Value chain analysis

value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product (i.e., good and/or service) for the market. The concept comes through business management and was first described by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.

The idea of the value chain is based on the process view of organizations, the idea of seeing a manufacturing (or service) organization as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources – money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits.

— IfM, Cambridge

The concept of value chains as decision support tools, was added onto the competitive strategies paradigm developed by Porter as early as 1979. In Porter’s value chains, Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales, and Service are categorized as primary activities. Secondary activities include Procurement, Human Resource management, Technological Development and Infrastructure Porter 1985

Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation.

Michael Porter

  • A supply chain and value chain are similar in nature, but the value chain takes a few more things into consideration, like product design, research and development, and advertising.
  • One of the goals of value chain analysis is to ensure the product is placed in the customers’ hands as seamlessly as possible.
  • The final result of a value chain analysis should be a more competitive, efficient business.

As competition increases for high-quality products, low costs and excellent customer service, businesses must continually assess the value they create. One of the most valuable tools, the value chain analysis, breaks down each process of a business and creates opportunities for innovation.

Value chain analysis can help companies in various ways. It can create change within a business, the products and services it offers, and its connections with other businesses and their customers or clients. The purpose of value chain analysis is “to create value that exceeds the cost of providing the product or service and generates a profit margin.”

The supply chain generally looks at the parts or materials that go into a product, where a product is manufactured, and the transportation logistics of getting it from the factory to the store. The value chain “takes into consideration contributions such as product design, research and development, advertising and other marketing. Even the work of lawyers, bankers, accountants and IT experts who help make a product possible is taken into consideration.”

A prime example of creating value for customers is Starbucks. Through its operations, it creates connections throughout the world, guarantees high-quality flavors and works to build a sustainable future.

“Starbucks … invests in coffee communities, sharing agronomy practices and our coffee knowledge,”

Starbucks’ value chain, like many others, is complex, but ensures value that will impress customers and keep them invested in the company. Starbucks begins by tasting a variety of coffees that use beans from locations such as Latin America, Africa, Arabia, Asia and the Pacific (inbound logistics). The company spends time visiting coffee growers and building lifelong relationships. Starbucks creates partnerships all over the world to ensure the best coffee for its customers. Its coffee is sold in stores worldwide (operations, outbound logistics) and allows customers to enjoy high-quality flavors at home or in a local Starbucks.

Another part of Starbucks’ value chain is interacting with customers and ensuring it provides an excellent service. Its social media accounts are a prime spot for interaction, where Starbucks offers twists on its classic drinks to provide a unique experience to customers each time they visit (marketing and sales, service). Alongside these processes, Starbucks maintains HR, technology development, finances and other operations.

Starbucks presents its coffee as “the end of a long journey – from the land, to the farmer, to the roaster, to your eagerly waiting hands. Each step is important in defining what that coffee will taste like.”