The Straightforward Guide to Value Chain Analysis [+ Templates]

Download Now: Free Value Chain Analysis Template
Meredith Hart
Meredith Hart

Published:

What's your business' competitive edge? A value proposition helps businesses identify what sets them apart from competitors.

Management team leader completing a value chain analysis

But how can you tell if your business activities create the most value for your customers and result in a strong profit margin? One way to get there is through conducting a value chain analysis.

Let's take a deeper look into value chain analysis and learn how you can analyze your business activities.

→ Download Now: Value Chain Analysis Template

We’ll cover:

Value chain analysis is a way for businesses to analyze the activities they perform to create a product. Once the activities are analyzed, a business can use the results to evaluate ways to improve its competitive advantage.

While one of the goals of value chain analysis is to improve operational efficiency, its final and most important goal is to establish an advantage over competitors.

Competitive Advantage

Competitive advantage is what sets your business apart from competitors. You'll need a clear idea of your target market to develop an advantage.

If you're an entrepreneur interested in clearly defining your business' target audience, find the ideal niche market for launching or selling your products. You’ll also need to know the benefit your product provides to the target market and understand your competitors’ offerings.

As you complete your value chain analysis, you’ll identify the edge you’re trying to gain over the competition. Firms typically choose between two types of competitive advantage: cost advantage and differentiation advantage.

Value Chain Analysis Template

Use this template to outline and visualize your:

  • Outbound Logistics
  • Technology Development
  • Inbound Logistics
  • And More!
Learn more

    Download Free

    All fields are required.

    You're all set!

    Click this link to access this resource at any time.

    Cost Advantage

    A cost advantage strategy aims to become the lowest-cost provider in your industry or market. Companies that excel with a low-cost strategy have extreme operational efficiency and use low-cost materials to reduce the overall price of their product or service.

    Examples include McDonald's and Walmart.

    Differentiation Advantage

    When using a differentiation strategy, you offer a unique or highly specialized product to gain a competitive advantage. The business needs to dedicate time and resources to innovation, research, and development.

    A successful differentiation strategy allows the business to set a premium price for its product or service. Examples include Starbucks and Apple.

    It's best to pick a single competitive advantage to focus your efforts on. Depending on which competitive strategy you choose, the goal of your value chain analysis will be to either reduce costs or differentiate to improve margins.

    Then, you'll have a clear idea of your business' goals and how you plan to provide value. It also narrows the scope of changes that need to be made to improve efficiency.

    Featured Tool

    Value Chain Analysis Template

    Fill out the form to access the free template.

    Porter's Value Chain Analysis

    But how would you choose which competitive advantage to go for? Using Porter’s value chain model, you can look at your business activities, pinpoint a unique value proposition, and determine the best way to establish dominance over your competition.

    Michael Porter, a Harvard Business School professor, introduces a simple value chain model in his book Competitive Advantage. He lays out the steps for performing a value chain analysis and places business activities into two categories: primary and support.

    Identifying the primary and support activities is critical in creating a value chain analysis. You’ll know where you spend the most resources, where your business can improve, and where your competitors may have an edge over you.

    Let’s take a look at these activities below.

    Primary Activities

    There are five primary activities, including all the actions that go into creating a business' offering. Let's explore them below.

    • Inbound logistics. This is how materials and resources are gained from suppliers before the final product or service can be developed. In your analysis, take a look at the locations of your suppliers and shipping costs from their facility to yours.
    • Operations. Operations are how the materials and resources are produced, resulting in a final product or service. Here, you may look at the cost of running your warehouse, machinery, and assembly lines.
    • Outbound logistics. Once a product is finished, it needs to be distributed. Outbound logistics describes this process. Consider your shipping costs to consumers, warehousing fees, distributor relations, and order processing operations.
    • Marketing and sales. This is how your product or service is presented and sold to your ideal target market. In your analysis, take into account advertising costs, promotional costs, reach, and cost-per-acquisition.
    • Services. This is the support a business provides for the customer, which can include support and training for the product, warranties, and guarantees. You’ll look at repair costs, product training costs, product adjustment frequency, and more.

    Support Activities

    Support activities help the primary activities in creating an advantage over competitors. They include:

    • Firm infrastructure. This entails all the management, financial, and legal systems a business has in place to make business decisions and effectively manage resources.
    • Human resource management. Human resource management encompasses all the processes and systems involved in managing employees and hiring new staff. This is especially important for companies that provide in-person service.
    • Technology development. Technology development helps a business innovate. This can be used in various steps of the value chain to gain an advantage over competitors by increasing efficiency or decreasing production costs.
    • Procurement. This is how the resources and materials for a product are sourced. The goal is to find quality supplies that fit the business' budget.

    Value chain analyses require research and can take time to develop. Below are the general steps it takes to create a value chain analysis.

    How to Create a Value Chain Analysis

    It’s now time to bring it all together in a unified process to create a value chain analysis. Let’s get started.

    1. Determine the business' primary and support activities.

    Together, the primary and support activities make up the value chain. They include each action required in developing a product or service, from raw material to final product.

    2. Analyze the value and cost of the activities.

    The team tasked with creating the value chain analysis should brainstorm ways each activity provides value to customers and the business as a whole. Compare the activity to the competitive advantage you're trying to achieve and see if it supports the goal.

    After the value analysis is complete, look at the cost of the activities. Is the activity labor-intensive? How much does X raw material cost?

    Asking similar questions will help identify which activities are cost-effective and which are not. This is where areas for improvement can be identified.

    3. Refer to your competitors' value chains.

    A value chain analysis improves your competitive advantage, so any business that conducts one should keep that information close to the chest. In all likelihood, you won't happen upon a nuanced, in-depth picture of your competitors' primary and support activities.

    Still, you can get some concept of your industry peers' value chains through competitive benchmarking — using relevant metrics to compare your company to competitors’. The practice is multifaceted and is used for three primary functions:

    • Strategic benchmarking, comparing business models and strategies.
    • Process benchmarking, comparing business and operational processes.
    • Performance benchmarking, comparing business outcomes based on a set of metrics.

    Once you've identified the benchmarking category you'd like to pursue, you can pick the competitors you'd like to measure yourself against. Then, you'd choose metrics that you can realistically collect data for and leverage resources that enable the relevant research.

    Value Chain Analysis Template

    Use this template to outline and visualize your:

    • Outbound Logistics
    • Technology Development
    • Inbound Logistics
    • And More!
    Learn more

      Download Free

      All fields are required.

      You're all set!

      Click this link to access this resource at any time.

      4. Understand your customer base's perception of value.

      The customer is always right. So however valuable your customers perceive your product or service to be is exactly how valuable it actually is. Customer perception might be the most crucial factor in framing your competitive advantage, so you need to have a pulse on it.

      Customer surveys, digging into any, and doing anything that will cue your target market’s perception of you are central to conducting a fully realized value chain analysis.

      5. Identify opportunities to gain a competitive advantage.

      Once the value chain analysis is complete, the primary stakeholders in the business can see an overview of where the business is excelling and where improvements can be made operationally.

      Begin with the improvements that take minor changes and provide high-impact results. After the easy wins are identified, you and your team can tackle the bigger challenges that might be hindering efficiency.

      The value chain analysis gives businesses a clear idea of how to adjust their actions and processes to provide the most value to their target market and increase profit margins for the company.

      Still not sure how it all works? Let’s take a look at an example.

      Value Chain Analysis Example

      Completing a value chain analysis allows businesses to examine their activities and find competitive opportunities.

      For example, McDonald's mission is to provide customers with low-priced food items. The analysis helps McDonald's identify areas for improvement and activities that add value to their products and services.

      Below is an example of a value chain analysis for McDonald's and its cost leadership strategy.

      value-chain-analysis_5

      Primary Activities

      • Inbound Logistics: McDonald's has pre-selected, low-cost suppliers for the raw materials for their food and beverage items. It sources suppliers for items like vegetables, meat, and coffee.
      • Operations: The business is a franchise, and each McDonald's location is owned by a franchisee. There are more than 39,000 McDonald's locations worldwide.
      • Outbound Logistics: Instead of formal, sit-down restaurants, McDonald's has restaurants that focus on counter-service, self-service, and drive-through service.
      • Marketing and Sales: Its marketing strategies focus on media and print advertising, including social media posts, magazine advertisements, billboards, and more.
      • Services: McDonald's strives to achieve high-quality customer service. It provides its thousands of employees with in-depth training and benefits so they can best assist their customers.

      Support Activities

      • Firm Infrastructure: The McDonald’s corporation has both C-suite executives and Zone Presidents who oversee the firm’s operations in various regions, with a general counsel overseeing legal matters.
      • Human Resource Management: It maintains a career page where job seekers can apply to both corporate and restaurant roles. It pays hourly and salaried rates and promotes its tuition assistance program to attract talent.
      • Technology Development: The restaurant has invested in touch kiosks to facilitate ordering and increase operational efficiency.
      • Procurement: The firm uses Jaggaer, a digital procurement firm, to establish relationships with key suppliers across various regions of the world.

      Value Chain Analysis Templates

      Here are a few value chain analysis templates to help you develop your own.

      1. HubSpot's Value Chain Analysis Template

      HubSpot Value Chain Analysis Template

      Available via Google Sheets and Google Slides, this interactive version of Porter's Value Chain Analysis can be customized to outline your company's value chain. Get your free copy.

      2. Porter's Value Chain Analysis Model

      This Porter's value chain analysis template provides a general overview of business activities.

      3. Template for Cost Profit Margin

      If you're analyzing the cost versus expected profit margin from your primary and support activities, this template's for you.

      4. Template for Educational Institutions

      Rather than analyzing the activities that go into creating a product or service, this model looks at the value chain involved in developing academic research.

      5. Template for Products

      Use this template to analyze the activities it takes to create a product from raw material to finished product.

      6. Template for Financial Acquisitions

      Did you recently acquire or merge with another business? If so, use this template to analyze the steps in the transition.

      Grow Your Business with Value Chain Analysis

      Your value chain analysis will help you identify areas for improvement and the activities that provide the most value to your customers and your business as a whole. Eliminating inefficient business activities speeds up production, improves your competitive advantage, and increases profit margins.

      Editor's note: This post was originally published in November 2018 and has been updated for comprehensiveness.

      New call-to-action

      Related Articles

      Outline your value chain analysis with this free template.

        Powerful and easy-to-use sales software that drives productivity, enables customer connection, and supports growing sales orgs

        START FREE OR GET A DEMO