Value Chain
Strategy Notes
Internal Analysis – 2 Types
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Traditional: SWOT
Contemporary, more powerful, more revealing: Value Chain
You will encounter SWOT when you start working, so understand its limitations!
Core Idea of Value Chain
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Products and services do not define companies.
Products and services are merely the outcomes of how people act in companies.
Creating and capturing value is a result of how people act.
Companies competing in different ways have different activity sets.
o e.g. Amazon vs. Barnes & Noble; Kodak vs. HP; Nucor vs. Arcelor Mittal
You can manage how people act.
SWOT
 Static view – a picture at a point in time
 Results in un-manageable "laundry list" of ideas
 Many ideas are over-simplified, very general, not actionable
 Strengths can also be weaknesses – not clear how to resolve
Value Chain
 Dynamic view – like a movie over time
 Illustrates derivation of strengths/weaknesses
 Yields better predictions about future developments
 Spotlights internal synchronization
 Provides actionable information – focusing on what people actually do;
since you are a manager of people, you can manage behavior.
Sources of Value Creation – Activities in 5 "Locations"
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Internally
1) what unique internal activities make you distinctive?
Upstream
2) what unique suppliers are you working with?
3) what unique relationships have you created with suppliers?
Downstream
4) what unique customers are you working with?
5) what unique relationships have you created with customers?
2
Suppliers
3
1
Firm
5
4
Customers
© 2014 Page West
Drawing a Value Chain
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Include both primary activities & support activities.
Identify activities in every cell, or are there some
cells left blank? If so, why?
Define activities in specific terms; it helps
understanding versus staying generic.
Include connections upstream with suppliers &
downstream with customers.
Indicate how the company achieves consistency of
activities across cells and internal coordination: are
the activities inconsistent, independently consistent,
mutually-reinforcing?
A properly-drawn value chain should present a picture of the company that is unique to that
company. Merely mentioning "advertising" as an activity does not distinguish it from its
competitors who also advertise. So if advertising is one activity set that sets this company apart,
what specifically is it that they do that accomplishes this (see next section below for further
illustration)? Similarly, the connections and coordination the company achieves across its value
chain activities helps uniquely describe the company. Any picture of the company would be
incomplete without such connections indicated.
Important note: Not all companies have successful strategies or fine-tuned and well-coordinated
value chains. When you analyze a company, articulate what is there, not what should be there!
Conducting a Value Chain Analysis
1. Identify key value-creating activities
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Include key activities in all departments/functions
o That are significant portion of operating costs
o That are different from how competitors might do something
o That are at the core of addressing industry KSFs
Explode out important sub-systems in micro-detail, e.g. advertising
development process (see example at right)
Develop brand
positioning
statement
Develop
alternative
ad layouts
Write
advertising
copy
2. Evaluate value and cost characteristics of activities
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Allocate costs to activities, using activity-based costing methods
Identify combinations of activities that support each other, and their
costs
Identify executional drivers and structural drivers of these activities, for
insight on how to drive down costs or increase value added
3. Identify potential improvements
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Can we increase benefits while holding costs constant?
Can we reduce costs while holding benefits constant?
Can we reduce required assets while holding steady on both benefits &
costs?
Would new asset investments increase benefits and/or reduce costs?
Can we expand scope without sacrificing benefits/costs to existing
customers?
Test ad
layouts with
consumers
Coordinate
final ad
production
Develop media
placement
plan
Buy media
Evaluate
readership
& response