What is it?
According to CIMA Official Terminology, the value chain is a sequence of business activities by which, in the perspective of the end-user, value is added to (or costs incurred by) the products or services produced by an entity.
Example of Value Chain Analysis process
Value chain analysis is based on the principle that organisations exist to create value for their customers. In the analysis, the organisation’s activities are divided into separate sets of activities that add value.
The organisation can more effectively evaluate its internal capabilities by identifying and examining each of these activities. Each value-adding activity is considered to be a potential source of competitive advantage.
The three steps for conducting a value chain analysis are:
1. Separate the organisation’s operations into primary and support activities
Primary activities are those that physically create a product, as well as market the product, deliver the product to the customer and provide after-sales support. Support activities are those that facilitate the primary activities, for example, HR.
2. Allocate cost to each activity
Activity cost information provides managers with valuable insight into the internal capabilities of an organisation.
3. Identify the activities critical to customer satisfaction and market success
There are three important considerations in evaluating the role of each activity in the value chain:
- Company mission, influencing the choice of activities undertaken
- Industry type, which influences the relative importance of activities. The value chain for a service industry, for example, will look very different from that of a manufacturing industry
- Value system, including the value chains of an organisation’s upstream and downstream partners in providing products to end-customers.
What benefits does Value Chain Analysis provide?
Value chain analysis can help organisations to gain better understanding of key capabilities and identify areas for improvement. It can help them to understand how competitors create value; and help organisations to decide whether to extend or outsource particular activities.
Questions to consider when implementing Value Chain Analysis
- Can we identify our areas of activity easily?
- Can we identify the costs and benefits of each activity easily?
- How will we turn this analysis into competitive advantage?
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The Nestlé Cocoa Plan
As part of their Creating Shared Value initiative Nestlé carried out a value chain analysis to identify the areas of greatest potential for joint value optimisation with society. These activities (Nutrition, Water and Rural Development) are seen as core to business strategy and operations, and vital to the welfare of the people in the countries where they operate.
In October 2009 the £67m ‘Cocoa Plan’ was launched in the Côte d’Ivoire, with planned investment of £67m over a 10-year period. The initiative aims to help cocoa farmers to run profitable farms and improve quality of life for their families, while ensuring a sustainable and high quality supply of cocoa in the long term. A focus on training, buying from co-operatives, eliminating child labour and working with the Fairtrade programme creates value, both for Nestlé and the farmers who supply them.
Related and similar practices
- Supply chain analysis
- Enterprise resource planning (ERP)
- Activity-based costing (ABC)