SLIDE 1

Value Chain Analysis

Porter suggested that activities within an organisation add value to the service and products that

the organisation produces, and all these activities should be run at optimum level if the

organisation is to gain any real competitive advantage. Competitive Advantage is the ability for a

firm to put "generic strategy" into practice, generic strategy includes:

1. Cost Leadership: offer the lowest price to customers
2. Differentiation: selecting the important attributes that buyers want so the company can
get a premium price
3. Focus: doing each strategy according to each market segment

What activities a business undertakes is directly linked to achieving competitive advantage.

For example:
1. A business which wishes to outperform its competitors through differentiating itself
through higher quality will have to perform its value chain activities better than the
oppositions.
2. By contrast, a strategy based on seeking cost leadership will require a reduction in the
costs associated with the value chain activities, or a reduction in the total amount of
resources used.

Value chain Diagram- International Sportwear

Applying the Value Chain to an Industry

THE VALUE CHAINS OF THE DIFFERENT FIRMS WITHIN AN INDUSTRY VARY FROM ONE
ANOTHER.

• IN FACT, THE DIFFERENCES IN THE VALUE CHAINS AMONG THE DIFFERENT INDUSTRY
PLAYERS PROVIDE THE SOURCE OF COMPETITIVE ADVANTAGES BETWEEN THESE PLAYERS.

Value chain example: Starbucks

Who Uses Value Chain Analysis?

The management and analysis of value chains are becoming both industry specific and
increasingly global, taking into account fast-changing markets, adjustments necessitated by
new technologies, delivery methods, trade and government involvement, and fast-paced and
fickle consumer demands. Add to that the global value chain's emphasis on sustainability, as
well as its goal to expand the economic prospects of the world's poorest nations by fostering
partnerships (especially in the agri-business sector). An example of this is discussed in the
December 2009 briefing paper, Upgrading Along Value Chains: Strategies for Poverty
Reduction in Latin America by Jonathan Mitchell, Christopher Coles, and Jodie Keane. In
both micro and macro-change management strategies, business leaders continue to
successfully implement Porter’s deceptively simple value chain framework.

The reason for this continued success is that Porter's framework is, first and foremost, a
general model. It is not meant to be a standalone, rigid framework that creates barriers
between functions or gives equal weight to every task that brings a product or service to
market. Various departments, including human resources, marketing, sales, and operations
utilize value chain analysis. Similarly, a wide variety of industries such as enterprise,
manufacturing, retail, service, and technology, in addition to governments and their
agencies, successfully adapt the basic value chain concept, and understand that not all
functions or activities need to receive the same level of scrutiny. 

For example, the Department of Defense (DOD) has a design-chain operations reference
(DCOR) that cites little need to spend time or resources analyzing marketing and sales
activities in their overall value chain. Although this is probably an accurate and reasonable
evaluation for the DOD’s purposes, it’s one that few other enterprises are likely to echo. 

Therefore, the first order of any value chain strategy is to identify the important tasks and
functions necessary to deliver your product or service. Once you identify value activities, you
can then focus analysis on where you can add value and discover areas for optimization,
differentiation, or cost efficiency. When you complete these aspects of analysis, you’re ready
to put together a plan for changes. 

Examples of Value Chain Analysis by Industry

For now and into the near future, value chains are a useful management strategy for many
different industries. However, as industries become more global, more cooperative, and
more socially aware, they’ve come to perceive value chains differently based on their
specific needs. Companies like FedEx see the future as a circular chain that values
renewability. The World Bank, the United Nations Conference on Trade Development, and
the International Crops Institute for the Semi-Arid Tropics all use global value chains to
foster international cooperation to assist the world's poorest countries. 

Companies that depend on global resources are developing initiatives to support global
value chains by working with governments, United Nations partners, and economic aid
organizations. In fact, in December of 2015, twenty value chain experts from various
organizations, including OECD, FAP, ILO, UNIDO, WFP, WTO, ACID/VOCA, and GIZ,
gathered for the “Inclusive and Sustainable Value Chain Development” meeting in Vienna,
Austria, to discuss inclusive and sustainable agriculture value chains. 

As one of the biggest purchasers of cocoa in the world, Nestlé has developed the "Every
Woman, Every Child Initiative." To improve company value, they have committed to
providing expertise, sustainable solutions, and social improvements, especially in the area of
child labor. A number of companies create partnerships to provide opportunities for overseas
development assistance through the development of agri-food value chains, such as those in
the macadamia industry in Kenya, the sweet sorghum by-products in India, and the seed nut
harvests in Uganda. These initiatives advocate a greatly expanded view of the value chain
called collaborative value networks. 

Additional examples include:

 Food and Beverage: Selecting and sourcing high-quality coffee beans, developing

loyalty through excellent customer service, and aggressively marketing their brand
were key elements in Starbucks’ creation of a unique identity and a robust
competitive edge. Rather than focusing on premium pricing, Pizza Hut outpaced the
competition by offering fast delivery of a less expensive product. 
 Delivery Service: To increase market share and brand loyalty, FedEx's value chain
emphasizes and invests in employee development through excellent human
resources initiatives and infrastructure improvements. 
 Retail: Walmart is constantly performing value chain analysis in order to keep costs
low for their customers. From regularly evaluating suppliers and integrating in-store
and online shopping experiences to remaining innovative in order to differentiate,
Walmart is driven by their commitment to helping people save money.
Implementing and Using Value Chain Analysis

Porter’s generic strategies — so named because they can be administered to products or

services in all industries — act as a starting point, not an absolute, step-by-step guide.
However,

Porter’s generic model identifies three general steps in value chain analysis: the initial
evaluation of tasks, the location of areas of cross-functionality, and the discovery of dynamic
areas of opportunity.

Additionally, to help manage and fulfill the strategies of Porter’s model, there are numerous
templates, articles, online courses, and other roadmaps available to develop goals,
strategies, and methods of value chain analysis. Many present industry-specific insight,
models, and assistance.
 
For example, approaches that focus on discovering cost advantages and disadvantages
include:

 Identifying primary and supporting activities

 Rating the importance of each activity in providing value to the product or service
 Identifying the cost drivers that cause a change in the activity cost
 Identifying linkages and dependencies
 Identifying cost reduction and value improvement opportunities

Approaches with a focus on finding differentiation include:

 Identifying activities that create value for your customers

 Identifying differentiation activities that improve customer value
 Identifying the best opportunity for differentiation

Value chain analysis as a tool also concentrates on finding activity links or, as Porter called
them, bridges between both the primary and secondary functions of a department, business
unit, or enterprise. Although the model is clear in defining general, discrete functions, there
are numerous areas of interactions and cross-functionality that can identify cost
opportunities, areas of greater efficiencies, and methods to distinguish a brand. 

Factors that can influence the value you provide include finding and utilizing the right people,
motivating the team, remaining relevant, incorporating technology, and listening to customer
feedback.

When analyzing the value chain, it is important to include many stakeholders, and to study
the entire market to find areas for competitive opportunities. It is also vital to provide clarity
and information, and to define goals. There are thousands of activities varying in importance
in the primary and supporting areas of the chain, and opportunities are discovered through
cooperative research and analysis, brainstorming, surveying, and observation.

Advantages of Value Chain Analysis

The advantages of value chain analysis can be seen by breaking product and service activities into
smaller pieces in an effort to fully understand the associated costs and areas of differentiation. With
value chain analysis, you can easily identify those activities where you can quickly reduce cost,
optimize effort, eliminate waste, and increase profitability.

Analyzing activities also gives insights into elements that bring greater value to the end user. Some
of the resulting activities may be as simple as negotiating with suppliers on raw material cost,
focusing on end-user experiences that are enhanced by new communication or customer service
experiences, and identifying activities that are better served by outsourcing — those that are not a
core competency, result in process improvements, or are less expensive when performed by
external suppliers. It is common practice for organizations of all sizes and in all industry verticals to
outsource to strategic partners.
A company may choose to design a product or service, but use an outsourced provider to build or
manufacture the product. When deciding to outsource, it’s important to consider whether the end
customer will have a concern with the company outsourcing the specific activity, whether
outsourcing impacts delivery time, and of course, the associated costs.

In addition to negotiations, creating a better experience, and finding opportunities to outsource,

analysis may also advocate the need for greater or more expensive resources that increase product
value, develop loyalty, or create differentiation from your competition. 

Disadvantages of Value Chain Analysis

Value chain analysis is no simple feat. Some of the difficulties involve gathering data (which can be
labor and time-intensive), identifying the tasks or functions that can add perceived or real value, and
developing and deploying the plan. Additionally, it is not always easy to find appropriate information
in order to break your value chain down into primary and supporting activities. 

Using Porter's Value Chain

To identify and understand your company's value chain, follow these steps.

Step 1 – Identify subactivities for each primary activity

For each primary activity, determine which specific subactivities create value. There are three
different types of subactivities:

 Direct activities create value by themselves. For example, in a book publisher's marketing

and sales activity, direct subactivities include making sales calls to bookstores, advertising, and
selling online.
 Indirect activities allow direct activities to run smoothly. For the book publisher's sales and
marketing activity, indirect subactivities include managing the sales force and keeping customer
records.
 Quality assurance activities ensure that direct and indirect activities meet the necessary
standards. For the book publisher's sales and marketing activity, this might include proofreading
and editing advertisements.

Step 2 – Identify subactivities for each support activity.

For each of the Human Resource Management, Technology Development and Procurement support
activities, determine the subactivities that create value within each primary activity. For example,
consider how human resource management adds value to inbound logistics, operations, outbound
logistics, and so on. As in Step 1, look for direct, indirect, and quality assurance subactivities.

Then identify the various value-creating subactivities in your company's infrastructure. These will
generally be cross-functional in nature, rather than specific to each primary activity. Again, look for
direct, indirect, and quality assurance activities.

Step 3 – Identify links

Find the connections between all of the value activities you've identified. This will take time, but the
links are key to increasing competitive advantage from the value chain framework. For example,
there's a link between developing the sales force (an HR investment) and sales volumes. There's
another link between order turnaround times, and service phone calls from frustrated customers
waiting for deliveries.

Step 4 – Look for opportunities to increase value

Review each of the subactivities and links that you've identified, and think about how you can
change or enhance it to maximize the value you offer to customers (customers of support activities
can be internal as well as external).

Value chain example: Starbucks

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," the company stated in its 2018 Global Social Impact Report. "We leverage
technology to develop new approaches to ensure the future of high-quality coffee, including
a new traceability pilot project announced in 2018."

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."