How to Conduct a Value Chain Analysis: Guide, Strategies, Examples
If you haven’t committed to analyzing your value chain, it’s time to take the plunge.
I know this sounds like some seriously boring jargon that belongs in the lecture hall, not the fast-paced world of sales. But a value chain assessment is one of the quickest and easiest ways to generate more profit with fewer resources.
To start, I’ll explain what a value chain analysis is and how to do one. We’ll discuss why value chain analytics matter and walk you through a value chain diagram. And, to make your life easier, I’ll link to a few chain analysis templates you can use to perform your analysis.
Ready to learn more?
What is a Value Chain Analysis?
This includes looking at shipping costs, manufacturing costs, the cost of digital storage, etc. Essentially a value chain analysis looks at any where your company spends money to ensure that money delivers value to the business.
The term value chain was coined by Harvard Business School Professor Michael Porter in his book Competitive Advantage: Creating and Sustaining Superior Performance. As the title suggests, it is a guide to ensuring everything your organization does delivers value.
What is a Value Chain?
Your company’s value chain is every single step you take to create your product or provide your service. Every step, from the very first research experiment to the procurement of raw materials to marketing the finished product and delivering it to the customer, is part of your value chain.
Porter divided these steps into two categories: primary activities and support activities.
Together, they make up a business’s profit margins. Changing and optimizing these steps allows you to tinker with your profit margins (for good or ill.) We’ll discuss the components of the value chain in more detail below.
The first step of a value chain analysis process is to look at each step in the chain. That includes aspects of the business model, technology development, or human resources management, for example. Then, you identify high-value and low-value areas and look for opportunities to improve efficiency.
What’s the Difference Between Value Chain & Supply Chain?
When you hear the word “chain” in a business context, chances are your brain goes straight to the supply chain. While the value chain is similar in the sense that it’s an umbrella term for an array of different activities, supply chain is not the same as value chain.
A supply chain is the network of suppliers and manufacturers that provide the raw materials and components needed to create a finished product or service. It accounts for everything a company must physically acquire to run, from machined parts to office computers to business cards.
A value chain is a tool to help businesses understand the activities that create value for their customers. It includes inbound logistics, procurement and supply chain management, outbound logistics, and firm infrastructure, for example. Improvements in these areas help your business stand out from the competition, improve quality, and increase customer satisfaction.
So, why does a value chain strategy matter so much?
Why is Value Chain Analysis Important for Sales Teams?
Value chain analysis is important to help businesses understand areas where they can improve efficiency and increase profits. This includes understanding how sales activities impact profits, but it also looks at every other part of the business.
When done correctly, value chain analysis help businesses gain a serious competitive advantage by:
- Eliminating waste: It’s hard to know where your time and money goes unless you take the time to examine each aspect of the business. That’s what value chain analysis does.
- Lowering costs: Examining costs helps you identify cost drivers. For example, are you paying for advertising that doesn’t convert or SaaS services you don’t use? That could make a major difference in your profit margin and give you a significant cost advantage over your competition.
- Optimizing efforts: You have good people, but they seem stretched thin all the time, and there’s no money in the budget for more staff. How can you use their time better? Performing a value chain analysis can identify activities that don’t contribute to the bottom line.
- Increasing profits: We’re guessing you want to see more profits, right? In addition to lowering waste, value chain analysis helps highlight competitive advantages you can leverage.
A value chain analysis provides an advantage over your competition. In fact, many businesses are surprised to find just how much of an advantage it gives them. Now, let’s talk about the main components of a value chain analysis.
Components of a Value Chain Analysis
A proper value chain analysis might look overwhelming, but it’s really pretty straightforward. Your goal is to identify where the value chain lies in your business specifically, because it’s different for every company. Then, you’ll map out all activities that apply to you, analyze each one, and look for ways to save time, conserve resources and maximize profits.
The main components of a value chain analysis include:
These are the main tasks your company engages in every day. These include:
- Inbound logistics, such as warehousing and inventory management
- Operations, such as manufacturing
- Outbound logistics, including packaging, distribution, and putting the final product into the world
- Marketing and sales to get your new product into customer hands
- End-user support
- Quality assurance
- After-sales services, such as installation and repair
What do you need to carry out those primary activities? These support activities include:
- Infrastructure, such as vehicles, computers, and a budget
- Human resources for hiring and compensation
- Technological development, like research and product design to create your outputs
- Procurement, including raw materials and other obtaining other inputs
Together, primary and support activities form a value chain framework that accounts for all activities contributing to profit margin. You can use this to delineate your business process whether you sell to restaurateurs or writers, grandmothers, or the government. The value chain model works the same way if you’re using it correctly.
How To Do a Value Chain Analysis
Now let’s break down the steps of a value chain analysis. Each of these value chain activities builds seamlessly on the last, bringing clarity to your business activities from start to finish.
1. Use a Value Chain Template
Before you can get started on your value chain workflow, you’ll need a framework. You can either create one yourself or use a free printable value chain template from sites like Creatly.
Either way, you want to map out your primary activities and support activities using Porter’s value chain breakdown discussed in the “Components of a Value Chain Analysis” section. It’s important to avoid skipping steps in the process. Even if you only offer digital products and therefore assume procurement or supply chain logistics don’t apply to you, they likely do in some capacity. For example, you likely use vendors to deliver your software or downloadable assets.
The point is, a value chain analysis is only beneficial if you are actually capturing the entire picture. Using a standardized value chain template ensures you can review each step thoroughly.
2. Identify and Sort All the Value Chain Activities
Now it’s time to identify all your business’s activities and sort them into the template’s boxes. Start by making a list of every. single. activity. your business undertakes. Even the ones that seem too small to mention, such as “employee birthday parties.” Everything you do adds value (or detracts from it), so you need to know.
Once you create a list, sort them into the appropriate boxes in the primary or support categories.
3. Determine the Value and Cost of Each Activity
Now it’s time to calculate the cost of each activity. How much does it run you to buy the raw materials for the famous mousepads you manufacture? What do you spend each year on employee birthday parties? How much does your sales team spend on client dinners? While this can be tedious, it’s not terribly difficult to comb through the receipts and get the numbers.
It’s more challenging to determine the value of each activity. Here you’ll need to do some serious digging. What do your employees value? What do your customers value? Why do they come to you, and why do they stay? Spend some time on this step digging up answers. You can:
- Send out surveys to see what your customers think
- Ask your employees what they think – and what they’ve heard from clients and customers
- Look online to see what people are saying
- Spend time on social media doing some social listening
4. Use Metrics to Rank Activities
Which metrics you decide to use are up to you. Maybe you choose new leads, email signups, sales or even a 1-10 scale. The point is to take a look at each activity and decide:
- How to measure its success
- How successful it is
Once you know these things, you can rank your activities to see where they land. Does the production process need improvement to eliminate waste? Is workflow stagnant because you’re using the wrong customer resource management system? Do you need to improve product design or sales operations by outsourcing? Can you streamline processes to reduce waste?
Don’t forget to include qualitative data as well, which can enrich your analysis and make it easier to make a business case for a systemic change. Bottom line: once you’ve identified areas that need improvement, get started!
5. Look for Areas to Improve
Once you’ve performed your analysis and ranked your activities, it's time to make improvements. While the specific process will vary by company (and by what your value chain analysis looks like!) There are a few moves you can make to improve your bottom line. These include
- Automate low-value tasks: If tasks aren’t contributing to the bottom line but still need to be done, look for ways to automate them. Sales, marketing, and HR teams often spend hours on tedious tasks that are easy to automate with the right tech stack.
- Improve your tech stack: Look for tools that provide access to the data and features you need – and integrate with your current stack. The right tools can lower costs and improve productivity.
- Eliminate costs that don’t provide value: During your value chain analysis, you’re likely to find some tasks that simply don’t deliver any value. Maybe someone ran a test that never ended or processes have changed over time. Make plans to cut those costs – just make sure to connect with other teams to ensure they aren’t delivering value elsewhere.
A value chain analysis should become a regular part of business planning. Make plans to perform this analysis regularly to ensure all costs are delivering value to your customer and your team.
Common Mistakes Made During a Value Chain Analysis
Mistakes are just a fact of life, but during a value chain analysis, they can lead to lost opportunities. A few of the most serious blunders to avoid during this process include:
- Failing to consider all activities that make up the value chain
- Ignoring procurement because you’re a digital business
- Assuming you don’t need the visual and so not mapping out activities, which allows aspects of the chain to slip through the cracks
- Failing to properly account for secondary activities
- Making improvements without doing a thorough value chain analysis
- Not looking for areas of differentiation between you and the competition
Real-World Value Chain Analysis Examples
Big companies like Starbucks and Apple use value chain analysis to detail their firm’s value chain and identify areas of improvement, such as which software to use. Interesting thought studies are also worth a read-through.
For now, though, let’s take a look at Starbucks for our value chain analysis example. Starbucks is an enormous company, with inputs and outputs all over the world. They begin by sourcing their beans from across the equator, then roasting and packaging them using their own proprietary methods. That’s a major category in the company’s value chain.
Next, they serve up coffee as well as coffee-making supplies at tens of thousands of shops all over the world. Starbucks also owns subsidiary brands, such as Seattle’s Best Coffee. To further its operational goals, Starbucks needs warehousing and distribution infrastructure, marketing and sales arms, and great service.
While Starbucks employs all the support activities that any other business does, one area where it does especially well is in technology. It is known for its cutting-edge apps and rewards, which bring customers in the door. This is an area where it continues to improve.
Areas where Starbucks could do better, on the other hand? It has seen its fair share of social justice faux pas, which indicates that it might look at improving its human resources arm. Value chain analysis helps identify each of these, put it in context and clarify next steps.
Putting Your Value Chain Analysis to Use
The value chain analysis is just the first step to greater profits and better workflow. Once you know what you can improve, it’s time to get to work! That means giving both managers and teams the best possible tools to increase sales, fine-tune communication, and meet higher thresholds of productivity at every level of the organization.
That’s where a good customer resource management system comes in. A CRM like Close helps contextualize your activities and provides the tools needed to make the changes you’ve identified. With an all-in-one system, you’ll never again have to worry about compartmentalization of activities leading to waste and profit losses.