Value Chain Analysis

Value chain analysis is a management tool that useful in the SWOT analysis stage of the strategic planning process.

SWOT, or strategic analysis, involves researching the environment, in which the organization operates, and the key resources and capabilities of the organisation itself. It is a key way to surface the major challenges facing the planners.

In making a strategic plan, it helps to understand how enterprise activities create value for the Intended beneficiaries of the organization.

One way to do this is by analyzing the value chain.

The generic concept of the value chain was made popular by Michael Porter of Harvard University. See Understanding Michael Porter: The Essential Guide to Competition and Strategy

Value chain analysis shows how activities create value

In the analysis, divide the organization’s operations into separate sets of activities that may add value. The organisation can more effectively evaluate its strengths by identifying and probing each of these activities. Each value adding activity is potentially a source of competitive advantage.

This diagram illustrates the general form of a value chain for an organization.

In a real world application, the chain may change as you map specific activities in the analysis.

Some analysts, in order to emphasize the primary nature of the major value creating activities place them at the top of the diagram, with the support activities below.

It might be easier to understand the concept with an illustration.

Value chain analysis for a specific organization

The following example illustrates the value chain framework with a simplified mapping of the activities of a large retail store network.

The top row of boxes set out the primary value creating activities. The bottom layers cover the support activities.

One or more of these activities may be a contributor to competitive advantage for the firm. It might be better than its rivals might at managing costs in one or more of the operations. For example, this retail store network may be faster at restocking than competitors, thus increasing chances of customers finding what they are looking for.

Conducting a value chain analysis

The stages for executing the analysis are -

Identify and classify activities by type -

This requires separating the organization’s operations into primary and support activities.

Primary activities are those that physically create a product or deliver a service, as well as market the product, deliver the product to the customer, and provide after-sales support. Support activities are those that facilitate the primary activities.

This apparently simple distinction is not always easy to make. Some support functions will argue they are ‘primary’. I have seen this happen with units that focus on legal and financial compliance matters, especially in taxation.

An additional framework that I have found very helpful in clarifying these matters is the Process Salience-Worth Matrix developed by Peter Keene in his book The Process Edge: Creating Value Where It Counts.

Allocate costs to each activity -

Activity based cost information provides managers with valuable insight into the internal capabilities of an organisation. Where possible this should involve allocating all costs. An operation may appear to be value creating when we ignore capital costs associated with the assets employed in the activity, and become a value destroyer when the capital costs are properly attributed. For more insights on managing cost see Evaluating and Improving Costing in Organizations International Good Practice Guidance

This International Good Practice Guidance establishes six fundamental principles that can help professional accountants and their organizations to evaluate and improve their approach to costing.

Identify the activities that are critical to customer’s satisfaction and market success -

The important issues here include -

  • Corporate purpose, policies, and overall strategy. These guide the scope of the activities an organisation undertakes and in particular, the choice of markets served, and products offered.
  • Industry type. The nature of the industry influences the relative importance of activities. The methods of industry analysis can help with this.
  • Value system. This includes the value chains of an organization’s upstream and downstream partners in providing products to end customers.

For a comprehensive introduction to undertaking value chain analysis in a global context, with insights into the wider inter organizational issues see the publication A Handbook for Value Chain Research.

Return from Value Chain Analysis to SWOT Analysis.

Return from Value Chain Analysis to Simply Strategic Planning Home Page.

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