Value Chain Analysis

A lot of words have been published about the “value of a chain”.

The goal: to develop a cost advantage better than its competitors.
A cost advantage can also be pursued by reconfiguring the value chain. Reconfiguration means
introducing structural changes such as a new production process, new distribution channels, or a
different sales approach.

These days, we are able to find tons of documents what’s all about.

For a full detail I refer to our best librarian on the net

As time to absorb is decreasing below I present you my “best practice” approach.

For the sake of convenience I’m using the CASE tool Visual Paradigm (because of its richness in process documentation).

Step 1: draw the standard Porter diagram

  • the Primary Functions
    • inbound logistics
    • operation
    • outbound logistics
    • sales & marketing
    • servicing
  •  the Secundary Functions
    • administrative finance infrastructure
    • human resource management
    • product & technology
    • procurement


Step 2: for each Function elaborate the Process Breakdown Structure

so for Inbound Logistics we have

  • quality control
  • raw materials control
  • supply schedules
  • goods receipt

Repeat this for each function of the Porter diagram, if needed dive until you reach a singleton of actions (mostly Level4 or Level5).

Step 3: link the Primary Functions with the Secundairy Functions

Meaning: in order to execute a Primary Function we need the support by one or more Secundairy Function(s).

For instance:

To execute the process Quality Control of Inbound Logistics we need a Budget.

To perform a Goods Receipt of Inbound Logistics we need a Planning.

Repeat this linking for each Primary Function.

Example Value Chain Analysis Report

Step 4: become the differentiator when processing

All processes of the Process Work Breakdown Structure (level 1: Porter Diagram, level 2 function tree till level 3) are pretty much standard at all companies. But as from L4 onwards you can make the difference, see SCOR

But what are the leavers to be different ?

Each action needs resources, needs a certain time, needs material etc to execute. This is a cost differentiator.

How our product on the market still is perceived, are we still good against the competitors ?

Do we still own the feedback of our customers?

What about the timing to launch / discontinue products?

Actions to improve the value chain:

For each L4 activity we need to determine the cost drivers to become “different” than our competitors:

  • Economies of scale
  • Learning
  • Capacity utilisation
  • Linkages among activities
  • Interrelationships among business units
  • Degree of vertical integration
  • Timing of market entry
  • Policy on targetinng cost or product differentiation
  • Geographic location

and for each cost driver:

  • determine the waste we are loosing along each activitiy  –> clarifies the cost of poor quality
  • determine the failures (itnernal / external)
  • determine how the capacity, load, can be improved
  • determine how the product/service is perceived on the market
  • determine how

For example, procurement of inputs that are unique and not widely available to competitors,
providing high levels of product support
services, or designing innovative and aesthetically attractive products are all ways of creating
product differentiation.

That’s only 1 method.

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