How does a value chain analysis help companies to develop a competitive advantage?
As a business, you use many metrics to evaluate performance, such as revenue, growth, and conversion rates. But how do you determine the actual value you provide to customers versus that of your competitors? One way is to identify your
company’s value chain. In this article, we’ll explore what a value chain is, how to identify the elements that comprise it, and how to use value chain analysis to gain a competitive advantage in the market. The term value chain was coined by Dr. Michael E. Porter in his 1985 book,
The Competitive Advantage: Creating and Sustaining Superior Performance. An economist and professor at the Harvard School of Business, Porter’s concept of the value chain helps business leaders understand how the activities within a company influence its profit margin. helps
business leaders understand how the activities within a company influence its profit margin. Porter’s value chain model is built on a combination of primary and support activities. Primary activities are those that add value directly to the production process, while support activities add value
indirectly by supporting the primary processes. Let’s take a closer look at each. When evaluating your company’s value chain, there are five primary activities you should analyze to ensure that the value you create exceeds the cost associated with developing the product or service: Secondary activities can help improve the efficiency of the primary activities in the value chain. The following four support activities typically play a role in each primary activity: typically play a role in each primary activity: What is value chain analysis?Evaluating the activities involved in creating, marketing, and distributing products or service offerings is known as value chain analysis. It’s a type of internal analysis that gives you a dynamic view of how your activities form a successful business system. This differs from SWOT analysis, which identifies your organization’s strengths, weaknesses, opportunities, and threats. Both analyses are beneficial for improving your business outcomes, but a value chain analysis is a visual model of these activities, which helps you identify ways to improve operational efficiency using one of the following strategies:
What are 5 steps to conduct a value chain analysis?The internal and external data collected when conducting a value chain analysis will help you determine the best value chain analysis strategy to boost your competitive advantage. There are five primary steps in conducting a value chain analysis:
Cost advantage strategyThe cost advantage strategy finds ways to optimize and reduce the cost of primary and support value chain activities. The goal is to save money without impacting the quality of products and services. IKEA, the Swedish furniture retailer, is a key example of using a cost advantage strategy to gain a competitive edge. They produce large volumes of standardized products and seek low-cost suppliers. The company ships products unassembled, which means they do not need internal resources to build the products. This helps keep IKEA’s prices low. Implementing a cost advantage strategy may include the following processes:
Since all aspects of your business are connected, cutting costs for one activity could also decrease costs in other areas. For example, automated processes won’t just cut down on labor costs—they’ll also free up personnel to focus on more impactful tasks. Differentiation advantage strategyThe differentiation advantage strategy is based on creating superior products or services, which could entail offering additional product or service features to meet a greater number of customer needs. Analyzing your customers’ value perceptions will help inform your differentiation strategy. You must identify what––in the eyes of your customers––will deliver the most value. For example, Starbucks has invested heavily in the “Starbucks Experience,” a marketing and sales effort that builds a loyal customer base. This starts with how Starbucks stores are designed: focusing on ambience, accessibility, and comfort, which ensures that people enjoy their visit. Starbucks prioritizes customer service, from writing customer names on their coffee cups to offering incentives like the Starbucks Rewards Card and the Starbucks Customer Experience Survey. The Starbucks app boosts engagement and brand loyalty with features such as a trackable rewards system, free perks, and GPS notification of nearby Starbucks locations. You can increase product and service differentiation to drive customer value through the following strategies:
How to use MindManager to model value chain analysisValue chain analysis is a data-intensive process that breaks down and analyzes each activity that contributes to your finished product or service. One way to simplify this process is by using a visual planning tool such as MindManager®. This solution enables you to leverage templates such as Gantt charts, which can be an ideal way to capture and visualize all primary and secondary activities that comprise your value chain analysis. Gantt chart in MindManager Once you’ve identified your value chain activities, you may discover processes that involve more than one team (e.g., a product moving from design to production to marketing). In such instances, using a swim lane diagram can help you document the processes associated with your product or service and identify who is responsible for each step in the process. e diagram in MindManagerYou can also use MindManager to create a product development roadmap to strategize your competitive advantage. Product roadmap diagram in MindManager Discover how MindManager can help you conduct a value chain analysis by downloading a free, 30-day trial.How does a value chain analysis help a firm gain a competitive advantage?When a firm takes into account its value chain, it needs to consider its value proposition, or what sets it apart from its competitors. Value chain analysis is designed to improve profits by creating a product or service that is so superior that customers are willing to pay more than the cost to develop it.
How can value chain analysis be used to maintain competitive advantage?Gaining a competitive advantage over rival businesses can help you boost company profits and entice new customers. Through value chain analysis, you can evaluate primary and secondary business functions and identify ways to improve efficiency, increase value and stand out from the crowd.
How value chain analysis gives competitive advantage to the business with example?Value chains help increase a business's efficiency so the business can deliver the most value for the least possible cost. The end goal of a value chain is to create a competitive advantage for a company by increasing productivity while keeping costs reasonable.
In what two ways can value chain analysis offer competitive advantage?There are two approaches to value chain analysis: cost advantage and differentiation advantage. These are lenses through which you should analyze your business.
|