“Value chain analysis is a strategic planning tool and it’s used to analyze the value chain of the focal company. Value chain is how internal functions create value to customers. Value system is the way each value chain is structured and it spans across multiple companies”
Using Value Chain Analysis
Original Porter’s Competitive Advantage is used as source. Here’s how to use value chain
analysis:
1. Defining Value Chain
2. Capturing Cost Data
3. Controlling Cost
4. Cutting Buyer’s Cost
5. Determining Purchasing Criteria
6. Reconfiguring Value Chain
1. Defining Value Chain: Identify business units/products, determine key functions and include all relevant activities of each function
2. Capturing Cost Data: Estimate costs and assign them to various activities in your value chain. Then, select stronger competitors and determine how they allocate costs to each activity and why. According to Porter, cost analysis part doesn’t need to be very precise, just the estimate is OK. But, a company needs to compare its cost profile against its competitors to reveal the competitor’s strategy.
3. Controlling Cost: Find cost drivers and control them such as,
- Scale: expand product lines/facilities
- Linkage: control supplier scheduling, location of warehouse, payment policies
- Timing: Wait until technology is getting less expensive then acquire them
- Investment: focus on technology that cut costs
- Procurement: reduce SKUs, supply base for better volume
4. Cutting Buyer’s Cost: Follow these simple guidelines,
- Lower setup cost/time
- Decrease financing cost
- Improve quality/reduce inspection
- Reduce required maintenance
- Speed up processing time
- Reduce required monitoring/control
5. Determining Purchasing Criteria: Try to figure out the key criteria and try to provide favorable delivery timing or improve product features, packaging and appearance or improve after sales/service
6. Reconfiguring Value Chain: Change the way each activity is performed to support strategy
