications for strategy-making and implementation. This aspect of the value chain cannot be copied by competitors because these are unique to the firm.
Under the value chain analysis, cost-competitiveness depresses of a company not only in the costs of on the inside executed happenings but also 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’.