Value chain analysis: Definition, examples, types, and more

Talk to anyone about what makes something valuable, and you’ll get dozens of different answers. Value is subjective in life but objective in business. That’s because successful companies know that every choice made within their processes, supply chain, and business structure has intrinsic value. And increasing the value of each interaction and sale can lead to a significant increase in profit over the long term.

That’s where value chain analysis comes in. When you know exactly how much value each interaction and sale provides—and work to increase it—you can revitalize your supply and sales chains for maximum value. You can also reduce the cost of selling while standing out from your competitors.

In this article, we’ll explain value chain analysis, its key components, benefits, and the process of conducting your own analysis so you can drive your company toward a more profitable future.

More in this guide:

• What is a value chain?
• Types of value chains
• Value chain vs. supply chain
• Why value chain analysis is important
• What are the benefits of a value chain analysis?
• How to conduct a value chain analysis
• Value chain analysis example
• Frequently asked questions
• Up your competitive advantage with better customer service

What is a value chain?

A value chain is a way of looking at your business operations to assess all the steps involved and how they provide value. The goal of a value chain is to identify the efficiency and effectiveness of each step in your process—every part of making and selling a product or service.

Then this analysis can help you make it better and more valuable for the customer. By analyzing your value chain, you can adopt a more value-based selling strategy that puts customer needs first.

Types of value chains

Depending on how you’re trying to edge out the competition, there are two primary ways to look at value chain analysis: cost advantage and differentiation advantage. Let’s explore both types of value chains and how they differ.

Cost advantage

With cost advantage analysis, you want to lower both the cost of production and the cost of products. If your company aims to do a cost advantage VCA, then you have a product that can be easily mass-produced and holds higher value as a low-cost item rather than a high-quality item.

Great examples of companies that use cost advantage VCA are McDonald’s and Walmart. They use low-cost production to sell massive amounts of products to customers daily, emphasizing quantity over quality.

Differentiation advantage

In contrast to cost advantage analysis, differentiation analysis seeks to set a company apart for its product quality and brand value. Sometimes, this process can actually increase production costs, but as long as your overall profit margin increases and you’re well past your break-even point, that’s fine.

Prominent examples of companies based on differentiation advantage VCA include Apple and Starbucks. Both of these companies sell relatively high-cost, high-quality products with high customization. They win over their customers with branding, features, and other non-financial aspects of their products.

Value chain vs. supply chain

Value chains and supply chains are completely distinct concepts:

1. Value chains include all activities contributing to a product or service’s value, including research and development, design, production, marketing, lead generation, and customer service.
2. Supply chains focus on the logistical flow of goods and services. This includes the movement and storage of raw materials, work-in-progress inventory, and finished goods from origin to consumption.

A value chain is much more broad than a supply chain—in fact, a supply chain can be considered a component of a value chain. Value chains emphasize maximizing value creation at each stage, ultimately enhancing a product or service’s value proposition for the customer.

Why value chain analysis is important

A value chain analysis is crucial because it gives your company a clear path to greater profits. By understanding your company’s value to your audience, you can craft a more strategic sales plan and alter your chain activities to produce additional revenue.

Value chain analysis also helps your company determine the best strategies within the current market—not just with your audience. For instance, if you’re looking to offer new financial management software, your value chain analysis might help you decide how specific you want your targets to be and how much to charge for your product. By finding the gaps in the market, you can use price and quality to pinpoint the perfect niche.

Essentially, value chain analysis gives you a starting point for your entire sales and marketing approach. From initial ads to sales funnel analysis and lead qualification, all improvements stem from the value chain.

What are the benefits of a value chain analysis?

The importance of VCA goes far beyond revenue alone. The VCA process is all about streamlining and alignment. When done right, it boosts profits and also:

1. Establishes better vendor management

2. Reduces cost and delivery times

3. Optimizes inventory

4. Improves customer relationships

5. Standardizes and optimizes processes

6. Helps you gain a competitive edge

No two businesses can survive by creating the exact same products and customer experiences, which means it’s never enough to simply match your competitors. To truly succeed, every business needs to find an edge. You can always examine your company’s value through alternative methods like customer feedback, but those methods don’t always provide consistent or useful information.

Despite being time-consuming, value chain analysis is a reliable tool for sales analytics to understand the full scope of your company’s activities. As a result, it remains one of the best ways to pinpoint improvement opportunities across your various departments.

How to conduct a value chain analysis

Conducting a value chain analysis requires careful and strategic planning. To start off right, follow these four steps.

1. Identify your primary and support activities

Primary activities focus on manufacturing goods and services, while secondary activities back up primary activities. The key to a successful value chain analysis is figuring out which processes are having issues and then implementing fixes promptly. Consider these elements in your VCA to pinpoint processes with specificity:

2. Analyze your costs and value contribution

Once you’ve identified your primary and support activities, the next step is to analyze the costs and value contribution of each. This means determining how much each activity costs to perform and how much value it adds to the final product or service.

By comparing the cost and value of each activity, you can identify areas where you can improve efficiency and reduce costs. Suppose you find that a particular facet of your customer acquisition cost (CAC) (such as a weekly ad) is very costly but doesn’t bring in much business. If that’s the case, you may want to consider eliminating it.

3. Identify any competitive advantages

To really understand your value, you have to define your edge. Identify any competitive advantages that your company has—anything from a unique product or service to a customer-first approach to a strong brand reputation.

Once you’ve identified your competitive advantages, you must determine how to use them to improve your value chain. For example, if you have a strong brand reputation, you may be able to charge a premium price for your products or services.

4. Develop strategies for improvement

Developing a concrete strategy for improvement could involve anything from streamlining your processes to investing in new technology. The goal is to find ways to make your value chain more efficient and effective.

After developing your strategies, implement them and track your progress. By regularly monitoring your value chain, you can ensure that it is always operating at its best.

Value chain analysis example

Here is a value chain analysis example for a common supermarket:

Based on low costs (inbound logistics and service), long hours (operations), and large amounts of distribution (procurement and outbound logistics), we can look at this example from a cost advantage point of view, meaning we’re looking for an opportunity to lower costs. Overall, the percentages look good for this company because:

1. None of the supermarket’s vendors account for more than 2.8 percent of purchase (procurement), which means it’s unlikely to switch.

2. Inbound logistics are extremely low and below half of the industry average.

3. It uses maximum work time for maximum production and distribution (operations).

To increase profit margin, the supermarket should hone in on its service primary activity rather than simply its conversion or win rate. This supermarket’s universal returns policy adds a lot of customer value and brand credibility, but it also costs mass production companies a significant amount of money. Because we’re looking at this company from a cost advantage point of view, it might be worth it for the supermarket to re-examine the return policy.

Frequently asked questions

Up your competitive advantage with better customer service

Running a full VCA requires a massive amount of data; the last thing you want is to spend more time and effort on a value chain analysis than it’s worth. That’s why integrating your sales software with a leading customer service solution like Zendesk is critical. Zendesk can help you differentiate your business by making it easy to prioritize the customer experience at every step in the customer journey.