Value Chain Analysis and Why is it Important?

The success of a company or business does not depend on any one person, idea, or even product. The success of a company is the result of every tiny effort that is made at each and every big or small step throughout the process.

Gone are the days when your instincts were enough to make a decision. In today’s highly competitive market, one needs to take every step after careful consideration to maximize the profit and minimize the risk at every stage in the production and distribution of products or services.

Businesses who are new or don’t want to compromise with their operations, seek the help of a market research company which a firm with market professionals ready to offer their services.

What is Value Chain?

Value Chain is the series of activities or steps involved in the production and distribution of a product or service during which value is added. The concept of Value Chain was given by Michael Porter, a Business School professor at Harvard, in his book- The Competitive Advantage: Creating and Sustaining Superior Performance.

The value chain involves every step from arranging machinery or system, procuring raw material, operation, production, marketing, distribution, or any other step involved. Porter classifies these different steps or activities into two categories – Primary activities and Secondary activities.

Primary Activities

Primary activities are those steps or processes that are a direct part of the production of a product or service. Without these activities, the conversion of input or raw material into output or finished product cannot take place and would not reach the customer. They include-

  1. Reception and Storage of Material. It includes transportation, receiving raw material, creating and maintaining inventory, etc. It makes the goods available for further operations.
  2. It includes the activities involved in the conversion of raw material into finished products. Here, the goods and services for sale are produced.
  3. Delivery of Products or Services. Along with the delivery, it includes warehouse management, shipping, transportation, and other processes till the customer receives the product or service.
  4. This is the process that takes care of the awareness of customers about the product or service and generating sales for the company. It includes advertisement, public relations management, market research, etc.
  5. Post-sale Activities. The cycle does not complete at the sale. The company needs to take care of its customers. This includes activities like installation, quality assurance, repair, and other customer services.

Secondary Activities

The activities or processes that help or assist the primary activities in the accomplishment of the larger goal are called Secondary Activities. Hence, these are supportive or auxiliary activities that ensure the smooth functioning of the company and include-

  1. Arrangement of Raw Materials. Outsourcing the requirements of raw materials, equipment, machinery, etc that are needed for the production of products or services.
  2. Technological Infrastructure. It includes the activities of research and development like market research, product design and development, etc. It involves a heavy investment at first but it is also a long-term investment.
  3. Human Resource Activities. HR management is a crucial aspect of any commercial organization. It involves all activities regarding the recruitment, hiring, appraisal, promotion, demotion, dismissal, or retention of the employees.
  4. It is the backbone structure of the whole organization. It involves departments like finance, planning, legal affairs, government approvals, etc.

What is Value Chain Analysis?

There can be various ways in which value is added to a product or service in a business. The scrutiny of all the activities and steps involved in a business with the motive of improving the process and increasing value addition is called Value Chain Analysis.

It is the process in which a person or a group of people critically observe the entire functioning of a particular business and come up with better alternatives of processes, cost-cutting ideas, value-addition ideas, etc. Value Chain Analysis is basically undertaken for profit maximization of the company or a better standing among competitors and in front of customers or potential customers in the market.

Why is Value Chain Analysis Important?

Value Chain Analysis is important because it lets you know and have the proper understanding of how and everything works in the organization and improves the value chain. Based on the focus of the organization, Value Chain Analysis can have two basic goals-

  1. Cost-Cutting

It is an important business strategy to reduce the cost to the company and increase the profit. The process includes analyzing the various processes with an aim to figure out areas where cost can be reduced to cut in such a way that the quality of the product is not compromised.

  1. Product Improvement

The process of product improvement involves further research to improve the product or service and make it better. The company makes a profit by making the product so good that the customer will not mind paying a little more for it over the comparatively cheaper competitors.

Value Chain Analysis in 3 Steps-

  1. Identifying the Value Chain Stages

Obvious enough, the first step in the Value Chain Analysis is to identify the various stages at which the value addition takes place.  It involves going through all the primary and secondary activities.

  1. Analyzing the Cost and Value

This step involves close observation and analysis of each step to determine how much does a step costs and how much value is it adding to the product or service. In case there is a negative imbalance, i.e., the cost is greater than the value, then it needs modification.

  • Room for Improvement

This is a crucial part of the Value Chain Analysis because it involves taking a closer look and doing a deeper analysis to find out areas where there is scope for competitive advantage but it is not obvious.

If you need further assistance regarding Value Chain Analysis or you would like to conduct the value chain analysis for your company in a precise and professional manner, there are market research companies that provide that kind of services. AEON Market Research is one the best market research companies in India which has an outstanding record of conducting value chain analysis along with other market researches by experts having more than 20 years of experience.