Value Chain Analysis

The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value. Customer value derives from three basic sources: activities that differentiate the product, activities that lower its cost, and activities that meet the customer’s need quickly. Value chain analysis (VAC) attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value.

VCA takes a process point of view: it divides (sometimes called disaggregates) the business into sets of activities that occur within the business, starting with the inputs a firm receives and finishing with the firm’s products (or services) and after-sales service to customers. VCA attempts to look at its costs across the series of activities the business performs to determine where low-cost advantages or cost disadvantages exist. It looks at the attributes of each of these different activities to determine in what ways each activity that occurs between purchasing inputs and after-sales service helps differentiate the company’s products and services. Proponents of VCA believe it allows managers to better identify their firm’s strengths and weaknesses by looking at the business as a process—a chain of activities—of what actually happens in the business rather than simply looking at it based on arbitrary organizational dividing lines or historical accounting protocol.

Judgment is required across individual firms and different industries because what may be seen as a support activity in one firm or industry may be a primary activity in another. Computer operations might typically be seen as infrastructure support, for example, but may be seen as a primary activity in airlines, newspapers, or banks.

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