What Is a Value Chain Analysis? 3 Steps | HBS Online (2024)

Successful businesses create value with each transaction—for their customers in the form of satisfaction and for themselves and their shareholders in the form of profit. Companies that generate greater value with each sale are better positioned to profit than those that produce less value.

To evaluate how much value your company is creating, it’s critical to understand its value chain. Below is an overview of what a value chain is, why it’s important to understand, and steps you can take to conduct one and help your company create and retain more value from its sales.

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Understanding the Value Chain

The term value chain refers to the various business activities and processes involved in creating a product or performing a service. A value chain can consist of multiple stages of a product or service’s lifecycle, including research and development, sales, and everything in between. The concept was conceived by Harvard Business School Professor Michael Porter in his book The Competitive Advantage: Creating and Sustaining Superior Performance.

Taking stock of the processes that comprise your company’s value chain can help you gain insight into what goes into each of its transactions. By maximizing the value created at each point in the chain, your company can be better positioned to share more value with customers while capturing a greater share for itself. Similarly, knowing how your firm creates value can enable you to develop a greater understanding of its competitive advantage.

Components of a Value Chain

According to Porter’s definition, all of the activities that make up a firm's value chain can be split into two categories that contribute to its margin: primary activities and support activities.

What Is a Value Chain Analysis? 3 Steps | HBS Online (1)

Primary activities are those that go directly into the creation of a product or the execution of a service, including:

  • Inbound logistics: Activities related to receiving, warehousing, and inventory management of source materials and components
  • Operations: Activities related to turning raw materials and components into a finished product
  • Outbound logistics: Activities related to distribution, including packaging, sorting, and shipping
  • Marketing and sales: Activities related to the marketing and sale of a product or service, including promotion, advertising, and pricing strategy
  • After-sales services: Activities that take place after a sale has been finalized, including installation, training, quality assurance, repair, and customer service

Secondary activities help primary activities become more efficient—effectively creating a competitive advantage—and are broken down into:

  • Procurement: Activities related to the sourcing of raw materials, components, equipment, and services
  • Technological development: Activities related to research and development, including product design, market research, and process development
  • Human resources management: Activities related to the recruitment, hiring, training, development, retention, and compensation of employees
  • Infrastructure: Activities related to the company’s overhead and management, including financing and planning

What Is Value Chain Analysis?

Value chain analysis is a means of evaluating each of the activities in a company’s value chain to understand where opportunities for improvement lie.

Conducting a value chain analysis prompts you to consider how each step adds or subtracts value from your final product or service. This, in turn, can help you realize some form of competitive advantage, such as:

  • Cost reduction, by making each activity in the value chain more efficient and, therefore, less expensive
  • Product differentiation, by investing more time and resources into activities like research and development, design, or marketing that can help your product stand out

Typically, increasing the performance of one of the four secondary activities can benefit at least one of the primary activities.

Why Is Value Chain Analysis Important?

Value chain analysis is essential for businesses to understand the sequence of activities required to deliver a product or service.

In addition to optimizing budgets and establishing competitive advantage, businesses can also use value chain analysis for:

  • Supply chain management: Value chain analysis provides insights into how each component of the supply chain adds value to the final product or service, which can lead to better supplier coordination and logistics management.
  • Strategic decision-making: Because the value chain provides an overview of the company's operations and interactions with external stakeholders, you can use it to help inform strategic decisions regarding partnerships, outsourcing, product development, and market expansion strategies.
  • Improving customer satisfaction: Insights gained from conducting a value chain analysis can be used to enhance the quality of your product and customer service, which can lead to higher customer satisfaction and loyalty.
  • Innovation and development: The value chain can also highlight opportunities for innovation like improving existing processes or identifying new ways in which your product can provide value to the consumer.
  • Environmental and social impact: Additionally, value chain analysis can be used to assess a company's operations' environmental and social impacts, which can help businesses adopt more sustainable practices and reduce their environmental footprint.

How to Conduct a Value Chain Analysis

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1. Identify Value Chain Activities

The first step in conducting a value chain analysis is to understand all of the primary and secondary activities that go into your product or service’s creation. If your company sells multiple products or services, it’s important to perform this process for each one.

2. Determine Activities' Values and Costs

Once the primary and secondary activities have been identified, the next step is to determine the value that each business activity adds to the process, along with the costs involved.

When thinking about the value created by activities, ask yourself: How does each increase the end user’s satisfaction or enjoyment? How does it create value for my firm? For example, does constructing the product out of certain materials make it more durable or luxurious for the user? Does including a certain feature make it more likely your firm will benefit from network effects and increased business?

Similarly, it’s important to understand the costs associated with each step in the process. Depending on your situation, you may find that lowering expenses is an easy way to improve the value each transaction provides.

3. Identify Competitive Advantage Opportunities

Once you’ve compiled your value chain and understand the cost and value associated with each step, you can analyze it through the lens of whatever competitive advantage you’re trying to achieve.

For example, if your primary goal is to reduce your firm’s costs, you should evaluate each piece of your value chain through the lens of reducing expenses. Which steps could be more efficient? Are there any that don’t create significant value and could be outsourced or eliminated to substantially reduce costs?

Similarly, if your primary goal is to achieve product differentiation, which parts of your value chain offer the best opportunity to realize that goal? Would the value created justify the investment of additional resources?

Using value chain analysis, you can uncover several opportunities for your firm, which can prove difficult to prioritize. It’s typically best to begin with improvements that take the least effort but offer the greatest return on investment.

One Piece of the Puzzle

Value chain analysis can be a highly effective means of understanding and contextualizing your business’s processes, but it’s just one tool at your disposal. There's a host of other frameworks and concepts that can help you evaluate organizational performance, craft winning strategies, and be more effective in your role.

Ready to learn additional frameworks that can enable you to make smarter business decisions? Explore our eight-week course Economics for Managers and other online Strategy courses, and find out more about how to develop effective pricing strategies.

This post was updated on May 16, 2024. It was originally published on December 3, 2020.

What Is a Value Chain Analysis? 3 Steps | HBS Online (2024)


What are the three steps in value chain analysis? ›

Three main steps can be distinguished in value chain analysis: (1) Identify the main functions and types of firms in the value chain; (2) Analyze structural connections; and (3) Analyze dynamics.

What are the three components of value chain thinking? ›

Components of a Value Chain

Inbound logistics include functions like receiving, warehousing, and managing inventory. Operations include procedures for converting raw materials into a finished product. Outbound logistics include activities to distribute a final product to a consumer.

What is a value chain analysis in simple terms? ›

What Is Value Chain Analysis? Value chain analysis is a means of evaluating each of the activities in a company's value chain to understand where opportunities for improvement lie. Conducting a value chain analysis prompts you to consider how each step adds or subtracts value from your final product or service.

What are the three primary steps in performing a value chain analysis? ›

According to our textbook, the three primary steps in performing a value chain analysis are: 1) identify the value chain activities, 2) evaluate their value-creating properties and cost characteristics, and 3) identify improvements that allow the company to capture greater value.

What are the three primary activities of the value chain? ›

The primary activities of the value chain include inbound logistics, operation outbound logistics, marketing and sales, and service.

What are the three 3 components that needs to be manage in supply chains? ›

Generally the key aspects of Supply Chain management are Purchasing (sourcing), Planning (scheduling) and Logistics (delivery). Sometimes logistics is separate, and procurement may be included with Purchasing, depending upon how location specific the procurement activities are.

What is the value chain process? ›

"Value chains are an integral part of strategic planning for many businesses today. A value chain refers to the full lifecycle of a product or process, including material sourcing, production, consumption and disposal/recycling processes.”

What is the sequence of value chain? ›

A value chain analysis is a strategic tool to assess and evaluate a company's activities and processes to deliver a product or service to customers. It involves examining the entire sequence of activities, from sourcing raw materials and production to marketing, sales, and customer support.

What is the value chain strategy? ›

Value chain analysis is a strategic process that can increase profit margins and provide a competitive advantage for companies of all sizes. Within this analysis, businesses identify areas where the value of specific production and sales activities can be increased.

What are the core processes of the value chain? ›

The value chain creates and delivers the product or service, which ultimately delivers value to customers. Core processes can exist within organisational functions but usually move across functions and departments, or even across and between enterprises.

How many steps are there in value chain analysis? ›

A five-step process for value chain analysis.

What is value chain analysis structure? ›

A company's value chain can be divided into primary activities and secondary (or support) activities. Value chain analysis is the process of examining each of those activities in terms of what they cost, the value they deliver, and how they might be optimized in keeping with the company's competitive strategy.

What is an example of a value chain? ›

An example of a value chain is the production process of coffee beans from the farm to the factories for processing, through different roasting grades, and finally to the coffee consumer as various coffee beverages. The whole process aims at providing value for the coffee consumer.

What is the first step of value chain analysis? ›

Step 1: Identify the Elements of the Value Chain

The first step to value chain analysis is to identify all the processes and activities that make up the value chain and determine the cost of each one. All of these can be categorized as either primary or supporting activities.

What are the three main areas in the value chain where significant? ›

The three main areas in the value chain where significant differences in the costs of competing firms can occur include: the nature and makeup of their own internal operations, the activities performed by suppliers, and the activities performed by wholesale distribution and retailing allies.

What are the three key areas to create responsible value chains? ›

Sustainability in supply chains requires three responsibilities: social, environmental, and financial. For those of you familiar with the Triple Bottom Line (TBL) method of accounting, these three elements will sound familiar.

What are the key activities in value chain analysis? ›

The value chain framework encompasses five primary activities -- inbound operations, operations, outbound logistics, marketing and sales, and service -- and four secondary activities -- procurement and purchasing, human resource management (HRM), technological development and company infrastructure.

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