Insight

An introductory guide to value chain analysis

Legendary business analyst Michael Porter, known for developing the three generic strategies and 5- Forces is also responsible for another valuable business tool: the value chain. This concept involves analyzing the process view of a company, looking at the various activities involved within its greater infrastructure – like staffing, equipment and raw materials – that determine the margin between costs and profits.

Like generic strategies, value chain analysis is vital for organizations to find ways in which to streamline their business models, a process that happens on a day-to-day basis. The following is an introduction into methods of value chain analysis:

Primary activities
In defining value chain analysis, Porter noted that any firm could be divided into two main segments, each of which creates a certain value. The first segment involves primary activities. These are activities concerned with creation of a physical product, distribution to buyers and eventual sale to consumers. There are five primary activities:

  • Inbound logistics: This is the step in which businesses receive raw materials from suppliers.
  • Operations: Here, the raw materials are processed into various goods and/or services.
  • Outbound logistics: With this step, the goods and services are moved out to distributors.
  • Marketing and sales: Once a distributor has these retail items, it has to promote them and facilitate sales.
  • Service: Once an item is sold, there still will be occasional maintenance and upkeep.

Companies will engage in hundreds, possibly thousands, of smaller activities in the process of developing their goods.

“Each company is made up of two segments, each of which creates a certain value.”

Secondary activities
​Sometimes called support activities, these steps provide assistance to primary activities. Essentially, secondary activities can be seen almost exclusively as internal steps, those tasks that help develop a company’s functionality. There are four secondary activities:

  • Procurement: This activity involves how a company acquires various resources and raw materials.
  • Human resource management: Companies also have to take steps to recruit, promote and, if need be, lay off workers.
  • Technological development: To transform material into products, companies typically acquire equipment, hardware and software. This activity also includes the technical knowledge of workers.
  • Infrastructure: This idea refers to a company’s various departments, including public affairs, accounting, quality assurance, general management, legal and finance.

As is the case with the primary activities, these support steps sometimes involve thousands of smaller subsystems.

Real-world example
Perhaps the most effective way to understand the concepts behind the value chain is to see them in action. As Investopedia noted, Starbucks is a prime example of the value chain model. In regard to procuring supplies, Starbucks controls the entire process, from start to end. By establishing various distribution centers, the company avoids costly fees to secondary shipping outlets while maintaining high-quality standards.

In terms of marketing, Starbucks takes a lighter approach, instead relying on its reputation for friendly customer service. However, Starbucks employs more aggressive campaigns as it rolls out new product lines. Finally, in regard to managing human resources, Starbucks definitely leads the industry. The company is well-known for developing its workforce through the use of promotions and creating a unique and approachable working environment. It’s a dedication to value chain analysis that allowed Starbucks to rise to the top of the coffee business, maintaining 21,000-plus stores in 65 countries.

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