| Definition |
Value Chain Analysis is used to identify potential sources of a companys economic advantage in its industry. The analysis separates a firm into its major activities in order to understand the behaviour of costs, the associated value added, and the existing and potential sources of differentiation. It depends on an understanding of how the firms own value chain relates to, and interacts with, the value chains of suppliers, customers and competitors. Companies gain competitive advantage by performing some or all of these activities at lower cost or with greater differentiation than competitors. |
| Implementation |
Value Chain Analysis involves understanding the linkages between activities and how the performance of one activity impacts the cost and performance of other activities. To perform value chain analysis:
- Divide a firm into its key activities and assign costs to those activities
- For each activity, understand the cost drivers, the linkages between activities and the companys cost position relative to competitors
- Identify linkages to the buyers value chain and assess potential sources of differentiation
- Develop a differentiation strategy that maximises value to the buyer and minimises increases in cost.
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| Purpose |
Value Chain Analysis identifies opportunities to gain cost advantages and increase differentiation.
- Cost advantage
Firms gain cost advantage by controlling key cost drivers, finding ways to reconfigure the value chain and optimising the linkages between activities. Understanding the linkages between value chains for different industries, market segments and geographic regions allows companies to optimise their business scope through acquisitions, divestitures and alliances
- Differentiation
Firms increase differentiation by understanding and selectively integrating their linkages with their customers value chains, thereby creating competitive advantage for their customers
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