Value Chain Examples: Supply Chain Analysis for Competitive Advantage

In today's dynamic business environment, pursuing operational excellence is as universal as it is challenging. Whether for-profit companies or mission-driven non-profits, organizations stand to gain from a well-crafted approach to their internal processes. Value chain analysis provides this approach, offering a systematic framework that breaks down complex activities into their constituent parts. It positions organizations to review the efficacy of every process, identifying areas ripe for innovation and improvements.

This blog will explain the essential activities that drive value and outline strategies to enhance business performance and customer satisfaction. Read on to discover how every step in a value chain impacts business success and how value chain management can become a cornerstone of your strategic approach.

A thriving organization recognizes the value created at every stage of its operations. The value chain framework, introduced in 1985 by business theorist Michael E. Porter, is a robust analytical tool that seeks to create a competitive advantage and higher profit margins by increasing customer value while decreasing the cost of delivering that value.

In this framework, differentiation and cost advantage are the two tactics for increasing an organization's profit margin--or operating budget in a non-profit scenario.

Cost advantage can be achieved through several tactics, including negotiating preferred pricing from vendors, taking advantage of economies of scale and implementing processes or technologies that lower production costs. Cost-saving tactics that undercut the value perceived by the customer are counterproductive. Two companies that have long-standing success in creating cost advantage are McDonald's and Walmart.¹

Differentiation based on unique customer value allows a company to charge premium pricing for its products. If your organization takes this tack to competitive advantage, balancing the additional production cost for the differentiator and the increased price will help you realize the most value. You can find a strategic differentiator in any of the primary activities in the value chain. Apple and Starbucks are famous for the additional value created by their differentiation strategies.¹

The value chain framework divides business activities into primary and support activities. Because Porter formulated the original value chain conception before the explosion of digital products, which is so familiar today, the original list of primary activities centers around manufacturing and distributing physical goods.¹

Primary activities are the direct operations that confer value on a product or service. In an organization that deals with physical products, the primary activities include:

These processes involve receiving, warehousing, and disseminating raw materials necessary for production.

This stage encompasses all tasks transforming raw inputs into the final product, including manufacturing and quality control.

After production, these activities, including storage, order fulfillment, and shipping, ensure the product reaches consumers.

This pivotal phase includes pricing strategies, building brand awareness and enabling sales through physical or digital channels.

Post-purchase services such as customer support and maintenance play a role in sustaining customer satisfaction and loyalty.

Depending on the type of business, different steps in the primary activity chain will have greater or lesser importance. For example, a physical retail store has fewer outbound logistics to consider than an online store. Although the actual activities in the value chain for a company producing virtual products or services differ, the same idea of primary and support activities applies.

About a decade after Porter published Competitive Advantage: Creating and Sustaining Superior Performance, advances in digital technology had started taking hold, and the Harvard Business Review published a piece on "Exploiting the Virtual Value Chain." The authors wrote,

"Creating value in any stage of a virtual value chain involves five activities: gathering, organizing, selecting, synthesizing, and distributing information. Just as someone takes raw material and refines it into something useful—as in the sequence of tasks involved in assembling an automobile on a production line—so a manager today collects raw information and adds value through these steps."²

At the time, the authors were considering the potential for adding value to physical goods and services with information. Still, with modifications, the framework can be extended to purely digital products and services, like online stock trading software, video games, and home energy management apps for cell phones.

Business activities that are not directly involved in producing the final product are sometimes referred to as support activities and sometimes secondary activities. Whatever they're called, these activities can help create a competitive advantage by adding more value, either through cost savings or product differentiation. These activities include:

This function secures the resources needed for all operations, striving to create vendor relationships and cost savings while maintaining quality assurance.

Innovations and technological enhancements that support primary activities, improving efficiency and adding value through technology-enabled process improvements.

Human Resource Management
Activities focused on personnel, including recruitment, training, and developing a strong organizational culture, are vital for quality control and superior performance.

Sometimes called overhead, firm infrastructure provides the necessary support for operations and includes administration, general management, finance, accounting, public relations, quality assurance and legal functions.³

Understanding and optimizing each of the primary and secondary activities and their interplay can significantly enhance competitive strategy. Methodical analysis empowers companies to examine their value chain activities with a critical eye, shaping a business model that delivers a unique value proposition and leads to superior marketplace performance.

A well-executed value chain analysis presents a compelling blueprint for operational excellence. It demystifies the complex interplay of internal activities that drive a business, from initial procurement to the ultimate delivery of a final product or service. By focusing on internal processes, it helps create clarity around operations and highlights areas for improvement. This sharp focus provides decision support for business initiatives and encourages organizations to evolve, fostering a culture of perpetual progress that's reflected in product quality, customer satisfaction, and financial performance.^{4, 3}

The model does have limitations to keep in mind. As mentioned above, Porter hypothesized the framework before the full blossoming of the Internet age. So, applying it to purely digital business models requires adaptation. Classification of particular activities as secondary creates the temptation to gloss over their potential impact on business competitiveness. Finally, it's crucial to maintain awareness of external conditions and larger strategic concerns while examining the details of internal operations.⁴

Despite its limitations, value chain analysis offers other benefits, such as increasing customer value and profit margins. For example, clarity about individual steps in the chain makes finding opportunities for supporting other strategic initiatives, such as environmental, social and governance (ESG) commitments, easier.¹

There are several ways to approach a value chain management process, with four typical components.

A comprehensive listing of the business activities, categorized as primary or secondary and briefly described, provides a map to follow through the rest of the steps. If the organization has multiple product lines, then the value chain for each product or service should be delineated.¹

Breaking down each function into its essential components gives your value chain analysis the most power because you can isolate the return on investment for each step. Once you've done that, look for linkages between subactivities. Often, dysfunction in one area will hamper efficiencies in a dependent area.³

Before proceeding with your analysis, it can be helpful to decide which path, differentiation or cost advantage you want to pursue, then analyze each activity with an eye toward advancing in that direction.¹

A key output of value chain analysis is the identification of cost drivers, the mechanisms that affect the cost of performing activities. Managers armed with this insight can strategically tweak operations to create a cost advantage, reducing expenses without compromising quality. Effective analysis points the way to tangible cost savings, whether it's renegotiating supplier contracts in procurement, restructuring business financing, or adopting lean manufacturing techniques in operations.

Quality assurance refers to processes that ensure standardized levels of quality, while quality control refers to the verification of quality products and results. Both are indispensable elements of the value chain that directly influence customer satisfaction and retention. A commitment to quality in all processes, from inbound logistics through operations to outbound logistics, ensures that products meet the high standards expected by consumers.⁵

Inventory management is a balancing act that requires precision to avoid excess stock or stockouts. Value chain analysis sharpens this balance, optimizing the handling of materials and the flow through the production process. Value chain analysis supports continuous improvement processes that further fuel value creation and customer satisfaction, such as lean methodology, Six Sigma, and TQM.⁶

Though often used interchangeably, the concepts of value and supply chains serve distinct purposes in business strategy. Understanding their interrelation is key to orchestrating a comprehensive approach to operational enhancement.

The supply chain encompasses the end-to-end processes involved in creating and distributing a product or service, including sourcing raw materials, manufacturing, and logistics. In contrast, the value chain shifts the focus from the physical movement of goods to the value-added processes that make a product more desirable to the consumer.

Because effective supply chain management minimizes cost and waste in the production cycle and speeds the delivery of the final product, it supports the creation of value. Conversely, the focus on creating customer satisfaction in the value chain helps to focus and optimize the work accomplished in the supply chain.¹

Logistics, which focuses on coordinating and moving products, materials and services across the supply chain, is a core component of the value chain’s primary activities.⁷ Effective logistics management ensures that inventory management is optimized, products reach customers efficiently, and ultimately, customer satisfaction remains high. It serves as a bridge, turning the operational efficiency of the supply chain into value-adding customer service.

Although they aren't considered part of the supply chain, secondary activities within the value chain play a significant role in sustaining and improving profit margins by supporting the primary processes and their potential to create product differentiation, new products, and customer satisfaction.

Secondary activities, or support activities as they're often called, include infrastructure management, human resource management, technology development, and procurement.

When secondary activities like developing a skilled workforce through human resource management or investing in cutting-edge technology are skillfully integrated with primary activities, they can substantially reduce costs and enhance product quality. This integration establishes a strong foundation for innovation and agility, allowing companies to respond to market changes swiftly and assertively.

A carefully orchestrated value chain, in which secondary activities are seen not as mere support but as integral parts of the business model, strengthens the overall value proposition. This holistic approach ensures that every aspect of the business is geared towards maximizing value and, by extension, optimizing profit margins.

Understanding where market conditions and competitive strategy intersect with the value chain provides a roadmap for outmaneuvering rivals. Marketing and sales efforts become more targeted when aligned with the unique strengths identified through value chain analysis. Additionally, aligning the service component ensures an end-to-end experience that converts first-time buyers into lifelong customers.

Because no organization operates in a vacuum, value chain analysis should be combined with ongoing competitor benchmarking and examination of external forces through analysis such as the familiar strengths, weaknesses, opportunities and threats (SWOT) framework and Michael Porter's Five Forces framework. Benchmarking competitor value chains and best practices can highlight internal weaknesses and opportunities to outpace the competition.⁴

Strategic and competitive benchmarking complement value chain analysis to gauge performance. While competitors’ value chains are unlikely to be publicly available, you can get an idea of them through benchmarking or researching competitors' relevant processes, business models and performance metrics and comparing them with your own.

Business history is replete with examples of companies that have soared by adeptly managing their value chains. These case studies provide a canvas of strategies that realigned resources for efficiency and innovation. Here are a few examples:

• In the early days of the digital revolution, FedEx dominated the shipping and logistics industry by turning its package tracking system into an added value for the customer¹
• Walmart became the widely recognized low-price leader in retail through careful management of its supply chain, among other initiatives¹
• Amazon built out the world-class cloud-based Amazon Web Services to support its operations, then created a significant income stream when it made the services available to others³

You can find information about these case studies and many other examples of successful value chain management online. Understanding and applying the principles of value chain management is imperative for organizations looking to heighten their strategic position. Adding value chain analysis to your strategic toolkit, along with external-facing analysis and modeling, will position your organization for enduring success and a robust competitive advantage.

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