Value Chain Analysis: What It Is and How To Use It

By Indeed Editorial Team

Updated November 8, 2021

Published July 10, 2020

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Many companies use analysis to evaluate and improve their business practices. While there are many industry specific measurement tools out there, a few are useful in all sectors. One of these is the value chain analysis. In this article, we explain what a value chain is, highlight the elements included in the value chain, describe the steps necessary to review a value chain, offer an example value chain analysis and provide the differences between value chains and supply chains.

Related: Supply Chain Management: What It Is and How It Works

What is a value chain?

A value chain is a thorough description of the value of a product or service from conception of the product to its delivery to the customer. It's the process through which a company creates value for its customers. Often, companies measure the success of their value chain through profit margin. By using the profit margin formula, businesses can see exactly how much value they add from a product's conception to its completion. Usually, more value-added means more profit for the company. Profit margin is the value created minus the cost of creating value.

Economic theorist and academic Michael Porter coined the term "value chain" in his 1985 book "Competitive Advantage." Since he described the value chain in that text, the business community has used the concept broadly. Any industry or company can use a value chain analysis since it's a general and highly adaptable model. Even within a single company, various departments can adjust the model as needed to serve their purposes. Many industries use this analysis and increasingly do so for global value chain studies.

Related: The Value of Increasing Your Business Vocabulary

Parts of a value chain

Porter's value chain has clear and specific elements broken down into two categories. The analysis prioritizes systems over departments since the end goal of a value chain analysis is to identify aspects of a system or process for improvement rather than an entire department. The value chain identifies common business activities and the assistance areas through which they function in two broad categories called primary and support:

Primary

The primary category of the value chain features five subcategories:

  • Inbound logistics: These processes relate to any internal logistics such as storing, receiving and distributing parts or materials. Suppliers are usually a key factor in inbound logistics processes.

  • Operations: These processes contribute to the shift from raw input materials to a final customer-ready output. Operations processes are usually internal.

  • Outbound logistics: These processes include steps that supply the product to the customer from your company. Sometimes, these involve external shipping connections while for other companies outbound logistics is an internal procedure.

  • Marketing and sales: These processes relate to the persuasion of customers to make a purchase from your company. Most companies have internal sales and marketing teams.

  • Services: These processes include any post-purchase action or support your company takes to maximize customer happiness and loyalty.

Support

Within the value chain's support category, Porter identified four important areas:

  • Firm infrastructure: These are the activities that support the creation of the product or service, but do not necessarily contribute to it directly. Accounting, management and legal are examples of firm infrastructures.

  • Human resources management: This activity covers anything related to employees or other laborers involved in all steps of the value chain.

  • Technology development: This activity includes all technological processes and procedures your company uses as part of the value chain.

  • Procurement: This activity includes any steps your business takes to purchase the raw materials necessary for creating your product.

Related: What Is Synergy?

How to use a value chain

To apply a value chain analysis to your company and find areas for growth and improvement, follow these steps:

1. Establish necessary procedures for each primary activity

Begin by identifying the necessary procedures for each primary activity. For example, a furniture maker would list their processes for obtaining their materials under inbound logistics and their delivery processes under outbound logistics. Do this for each of the five categories: inbound logistics, operations, outbound logistics, marketing and sales and services.

2. Identify necessary procedures for each support activity

Establish all necessary processes for the support activities as they apply to the primary activities. For example, the furniture maker would list under the firm infrastructure subcategory how the company's accounting department procedures support inbound logistics, operations, outbound logistics and so on. Do this for all support activities within firm infrastructures, human resources management, technology development and procurement.

3. Analyze each process for possible improvements

Once you've established every process within your value chain, analyze each for possible improvements. See where you could streamline processes, dispense with unnecessary steps or restructure communications to improve the efficiency and value of the procedure. Do this for every process.

4. Find productive solutions

Now that you've identified areas for improvement, find realistic solutions that you can apply to the process. Choose a few areas to address with concrete solutions and prepare a tracking system to compare metrics after implementation.

5. Apply findings

Apply your selected solutions to your processes. Track related metrics to see how your adjustments improve the value of your product and overall value chain.

Related: Definitive Guide To Horizontal Integration

Example of a value chain

Let's Table That is a furniture store that sells custom furniture. This example value chain provides a brief overview of how a value analysis works.

Value Chain Analysis Example: Let's Table That Furniture Store
Support Activities Firm Infrastructure: Accountants manage accounts payable and receivable.
Human Resources Management: Carpenters build furniture.
Technology Development: POS system tallies sales.
Procurement: The purchasing team researches various suppliers.
Primary Activities
Inbound Logistics:

- Purchase raw materials

- Ship raw materials
Operations:

- Build furniture

- Meet with clients
Outbound Logistics:

- Ship finished products

- Obtain protective shipping materials
Marketing and Sales:

- Digital marketing

- Print marketing
Service:

- Wood refinishing

- Repair work

Value chain vs. supply chain

While value chains and supply chains do share substantial overlapping qualities and elements, there are some important key differences. The supply chain tracks the creation of the product and directly related endeavors while the value chain tracks every element of the company to measure added value. Supply chains are primarily external, while value chains are primarily internal. Supply chains focus on identifying the physical parts and materials that go into a product while value chains measure all the elements of a supply chain in addition to related processes within marketing, advertising, design and research and development.

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