In 1985, Michael Porter provided an essential value chain (VC) model that identifies potential sources of competitive advantage in his book “Competitive Advantage”. He divided the production process of the company into main and auxiliary activities that add value to the final product.
This approach allowed us to analyze the costs of each strategically important process to reduce expenses or increase differentiation. The VC shows at what stage of the production process profit is earned, and at what point it is lost.
The total value of the company’s services is measured by revenue, which is determined by the volume of services provided and the assigned price. A company that achieves competitive advantage through differentiation will perform its activities better than competitors.
If a company is able to produce products at a lower price without losing quality, it can bet on lower prices in order to gain a greater market share. Or it should market only superior products. Otherwise, the company will soon face marketing difficulties.
When a company effectively combines cost reduction for certain types of activities and implements services of excellent quality, the customer is willing to pay more. In this situation, conditions are created to maximize profits in the long run.
What is included in the value chain?
The VC is a visualization of all the company’s internal activities related to the production of goods and services. It is formed by:
- main activities that directly affect the final product
- and supporting activities that indirectly add value
While core activities add value directly to the manufacturing process, they are not necessarily more important than supporting procedures. Currently, the competitive advantage is mainly associated with technological improvements or innovations in business models or processes. On the other hand, core activities are usually a source of cost benefits, where costs can be easily identified for each type of service and can be managed appropriately.
Objectives and results of the analysis
The best result of value product analysis and strategic management should be the achievement of the following points:
- Identification of fundamental market opportunities in the short and medium-term.
- Identification of the reasons limiting the implementation of these opportunities.
- Search for new strategies to address these reasons in order to realize opportunities (with an eye on maximum profit).
- Attracting consumers to cooperation through surveys, focus groups, etc. in order to identify the best marketing strategies.
- Making recommendations about the practical implementation of a strategy that promotes a fair and objective assessment of a product marketed.
A value chain is a tool for analyzing potential sources of providing greater value to consumers and identifying synergies. The classical model of the VC includes four main activities of the organization (chain links) aimed at creating value for the organization’s consumers:
- input logistics;
- production operations;
- output logistics;
- marketing including sales and services.
In addition, four supporting activities are also included in the value chain model: organizational infrastructure; human resources management; technological developments; procurement involving the acquisition of everything necessary for the conduct of core business.
These supporting activities relate to all core business areas. In a more detailed model of the organization, each type of its activity, in turn, can be concretized, for example, marketing – according to its individual functions: conducting market research, product promotion, marketing development of a new product, etc.
The task is to check the costs and output parameters of each of the types of activities and find ways to improve them. By comparing this data with competitor data, ways to gain competitive advantage are identified.
Thus, each type of activity should be analyzed from the point of view of providing benefits to the consumer and determining what costs it translates into. Typically, an analysis of the VC of a particular organization is carried out taking into account its relations with the value chains of suppliers, distributors, and consumers.
In this way, a competing organization, for example, can help major suppliers find ways to lower their costs, leading to lower prices for the parts they supply. In the same way, assistance can be provided to consumers in the direction of their activities in a more efficient or cheaper way, making consumers more loyal to this competitor’s organization.
So, the analysis concerns are not only the processes occurring within the competing organization but are conducted much more widely, going beyond the framework of a specific competing organization. This clearly shows the connection with the marketing of partnerships.
Value chain analysis techniques
In the profit model, an important place is occupied by the task of presenting the creation of a complex product in the form of a value chain.
The essence of the traditional presentation of the product as a consumer value chain, which many firms can take to create, was also presented by A. A. Thompson, A. J. Strickland and P. Doyle. They determined that a VC is an essential tool for strategic cost analysis. The VC determines the activities, functions, and processes for the development, production, marketing, logistics and support (service) of a product or service.
The value chain of activities begins with the provision of raw materials and continues through the production of parts and components, assembly and production, wholesale and retail sale of a product or service to end-users.
It considers both the main activity (product creation life cycle) and auxiliary (development of research and development infrastructure, human resource management, knowledge management, etc.).
Let us pay attention to the decisive role of the end consumer, to his attitude to the price and quality of the consumed product – the result of the activities of all participants in the common VC analysis.
As for other functions and business processes that were not included in the considered business system scheme (suppliers and delivery), the company can increase its competitiveness by taking on these additional functions that have a beneficial effect on consumer centers (increasing the value of goods for consumers).