The second framework that companies can use to identify and evaluate the ways in which their resources and capabilities can add value is value chain analysis. This framework is useful because it enables companies to understand which parts of their operations or activities create value by segmenting the value chain into primary and secondary activities as illustrated in the figure.
The figure illustrates how the value creating activities performed by the company can be separated into primary and secondary activities. Primary activities, shown vertically, represent traditional line activities such as inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities, shown horizontally, are represented by a company’s staff activities and include its financial infrastructure, human resource management practices, technological development, and procurement activities.
The first step in value chain analysis is to carefully examine each of the company’s primary activities to determine the potential for creating or adding value.
- Inbound Logistics: Examine all activities related to the receipt, control, warehousing, inventory, and distribution of raw materials or component parts into the production process.
- Operations: Activities to be examined are all those necessary to convert the inputs (raw materials or components) available as a result of inbound logistics into finished products. Examples include machining, assembly, equipment maintenance, and packaging.
- Outbound Logistics: This category represents the company’s activities involved with the collection, storage, and physical distribution of products to customers. Examples include warehousing or storage of finished products, material handling, and order processing.
- Marketing and Sales: Several marketing and sales activities must be completed to both induce customers to purchase products and ensure that products are available. Activities include developing advertising and promotion campaigns; selecting and developing distribution channels; and selecting, training, developing, and supporting a sales force.
- Service: These are the activities that a company offers to enhance or maintain a product’s value, including installation, product use training, and adjustment, repair, and warranty services.
The next step in the value chain analysis process is an examination of the company’s support activities to determine any value creating potential in those activities.
- Procurement: These are activities that are completed to purchase the inputs needed to produce a company’s products, including items consumed or used in the manufacturing process (such as raw materials or component parts), supplies, and fixed assets (machinery, equipment and facilities).
- Technological Development: All activities that are completed to either improve a company’s products or its production processes. This includes basic research, process and equipment design, product design, and servicing procedures.
- Human Resource Management: These activities are related to the recruiting, hiring, training, developing, and compensating (including performance assessment and reward systems) of a company’s employees.
- Company Infrastructure: These activities support the activities performed in the company’s value chain, including general management practices, planning, finance, accounting, legal, and government relations. By performing its infrastructure related activities, a company identifies external opportunities and threats, and internal strengths and weaknesses related to company resources and capabilities, and supports or nurture its core competencies.
Using the value chain framework enables managers to study the company’s resources and capabilities in relationship to the primary and support activities performed to design, manufacture, and distribute products, and to assess them relative to competitors’ capabilities. For these activities to be sources of competitive advantage, a company must be able to perform primary or support activities in a manner that is superior to the ways that competitors perform them. Also perform a primary or support activity that no competitor is able to perform to create superior value for customers and achieve a competitive advantage.
This implies that, given that individual companies are comprised of unique or heterogeneous bundles of activities, reconfiguring the value chain, or rebinding resources and capabilities, may enable a company to develop unique value creating activities. The managerial challenge is that the value creation process is difficult and there is no one best way to assess a company’s primary and support activities or to evaluate the value creating potential of those activities either within the company or relative to competitors, because of incomplete or ambiguous data.
However, by being objective, managers may be able to use the value chain framework to identify new, unique ways to combine resources and capabilities to create value that are difficult for competitors to recognize, understand, or imitate. The longer a company is able to keep competitors “in the dark,” as to how resources and capabilities have been combined to create value, the longer a company will be able to sustain a competitive advantage.
Companies can use outsourcing as an alternative to identify primary or support activities for which its resources and capabilities are not core competencies and do not enable the company to add superior value and achieve competitive advantage.