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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:

  • Cost advantage: by better understanding costs and squeezing them out of the value-adding activities.
  • Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than their competitors.

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.

  1. Primary Activities - those activities that are directly concerned with creating and delivering a product/service
  2. Support Activities - whilst not directly involved in production, support activities may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.

Value Chain Analysis can help in achieving competitiveness through a number of different ways. For example:

Cost Advantage

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.

Outsourcing Activities

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:

  • Can the activity be performed cheaper or better by suppliers?
  • Is the activity one of the organisation's core competencies from which stems a cost advantage or product differentiation?
  • What is the risk of performing the activity in-house? If the activity relies on fast-changing technology or the product is sold in a rapidly-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets.
  • Will the outsourcing of an activity result in business process improvements such as reduced lead time, higher flexibility, and reduced inventory?

See Also:

Case Study: Fighting Competition from New Technology and Business Models