Value Chain and Cost Analysis

Porter's Value Chain

The value chain is a tool that divides a firm's activities into strategically significant types of activities to understand where value is created and where costs arise.

Primary activities:

• Inbound logistics — receiving, storing, and managing raw material inventories
• Operations/production — transforming incoming resources into the product
• Outbound logistics — storing and delivering the product
• Marketing and sales — attracting customers
• Service — after-sales support

Support activities (infrastructure):

• Firm infrastructure — general management, finance, legal department
• Human resource management
• Technological development (R&D, IT)
• Procurement

Margin = Created value - Total costs

Analysis of Sources of Competitive Advantage

There are two ways to use the value chain:

1. Searching for ways to reduce costs: identify which link contains the main costs; look for opportunities for reduction: automation, outsourcing, optimization, negotiations with suppliers.

2. Searching for ways to differentiate: determine in which link unique value can be created for the customer: premium ingredients (McDonald’s vs Shake Shack), exceptional service (Ritz-Carlton), technological innovation (Tesla OTA-updates).

Value System

A company’s value chain is embedded in a broader system: supplier chains, distribution channels, buyer chains. Integration with key links in the system is a source of advantage.

Example of IKEA: Competitive advantage lies in the combination of value chains: flat packing reduces logistics, self-assembly shifts part of the work to the customer, global producers under IKEA’s control ensure low production costs.

Practical Assignment

Choose one of your current businesses or a well-known company. Build its value chain. Determine: (1) Three links with the highest costs. (2) Two links where the most value is created for the customer. (3) One opportunity for improvement—either cost reduction or enhancing differentiation.