Mtm11 white paper value chain analysis

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Value Chain Analysis
Intelligence Collaborative - Mastering the Methods Series

This White Paper is #11 in a series of intelligence methods being offered to members of the
Intelligence Collaborative. It was developed by Dr. Craig S. Fleisher to provide a concise
overview of how to apply key intelligence methods to support analysis. Although every
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and Aurora WDC make no implied or explicit warranties as to its applicability or use in
your particular work context.
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Craig S. Fleisher, Ph.D.
Aurora WDC
Email: craig.fleisher@aurorawdc.com
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Win/Loss Analysis

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Abstract
Value chain analysis (VCA) is used to identify a company’s potential sources of economic advantage and
to achieve an optimal allocation of resources. For our purposes, a value chain can be defined as the full
range of sequential organizational activities that are needed to take products and services from the
original idea all the way through the different stages of production. This includes the physical
transformation and inputs of various producer services, delivery, and post-sale services to final
customers. Value chains within a company or industry are actually composed of a specific model of
performance characterizing the discrete stages of organizational value creation.
(Source: Porter, 1985)
The Method’s Primary Value
The unique strength of VCA is that it can be used to help companies bridge the strategic gaps between
their capabilities - aspects of the business that employ resources effectively and perform well - and
opportunities and threats in their competitive environments. Hence, VCA’s two main objectives are to
identify opportunities to secure cost advantages and to create customer-satisfying product/service
attribute differentiation. Cost advantages can be achieved by reconfiguring the entire value chain to
lessen overall costs or the costs of any of the key activities along the chain. Likewise, differentiation can
be achieved through value chain reconfiguration or by delivering innovative ways of generating higher
value from a particular activity or set of linked activities.

Overview of the Method
Value chains are more complex than the simplified version shown on the prior page. In many cases, the
input and output chains comprise more than one channel, and these channels can supply more than a
single market. Porter classifies all these activities into two main categories.
1. Primary activities include the following (three of these primary activities are product-related):
• Inbound logistics are activities in which resources are acquired for later processing by the
business, including such areas as inventory warehousing and handling.
• Operations are activities that transform the gathered inputs into the final product or service.
• Outbound logistics are distribution-oriented activities such as logistics and shipping.
Two of these activities are market-related:
• Marketing and sales are all the activities designed to communicate the product’s or service’s
benefits to consumers, such as marketing communications, pricing, and channel management.
• Services include post-sale support activities.
2. Support activities include all the important activities that cut across the company’s primary activities
and provide ongoing infrastructure assistance for the rest of the organization. These activities differ
by industry and company, but they generally include the following:
• Firm infrastructure includes administrative support activities covering the range of primary
activities, such as accounting, legal, planning, and all forms of stakeholder relations, such as
government and public affairs, communications, community investment, and investor relations.
• Human capital management includes aspects of the company and its human capital
enhancement process, such as recruitment, incentive systems, motivation, training, promotion,
and industrial/labor relations.
• Procurement includes activities such as funding, subcontracting, supplier management, and
specification.
• Systems and technology includes infrastructure facets of the business that help design, develop,
and/or deliver products more effectively and efficiently, such as engineering, R&D, and
information technology.
Where the Method Fits in Planning and Strategy
From the company’s perspective, VCA is a highly practical tool for understanding its strengths and
weaknesses. From an industry perspective, VCA provides a good understanding of the company’s
competitive position relative to key customers and suppliers. VCA also helps you understand the nature
and sustainability of the company’s resources and capabilities and what new resources and capabilities
it might require to be competitive in the future. For those who perform a SWOT analysis as part of their
insight development process, VCA provides a much better real-world sense of what is really a strength
or a weakness.

VCA encourages the company to comprehensively review all the activities that deliver value to the
customer. It is also more inclusive of the complex economic cost drivers that affect customer value.
These include structural drivers (scale, scope, experience, technology, complexity) and executional
drivers (management style, total quality management, plant layout, capacity utilization, product
configuration, vertical links with suppliers and customers).
For an organization to develop and execute a successful product, it is essential that it add value in each
activity that the product goes through during the life cycle. The highest value is achieved in the product
development process by adding value in each and every stage. Doing that requires each stage and
synchronization between stages to be effective. VCA helps make it clear that an appropriate
organizational structure and processes are required. These will contain the required functional
departments to perform these activities and a proper communication approach to synchronize the
activities of these functional units efficiently.
Cautions with Applying this Method
Despite the strengths of VCA, its usefulness is being challenged by the radical changes that information
technologies have wrought. A growing school of management thought asserts that traditional value
chains oriented around vertical linkages cannot constantly reinvent value at the speed required for
successful strategy execution and meeting customer responsiveness demands.
Traditional VCA was developed to help you understand physical assets and flows. It may not be as
appropriate to employ for competition based on intellectual assets and services. That being said, newer
conceptual developments are happening in the broader scholarship. They increasingly allow for
functional modification of the traditional VCA for emerging modes of competitiveness, including value
net analysis, value grid analysis, value migration, value constellation analysis, value stream mapping,
value shop analysis, and service value chains.
Managing value chains in an information communication and technology environment requires the
inclusion of economic realities that are not explicitly addressed by original versions of the VCA model
(like Porter’s). VCA treats information as a supporting element in the company’s strategy. At best, it is
only part of a secondary activity. Recent models such as the virtual value chain and value web
management treat information as a separate and distinct value-creating factor that must be managed
separately but together with the enduring physical value chain.
VCA also has been criticized for being too simplistic because many of its qualitative prescriptions are
difficult to implement. The most prominent shortcoming is that they require significant amounts of
resources. Effective VCA requires a large investment in benchmarking, customer and stakeholder
research, competitive analysis, and industry structure analysis, often using data that is not freely or
easily available. Conducting VCA might be straightforward in theory, but it is relatively difficult and time-
consuming to apply for maximum and relevant effect. This is a key reason why many companies do not
choose to exploit it in their ongoing analysis activities.

Furthermore, most of a company’s internal accounting data is incompatible with the analytical
dimensions of VCA for several reasons. Traditional management accounting systems rarely, if ever, do
the following:
• Collect data related to value-creating activities. Instead, they collect data related to
product/service and period costs.
• Collect period costs by product or service, making it difficult to accurately assign overhead costs
to value-creating processes.
• Collect data on cost drivers. Departmental budgets are rarely an accurate source for
determining the actual cost of value-creating activities.
• Enable transfer prices and arbitrary cost allocation of traditional management accounting
systems to appropriately encompass the synergies created by horizontal links in the company’s
value chain or the vertical links in the industry’s value system.
Applying the Method
Conducting a successful VCA requires judgment, attention to detail, competitive knowledge, and
quantitative analysis. Understanding the company’s industry structure and, more importantly, aligning
this knowledge with the company’s capabilities, are intrinsic to crafting successful strategies.
The VCA process begins with an internal analysis of the company’s value chain, followed by an external
competitive analysis of the industry value system. It concludes by integrating these two analyses to
identify and create a strategy that can potentially sustain competitive advantage.
Step 1: Define the Company’s Strategic Business Units
The first level of review draws boundaries around the business’s various segments. This is necessary
because the different segments of the business will have different sources of competitive advantage
that require different strategies.
Step 2: Identify the Company’s Critical Value-Creating Activities
For companies that haven’t adopted ABA, Porter offers several distinctions that define value-creating
activities. These companies are those that
• Have different economic structures
• Contribute to a large or growing percentage of total costs
• Contribute to or have a strong probability of contributing to product/service differentiation
Step 3: Conduct an Internal Cost Analysis
Companies can achieve cost advantages and better margins by either reducing the cost of individual
value chain (VC) activities or reconfiguring the VC. Reconfiguration means structural changes such as a
new production process, new distribution channels, or a different sales approach such as direct-to-
consumer approaches instead of owning retail outlets. An internal cost analysis is composed of the
following steps:
1. Assign costs to each critical value-creating activity identified in Step 2

2. Find the cost drivers for each critical value-creating activity that is driven by more than
one major cost category.
3. Diagnose the company’s current strategy for areas of potential low-cost advantage.
You should be able to estimate costs and margins for each of the activities in your chain like the above
figure for a seafood processing company (Source: www.fao.org, accessed Jan. 23, 2014)
Step 4: Conduct an Internal Differentiation Value Advantage Analysis
Differentiation advantages can arise from any segment of the value chain. For example, procurement of
unique and scarcely available inputs that rivals cannot access can allow value-adding differentiation of
the product to customers, as can effective distribution channels that provide customers with high levels
of service quality. Similar to the internal cost analysis, the internal differentiation analysis starts with
identifying the company’s value-creating activities and cost drivers.
Step 5: Map the Industry Profit Pool
• Define the Parameters of the Industry Profit Pool
• Estimate the Total Size of the Industry Profit Pool
• Estimate the Distribution of the Profit Pool
Step 6: Vertical Linkage Analysis
The opportunities to achieve cost and differentiation advantages within the company’s value chain were
reviewed in Steps 1 through 4. Step 5 allowed you to determine whether the company is strategically
positioned in the shallow or deep end of the industry’s profit pool. Vertical linkage analysis allows you to
seek opportunities to exploit the most important sources of competitive advantage in the industry’s
value system. You can combine your intimate knowledge of the company’s economic structure,

customer value, and external competitive analysis to determine how to reposition the company into the
deep end of the industry profit pool - and keep it there
Step 7: Iteration
Repeat Steps 1 through 6 periodically by making VCA a central component of your company’s
competitive intelligence and strategy development system. This helps you proactively manage
evolutionary and revolutionary industry change. VCA should be completed at least annually and can
show subtle shifts in rivals’ tactics or strategies that you may competitively exploit for optimal impact in
most product, company, or industry spaces. This will help you determine how the primary and support
activities can work together effectively and efficiently to help your organization achieve healthier
margins and sustain competitive advantage.
Complementary Methods
• Benchmarking
• Competitor Cash Flow Analysis
• Competitive Profiling
• Customer Value Analysis
• Functional Capability and Resource Analysis
• Profit Pools Analysis
• SERVO Analysis
• Strategic Cost Management
• Supply Chain Management Analysis
• SWOT Analysis
Additional Resources
See chapter 13 (pg. 221-245) on Value Analysis in the (2013) book Analysis without Paralysis: 12 Tools
to Make Better Strategic Decisions, 2nd
Ed., by Babette E. Bensoussan and Craig S. Fleisher, Upper Saddle
River, NJ: FT Press.
Business and Competitive Analysis: Effective Application of New and Classic Methods by Craig S. Fleisher
and Babette Bensoussan, 2007, Upper Saddle River, NJ: FT Press.
Strategic and Competitive Analysis: Methods and Techniques for Analyzing Business Competition by Craig
S. Fleisher and Babette Bensoussan, 2003, Upper Saddle River, NJ: Pearson/Prentice Hall.
Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 1985, New
York, NY: The Free Press. The chapters in Part I are focused on VCA.
A Handbook for Value Chain Research by R. Kaplinsky and M. Morris. Paper produced for the IRDC.
http://www.globalvaluechains.org/docs/VchNov01.pdf

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