Definition: Value chain analysis is a process of dividing various activities of the business in primary and support activities and analyzing them, keeping in mind, their contribution towards value creation to the final product. And to do so, inputs consumed by the activity and outputs generated are studied, so as to decrease costs and increase differentiation.
Value chain analysis is used as a tool for identifying activities, within and around the firm and relating these activities to an assessment of competitive strength.
As shown in the figure, Michael Porter classified the entire value chain into nine activities which are interrelated to one another. While primary activities include the activities that are performed to satisfy external demand, secondary activities are those which are performed to satisfy internal requirements.
Classification of Value Chain Analysis
Value Chain Analysis is grouped into primary or line activities, and support activities discussed as under:
- Primary Activities: The functions which are directly concerned with the conversion of input into output and distribution activities are called primary activities. It includes:
- Inbound Logistics: It includes a range of activities like receiving, storing, distributing, etc. which make available goods and services for operational processes. Some of those activities are material handling, transportation, stock control, etc.
- Operations: The activity of transforming input raw material to final product ready for sale, is termed as operation. Machining, assembling, packaging are the activities covered under operations.
- Outbound Logistics: As the name suggests, the activities that help in collecting, storage and delivering the product to the customer is outbound logistics.
- Marketing and Sales: All the activities like advertising, promotion, sales, marketing research, public relations, etc. performed to make the customer aware of the product or service and create demand for it, comes under marketing.
- Service: Service means service provided to the customer so as to improve or maintain the value of the product. It includes financing service, after-sales service and so on.
- Support Activities: Those activities which assist primary activities in accomplishment, are support activities. These are:
- Procurement: This activity serves the organization, by supplying all the necessary inputs like material, machinery or other consumable items, that required by the organization for performing primary activities.
- Technology Development: At present, technology development requires heavy investment, which takes years for research and development. However, its benefits can be enjoyed for several years and by a multitude of users in the organization.
- Human Resource Management: It is the most common plus important activity which excel all primary activities of the organization. It encompasses overseeing the selection, retention, promotion, transfer, appraisal and dismissal of staff.
- Infrastructure: This is the management system, which provides, its services to the whole organization and includes planning, finance, information management, quality control, legal, government affairs, etc.
In the fast paced world, the main focus of the organization is customer satisfaction, and value chain analysis is the technique that helps to attain that level. Under this, each business activity is considered as essential, which contributes value and is constantly analyzed, to increase value as regards the cost incurred.