Value Chain Analysis

Value chain analysis

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Value Chain Analysis helps to identify the core competencies of the company and those activities that drive competitive advantage. The value chain is a systematic approach to examining the development of competitive advantage. It was created by M. E. Porter in his book, Competitive Advantage (1980). The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organisation. The 'margin' depicted in the diagram is the same as added value. The organisation is split into 'primary activities' and 'support activities.

Primary activities:

1. Inbound logistics: materials handling, receiving and warehousing raw material, inventory control;

2. Operations: machine operating, assembly, packaging, testing and maintenance, process of transforming inbound into finished goods and services

3. Outbound logistics: order processing, warehousing, transportation and distribution of finished goods;

4. Marketing and sales: advertising, promotion, selling, pricing, channel management;

5. Service: installation, servicing, spare part management;

Support activities:

6. Firm infrastructure: general management, planning, finance, legal, investor relations, culture;

7. Human resource management: recruitment, education, promotion, reward systems;

8. Technology development: research & development, IT, product and

    process development;

9. Procurement: purchasing raw materials, lease properties, supplier contract negotiations.

By subdividing an organisation into its key processes or functions, Porter was able to link classical accounting to strategic capabilities by using value as a core concept, i.e. the ways a firm can best position itself against its competitors given its relative cost structure, how the composition of the value chain allows the firm to compete on price, or how this composition allows the firm to differentiate its products to specific...