Using Value Chain Analysis
Organisations involved in products or services will perform a number of activities to produce and deliver the final item to the market place. In addition organisations will be involved in relationships with suppliers and distributors.
The margin or profit an organisation makes will depend on its effectiveness in managing relationships and performing key activities efficiently. Reconfiguring the activities and/or relationships can lead to improved competitiveness through lower costs or better differentiation.
Value Chain analysis is a powerful analytical model developed by Michael Porter and described in his book ‘Competitive Advantage, 1985’. It defines the core competencies of an organisation and the activities in which it can pursue a competitive advantage for example:
The technique is used to describe and evaluate the full range of activities required to design, deliver and support a product or service. It includes the company’s internal business and production processes, suppliers, manufacturers, distributors, and customers. Other objectives of the analysis are to evaluate critical interface relationships, i.e. suppliers and customers, in order to imbed them into the value chain.
The model illustrated below identifies the generic primary and secondary activities of an organisation.
Value Chain Analysis can help in achieving competitiveness through a number of different ways. For example:
An organisation may achieve a cost advantage either by reducing the cost of individual value chain activities or by reconfiguring the value chain, i.e. introducing new production processes, distribution channels, or a different sales approach.
This can arise from any part of the value chain. For example, procurement of inputs that are unique (not widely available to competitors) can create differentiation, as can distribution channels that offer high service levels. Other advantages may be achieved either by changing individual activities to improve the final product or by reconfiguring the value chain.
There are several ways in which an organisation can reconfigure its value chain. It can forward integrate in order to perform functions that once were performed by its customers. It can backward integrate in order to have more control over its inputs. It may implement new process technologies or utilize new distribution channels. Ultimately, the organisation may need to be creative in order to develop a novel value chain configuration that increases product differentiation.
Value chain activities are not isolated from one another. Rather, one often affects the cost or performance of others. Linkages may exist between primary activities and also between primary and support activities.
Sometimes an organisation may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced.
Through such improvements the organisation has the potential to develop a competitive advantage.
Organisations may specialise in one or more value chain activities and outsource the rest. The extent to which an organisation performs ‘upstream’ and ‘downstream’ activities is described by its degree of vertical integration.
Outsourcing decisions can be facilitated by using value chain analysis to understand the organisation's strengths and weaknesses in each activity, both in terms of cost and ability to differentiate. When selecting which activities to outsource, value chain analysis can help answer the following questions:
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