Especially in complex production processes, inefficiencies often arise. A value chain analysis helps you to uncover and subsequently eliminate these inefficiencies. The following article explains how to create a value chain and how to proceed with the subsequent analysis.

What is a value chain?

A value chain is a method developed by Michael E. Porter for the strategic analysis of the production process of a product or service. It reveals the contribution of individual production stages to the profit margin. Furthermore, a value chain analysis uncovers potential weaknesses in the production process. By addressing these weaknesses, you maintain your company's competitiveness, increase your profit margin, and secure a competitive advantage.

Using value chain analysis, a car manufacturer could, for example, identify inefficiencies in certain areas of its production. These could include waiting times that arise when certain production processes are not coordinated. By eliminating this problem, the car manufacturer can increase production while keeping costs constant, thereby increasing its profit margin, as more cars can be produced within the same timeframe.

In addition to the internal (horizontal) value chain for considering an individual company, there is also an external (vertical) value chain, which classifies the individual company as part of an entire industry.

Let's revisit the example of the car manufacturer. This manufacturer sources individual parts from suppliers and then assembles them into finished cars. In this case, the horizontal value chain encompasses the production of the cars from the delivery of the raw materials to final delivery. The vertical value chain, on the other hand, considers the car manufacturer as part of the industry, which includes all steps from raw material extraction through the suppliers to the local car dealer.

Here's how to proceed with the analysis.

The individual elements of a value chain are divided into two areas: primary activities and support activities . Primary activities encompass all processes directly involved in value creation, from logistics and production to customer service. Support activities, on the other hand, are not directly part of the production process but create the necessary framework for it. Specifically, these include the company's infrastructure, personnel, research and development expenditures, and procurement. Both primary and support activities can be further subdivided for more detailed analysis.

By meticulously listing the factors contributing to the value creation process, you uncover potential weaknesses and inefficiencies in your production process. From these insights, concrete optimization opportunities can be derived, the practical implementation of which will allow you to make your production processes more efficient and potentially gain a competitive advantage over your competitors.

Low cost or differentiation?

With regard to optimizing a production process, two strategies have proven effective: the low-cost strategy and the differentiation strategy.

The low-cost strategy aims to increase profit margins through savings in the production process. This involves examining the individual activities of the value chain for their costs and potential savings. However, the goal is not to reduce costs at any price, as the savings should not compromise the quality of the final product.

The car manufacturer in the example could try to purchase its raw materials more cheaply or make its production process more efficient in order to achieve the same result with less material or personnel input. However, this should not come at the expense of quality.

A differentiation strategy aims to gain a competitive advantage through distinctive features that set a product apart from those of its competitors. This involves analyzing individual elements of the value chain, considering both their differentiation potential and the associated costs. Based on the results of this analysis, a strategy is developed to achieve the greatest possible differentiation at the lowest possible cost. However, the costs of differentiation must not exceed the resulting price premium at the point of sale.

A car manufacturer could differentiate itself from other manufacturers, for example, through lower fuel consumption or other special features of its vehicles.

PowerPoint template for value chain analysis

In our shop you will find high-quality PowerPoint templates that make it easy to create and present a value chain diagram. The template set also includes a number of helpful examples for the practical implementation of a value chain analysis.