Relevance and importance

The concept can be helpful in understanding how value can be created or lost in companies. It is the cost of these value activities and the value they deliver, that determines whether or not the best value products and services are developed. The value chain analysis is a systematic way of studying the direct and support activities undertaken and this analysis should give greater awareness concerning potential for lower costs and differentiation. Due to advantages of size the SME may be able to analyse its value chain and gain the benefits more quickly than larger more complex organisations.

Overview

Primary activities

	Inbound logistics The activities concerned with receiving, storing and distributing the inputs internally. For example, materials handling, stock control, transport.
	Operations Transform the inputs into the final product or service. For example, assembling, packaging, and testing.
	Outbound logistics Collect store and distribute the product or service to customers. For products this might be warehousing, transport, and for services it might be delivering a service at the customers' offices.
	Marketing & sales Provide the means by which the customers are made aware of the product and service, and are able to purchase it. For example, advertising, selling, promotion.
	Service Activities which improve or maintain the value of the product or service. For example, installation, training, warranty, spare parts.

Support Activities:
These help improve the effectiveness or efficiency of primary activities.

	Procurement This refers to the process for acquiring the inputs for the primary activities.
	Technology development All activities have a technology even if it is just knowledge. These may be concerned with the product, e.g. design, R&D, or the process. This area is important for innovation capability.
	Human resource management Those activities involved in recruiting, managing, training, developing and rewarding people within the organisation.
	Infrastructure The systems of planning, finance, quality control, information management and structure of the company, among others. These can be crucial to the company's performance

In many cases an organisation will have to have a set of links and relationships with other companies which are necessary to create the product or service. This is known as a Value System or in more recent times with extensive links built on e-commerce, a Value Network.

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Recommendations and practical tips

Specialisation in the value system, for example in product design or service, can enable a company to gain competitive advantage.

Use the value chain analysis as an aid to making "make or buy" decisions, for example with a particular component.

Analyse the value system relevant to your industry sector to identify the best partners for your company and the best kind of relationship to have with them, e.g. partner, supplier.

Understand that there are many linkages in the value chain. Behaviour in one part of the organisation may affect costs and performance in another part. Several activities may depend on each other. For example, higher quality inputs and a more efficient procurement system may help achieve better service for the customer.

The value chain analysis can be very useful for companies seeking to apply a cost leadership or differentiation strategy. For example, areas of cost advantage or of specialisation valued by buyers can be identified.

Warnings and potential pitfalls

Managers need to understand the whole process to make informed decisions.

Organisations should be clear about what activities to undertake themselves.

Do not look at the company's internal position alone. Consider you customers and suppliers too.

Things change continually so try to gain improved knowledge of your value chain and the value system in your sector so as to continue making informed decisions.

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