Value Chain Analysis: Increasing Customer Value and Profitability

Value is key to business success.

Delivering value to customers = Increased acquisition, retention and advocacy, and delivering value to the business = Better margins and increased profitability.

Understanding where and how your business delivers value promotes better operational efficiency and identifies opportunities for competitive advantage. 

What is value chain analysis?

Value chain analysis is the process of analyzing the activities undertaken by a business to deliver a product or service of value to customers. Analyzing the value chain determines whether the value that each individual activity provides to the customer is greater than the cost of carrying out the activity to the business. 

What are the activities within a value chain?

Introduced by Michael Porter in 1985, an organization’s value chain is made up of nine value-adding activities that influence profit margin. These can be split into two types: primary and support. 

The five primary activities are those directly associated with producing and selling a product or service and include:
•    Inbound Logistics – receiving and storing materials from external suppliers
•    Operations – transforming materials into products/services
•    Outbound Logistics – processing orders and distributing to customers
•    Marketing and Sales – promoting products and services to buyers and facilitating their purchase
•    Service – ensuring that the product or service continues to provide value to customers post-purchase

Support activities are those that support the primary activities and include:
•    Procurement – responsible for negotiating purchasing costs across all five primary activities
•    Technology Development – responsible for the systems used to manage and process information within the organization
•    Human Resource Management – responsible for recruiting, training and retaining people with the right skills to deliver the products/services
•    Firm Infrastructure – relates to the functions that allow the business to maintain daily operations e.g. finance

Value chain analysis and competitive advantage

Customers are spoilt for choice when it comes to making a purchase decision. Attracting their attention and winning business means offering something that delivers a higher perceived value than the other options on the market to gain a competitive advantage. Competitive advantage can be achieved through two strategies: cost advantage and differentiation advantage. 

•    The goal of a cost advantage strategy is to create a valuable product that delivers maximum value for the business and the customer at the lowest cost. Analyzing the value chain allows organizations to identify the cost drivers for each activity and find ways to reduce them, lowering production costs and increasing profit margin.  

•    A differentiation strategy aims to create value by offering a unique or superior product to those offered by competitors. Identifying the unique aspects of a product/service that set it apart from the other offerings on the market increase perceived value and can therefore demand a higher price. 

How to conduct a value chain analysis in 3 steps

1.    Identify activities within the value chain 

Determine the primary and support activities needed to offer your product or service. In the banking industry for example, one of the primary activities is the marketing team running advertising campaigns to attract new customers and this is supported by the team responsible for business technology making it possible for customers to quickly and easily create new accounts via the digital channels they have become accustomed to such as mobile banking apps. 

2.    Identify the cost and value of each activity

Calculate the cost of each activity and the value that it is adding for the business and/or customer. In the banking example, the team would analyze whether marketing campaigns are providing a good return on investment in terms of customer acquisition and whether the business’ technology was providing value for internal and external customers. 

3.    Identify opportunities for competitive advantage

Determine which activities provide the greatest opportunity to gain a cost or differentiation competitive advantage. For example, could the marketing team negotiate a better deal with the agency they use for their advertising campaigns or run a promotion that appeals to customers more than those offered by competitors?

Identify value creating activities within your organization using the value chain analysis template in Bizagi Modeler* 

*available to users on the Enterprise plan