What is value chain analysis? Why it matters and how to get started

The internet has given businesses access to the world’s largest customer base, but it’s also created unparalleled competition. Even the most niche businesses find that they have competition in the unlikeliest of places. However, you can still put your company at a competitive advantage when you complete a value chain analysis.

Learn how to do a value chain analysis so you can stand out from the competition, add value to your business, and solidify your company as a market leader.

What is value chain analysis?

A value chain analysis looks at the company’s processes at a granular level, rather than the company as a whole, to determine where value can be added.

Within the value chain analysis framework, first described by Michael Porter in 1985, companies identify primary and support business activities that contribute to its final product, visualizing each step of production, from conception to delivery. Then they analyze those activities to determine where the business can save money, increase efficiency, or maximize differentiators.

Value analysis vs value engineering

Value analysis and value engineering are sometimes used interchangeably. The objective of both value analysis and value engineering is to reduce costs and improve efficiencies across a product’s value chain. But the methods are applied under different circumstances.

Value engineering focuses on optimizing value before a product is developed. The purpose is to prevent unnecessary costs and value loss by building in those efficiencies during the design phase.

Value analysis, on the other hand, focuses on optimizing the value of an existing product. It’s a retroactive technique that reviews a product’s value chain to uncover cost-saving opportunities. Where value engineering is preventative, value analysis is remedial.

Benefits of value chain analysis

The goal of a value chain analysis is to learn how to create maximum value for your business and for your customers at the lowest cost. Without having a clear view of each activity in a business, recommendations for any improvements are based solely on conjecture. In fact, without conducting a value chain analysis, it’s difficult to determine if changes will add meaningful business value or if they’re just satisfying stakeholder whims.

By improving your value chain, you can also improve your company’s competitive advantage. There are two significant ways to go about achieving that differentiation in order to stand out from the competition.

Being the lowest-cost provider: This is the “Walmart option.” If your aim is to reduce operational costs to deliver the lowest-cost product on the market, that goal needs to be the decision driver throughout your value chain analysis.

Being the most specialized provider: This is the “Nordstrom option.” If your aim is to create a unique product or experience, that should be the decision driver throughout your value chain analysis.

How to do a value chain analysis

Follow these steps to start your own value chain analysis (and click either of the templates above to follow along in Lucidchart).

1. Identify primary and secondary activities

Following Porter’s value chain model, your visual should include the following value chain components, divided into two categories: primary activities and support activities. Primary activities are the activities that are required to create your final product, and they include:

• Inbound logistics: The process of receiving raw materials or parts from suppliers and storing and/or distributing those materials for the production process
• Operations: The process of converting inputs (raw materials, labor, and energy) into the final product or service
• Outbound logistics: The storage and distribution of your final product to distribution centers, wholesalers, retailers, and customers
• Marketing and sales: The process of targeting the product/service to the right customer group, promoting the product through various channels, and organizing a sales force
• Service: The activities required to keep the product or service working effectively for the buyer, such as installation, training, repair, and maintenance

Support activities help the primary activities to achieve a competitive advantage for the company. Some examples include:

• Technology development: Research to determine how the company can use technology to automate processes and develop new products
• Human resource management: The activities involved with recruiting, training, and retaining the employees needed to be successful
• Procurement: The sourcing of raw materials at the best quality for the budget
• Firm infrastructure: The activities involved with a company’s structure, management, planning, accounting, and finances

Include all the business processes that add value to your company, from recruiting to design to packaging to troubleshooting.

Don’t be afraid to work as a team: You may need to lean heavily on leaders within departments who are in charge of each activity, as you’ll most likely not be familiar with the granular daily operations of each department.

2. Analyze business activities

Go back to your reason for undergoing a value chain analysis: Are you adding value based on specialization or on lowest cost? The decisions you make from here on out will be guided by this principle.

Link each business activity to the value you’re offering, and evaluate what your company needs to do or change in order to provide the greatest value.

For instance, fielding support calls may be one aspect of your “service” primary activity. If you are being guided by lowering costs, you may determine that support calls should be outsourced to a call center provider and kept to the shortest amount of time per call possible.

However, if you are being guided by adding value through specialization, your company could improve the quality of each support call. Perhaps you implement after-call surveys to improve the quality of service. You’ll be looking at every single aspect of all the activities that make your business operate and determining where value can be added, either to lower costs and produce a lower-costing product or to focus on specialization and produce a more unique product.

3. Create a plan of action

As you can imagine, a value chain analysis will take a good amount of time, so be careful not to lose momentum during or after the process. After you have identified the value-adds, your business will need to actually incorporate those decisions.

Choose the lowest-hanging fruit first (that is, determine the easiest changes first). These changes can be visually identified on your value chain analysis model: you can star them, highlight them, or make them into their own flowchart. (The value chain diagram templates in Lucidchart make it easy to map your value chain and identify cost-saving opportunities).

These easy wins are important because they’re key to keeping the momentum going: Once your team sees the changes, they’re more likely to tackle the larger, more involved value-adds.

If you’ve identified changes that will make only marginal improvements but come at a great cost, it may not be worth it. Stick to practical, achievable changes that add mid-to-significant value to your business.

Prioritize the changes you plan on making and share these changes with stakeholders so you’ll have their approval and support.

Use Lucidchart for value chain analysis

Because a value chain analysis is such a visual endeavor, your business needs a visual platform. With Lucidchart, a cloud-based diagramming platform, you can easily and quickly create a value chain analysis model that can be distributed instantly and updated in real time. You can also integrate your Lucidchart value chain analysis diagram into popular apps and create slides in presentation mode, so presenting your value chain analysis to stakeholders is both simple and elegant.