Value Chain Analysis

Many organizations do not achieve the profits they anticipate by using incorrect methods or models to determine the true costs of products and services. This failure to correctly assess the costs associated with business not only affects the profit margin, but the organizations competitive advantage as well. In order to asses whether the organization is failing to realize optimum resource allocation, the organization should look at the methodology first popularized by Michael Porter titled the Value Chain Analysis (VCA). "VCA seeks to define the entire chain through which goods are supplied to a customer" (Booth, 1997, 2). The VCA can be a powerful tool in increasing an organization's competitive advantage; by correctly pricing products and assessing the true costs of materials and labor, organizations can align the improvements in efficiency, quality, and profits with its strategic objectives.

Before explaining the advantages that a value chain can offer, it is important to first identify the value chain itself. According to Stabell and Fjeldstad (1998) Porter's work on VCA began by disseminating an organization's activities into two categories, primary activities and support activities (See Figure 1):

Primary activities are directly involved in creating and bringing value to the customer, whereas support activities enable and improve the performance of the primary activities…The support lable underlines that support activities only affect the value delivered to customers to the extent that they affect the performance of primary activities (p 417).

Within the value chain, it is important for an organization to correctly identify how each primary activities category relates to its organization. The first c...

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...can be key in improving customer sales. If a customer does not see the value of an organization's product, that customer may begin to shop for a competitor's product based only on price. Price is not the only competitive advantage an organization may have, but if it is not able to articulate the non-price value, it can significantly lower the organization's competitive advantage.

References

Booth, R. (January 1997). Appreciating the Value Before Counting the Cost. Management Accounting: Magazine for Chartered Management Accountants. 57(1). Retrieved 11/10/2006 from EBSCOhost database.

Stabell, C.B. and O.D. Fjeldstad. (1998). Strategic Management Journal. 19, 413-437. Retrieved November 11, 2006 from EBSCOhost database.

The Value Chain (2006). NetMBA: Business Knowledge Center. Retrieved November 11, 2006 from: http://www.netmba.com/strategy/value-chain/