A value chain is used to systematically visualize processes and value adding activities within a business

The value chain is a classic framework to structure the activities of a business. Each step adds value to a product by transforming resources. This value add justifies a profit margin at the end, meaning the price of the end product is higher than the sum of total costs incurred along the value chain.

Michael Porter’s value chain is the most common version

The primary activities in Porter’s value chain are the major contributors to value creation. Supporting activities are necessary to run the business, but not necessarily create value by themselves. These activities are often referred to as overhead.

Porter's Value Chain for consulting case interview preparation

The above example is mainly applicable for a classic manufacturing process but can also hold well for more abstract service companies, where information is processed. In general, a value chain could also depict an entire industry covering the activities done by several companies in order to produce a complete product. Depending on the industry, primary and supporting activities will vary and will have to be adapted according to industry.

You can use the value chain analysis both in market analysis and company analysis cases

On a company level, the value chain analysis is a powerful tool when you need to determine a root cause of a general problem in a structured way. It can be considered as search pattern within a company’s or an entire industry’s processes. Possible business situations where a value chain analysis may be useful are:

  • When there are general quality problems or increasing costs. Here you would lay down the primary and supporting activities. Examine each step to find the exact root cause of the problem
  • If you need to assess a business model, conduct a value chain analysis to figure out the key processes of a company, resulting in most value and margin. Here, you would define the activities that are the core competencies and secondary activities of the client and evaluate strengths and weaknesses (see SWOT analysis) to make more detailed recommendations
  • When facing logistic issues, use it to analyze all parts within a supply chain
  • In case of a business model redesign, conduct a value chain analysis to figure out what steps can be outsourced

On a market level, the value chain allows you to get a quick overview over relevant players and the power of each participant. If you want to understand a product with respect to its manufacturing and its unique characteristics, follow its production along the value chain. In addition, if you are asked to conduct a profit pool analysis of an industry, you would need to structure it according to value chain steps. Doing so provides transparency about the attractiveness of single steps within a value chain.

Key takeaways

  • The value chain is a powerful tool to structure your analysis (since it is MECE per definition)
  • It usually differentiates between value adding primary activities and supporting activities (a.k.a overhead)
  • It is a systematic search pattern to analyze both companies and industries
2 Comment(s)
May 02, 2014 13:41 -
Jan

I guess if you apply the concept in the end, it depends on the company you analyze and the relevance of the process for their value creation process: For a pharmaceutical company, R&D might even belong to the Primary Activities

May 02, 2014 03:22 -
Philipp

I know it as "Procurement" instead of "Research & Development", with R&D being discussed under the header of "Technology". See: http://en.wikipedia.org/wiki/Value_chain

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