Value chain analysis: Why it’s important and how to do it

Value chain analysis is a strategic tool developed by Michael Porter to help companies identify their competitive advantages by examining all steps involved in producing a product or service, from raw materials to delivery to the customer. This analysis is divided into primary activities, such as supply chain management, operations, and sales, and support activities, like research and development and human resource management. Through value chain analysis, businesses can uncover unnecessary processes and high costs, enabling them to enhance efficiency, reduce expenses, and improve customer satisfaction. The process can lead to either a cost advantage, by minimizing costs throughout the value chain, or a differentiation advantage, by identifying and investing in unique features that justify higher prices. While applicable across industries, the analysis is particularly useful in understanding competitors' strategies and optimizing internal operations. Value chain analysis is often used alongside other strategic tools like SWOT and competitive analysis to refine business strategies and identify core competencies and distinctive competencies that can sustain a competitive edge in the market.