Value Chain Analysis - Finding Where Value Is Created, Lost, and Strengthened

Video: Value Chain Analysis: Find Where Your Business Creates Value and Where It Loses It

Learning Objectives

By the end of this chapter, you should be able to:

• explain the purpose of Value Chain Analysis;

• distinguish between primary and support activities;

• identify where an organisation creates customer value;

• identify where costs, delays, inefficiencies, or performance gaps occur;

• understand how activities interact across the value chain;

• distinguish between activities that create value and activities that simply consume resources;

• identify opportunities to strengthen differentiation or reduce cost;

• connect value chain findings to organisational capabilities;

• identify potential opportunities for redesign, automation, outsourcing, integration, or investment;

• prioritise value chain improvements based on strategic impact and feasibility;

• translate value chain analysis into strategic recommendations.

Why This Matters

An organisation doesn't create value in one place. Value is created, or lost, across a series of activities.

• A company may have an excellent product but poor distribution.
• It may have strong customer relationships but inefficient operations.
• It may have low production costs but weak marketing.
• It may deliver exceptional service but destroy value through an unnecessarily expensive operating model.

The important question is therefore not simply: What does the company do? It is: Where, across everything the company does, is value being created, lost, or strengthened?  That is the purpose of Value Chain Analysis. It helps you move inside the organisation and examine how activities contribute to:

• customer value;

• cost;

• quality;

• speed;

• reliability;

• differentiation;

• competitive advantage; and

• ultimately, profitability.

Discover Your MAD Skills Principle

Don't just map the activities. Find the activities that change the economics of the business.

A weak value chain analysis simply lists activities: "The company buys materials, produces the product, markets it, sells it, and provides customer service." That is a description. A stronger analysis asks:

• Which activities create value for the customer?
• Which activities create unnecessary cost or friction?
• Which activities are strategically important?
• Where is performance below what customers expect?
• Which activities could create a meaningful competitive advantage?

That is analysis.

What Is Value Chain Analysis?

Michael Porter's Value Chain separates an organisation into the activities involved in creating, delivering, and supporting its products or services. The traditional model divides activities into two broad categories:

Primary Activities

Activities directly involved in creating and delivering the offering:

1. Inbound Logistics

2. Operations

3. Outbound Logistics

4. Marketing & Sales

5. Service

Support Activities

Activities that enable the primary activities to function effectively:

1. Firm Infrastructure

2. Human Resource Management

3. Technology Development

4. Procurement

The framework is useful because it forces us to look beyond the final product. Customers experience the outcome of the entire system.

The Value Chain

Primary Activities	What to Examine
Inbound Logistics	Receiving, storing, and managing inputs
Operations	Converting inputs into the product or service
Outbound Logistics	Distribution and delivery
Marketing & Sales	Creating demand and converting customers
Service	Supporting customers after purchase

Support Activities	What to Examine
Firm Infrastructure	Finance, planning, legal, governance, administration
Human Resources	Recruiting, training, development, incentives
Technology Development	Systems, data, R&D, automation, innovation
Procurement	Sourcing and purchasing inputs and services

The categories are useful starting points, but don't become trapped by the traditional diagram. A service business, software company, hospital, university, or nonprofit may have very different activities. The objective is to understand how value actually flows through that organisation.

Deciphering Case Characteristics

Value Chain Analysis is particularly useful when a case involves:

• declining margins;

• high operating costs;

• poor customer experience;

• inconsistent quality;

• supply chain problems;

• operational inefficiencies;

• slow delivery;

• service problems;

• competitive differentiation;

• outsourcing decisions;

• automation;

• vertical integration;

• process redesign;

• productivity improvements;

• questions about where the organisation should invest.

It is especially valuable when the case asks: Why is the company struggling to create value despite having a good product or strong market position?

The Value Chain Question

Before mapping the activities, define: What does the customer actually value? For example, customers may value:

• low price;

• speed;

• convenience;

• reliability;

• customisation;

• quality;

• availability;

• service;

• trust;

• experience.

Once you know what customers value, you can examine how each activity contributes to delivering it.

Step 1: Identify the Customer Value Proposition

Start with the customer's perspective. Ask: Why does the customer choose this organisation? Suppose a company competes on: Fast, reliable delivery of customised products. That immediately tells you what the value chain needs to support. You should now examine:

• procurement;

• production;

• inventory;

• scheduling;

• logistics;

• technology;

• customer communication;

• service.

A slow process anywhere in that chain could undermine the entire value proposition.

Step 2: Map the Activities

Identify the activities required to deliver the value proposition. Don't automatically copy the textbook categories. Instead, map the organisation's actual process. For example: Supplier → Receiving → Production → Quality Control → Distribution → Customer → Service. Then identify the support systems behind those activities: People + Technology + Procurement + Finance + Management. Now you can begin asking where value is created or lost.

Step 3: Evaluate Each Activity

For every major activity, ask five questions:

1. Does it create customer value?

Does the activity directly or indirectly improve something the customer cares about?

2. What does it cost?

How many resources does the activity consume?

3. How well does it perform?

Consider:

• speed;

• quality;

• reliability;

• productivity;

• error rates;

• customer satisfaction.

4. Is it strategically important?

Could this activity create differentiation or cost advantage?

5. Could it be improved?

Could the organisation:

• redesign it;

• automate it;

• outsource it;

• insource it;

• integrate it;

• simplify it;

• eliminate unnecessary steps?

The Value Creation Test

For each activity, ask: Would the customer be willing to pay more, or would the organisation become more competitive, because we do this activity well? If yes, the activity may be a source of value or differentiation. For example: A luxury hotel's concierge service may be expensive to operate, but it contributes directly to the customer experience. An automated inventory system may not be visible to customers, but it can reduce stockouts and improve delivery reliability. Not every valuable activity is customer-facing.

The Value Destruction Test

Now ask: Where are we spending significant resources without creating equivalent value? This is where value chain analysis becomes especially powerful. Examples include:

• unnecessary process steps;

• excessive inventory;

• duplicate data entry;

• rework;

• inefficient transportation;

• excessive management layers;

• outdated technology;

• poor scheduling;

• avoidable customer-service contacts.

An activity can be necessary without being performed efficiently. That distinction matters.

Value Created vs. Value Captured

Another important distinction is between creating value and capturing value. A company may create significant value for customers but capture little of it. For example: A restaurant provides exceptional food and service but has high labour costs, food waste, and inefficient table turnover. Customers may receive substantial value. The company may not capture enough of that value as profit. Therefore, ask two separate questions:

• Value Creation
  • Does this activity improve the customer's experience or willingness to pay?
• Value Capture
  • Does the organisation retain enough of the value created to generate attractive returns?

That distinction can uncover important strategic problems.

Finding Performance Gaps

A useful value chain analysis compares: Expected Performance vs. Actual Performance. For example:

Activity	Customer/Business Expectation	Actual Performance	Gap
Procurement	Reliable supply	Frequent shortages	High
Operations	48-hour production	72 hours	High
Distribution	Next-day delivery	2–3 days	High
Service	Same-day response	48 hours	Medium

The gaps tell you where to investigate further. But a gap doesn't automatically tell you the root cause. That requires deeper analysis.

Root Cause: Don't Fix the Symptom

Suppose customers complain about late deliveries.

• A weak analysis says: Problem: Distribution is too slow.
• A stronger analysis asks: Why are deliveries late?

Perhaps: Late deliveries → Production schedules are frequently changed → Production lacks accurate demand forecasts → Sales information is not integrated with operations →  The company uses disconnected systems. Now the apparent logistics problem may actually be a technology and information-flow problem. That changes the solution. The organisation may not need more trucks. It may need better data integration and planning.

Value Chain Activities Are Connected

One of the most important lessons is that activities don't operate independently. A problem in one activity can create problems elsewhere. For example: Poor procurement → Inconsistent raw materials → Production delays → Lower product quality → More customer complaints → Higher service costs. The initial problem appears to be a procurement issue. The financial impact appears throughout the value chain. This is why value chain analysis should be viewed as a system, not a list.

The Connection Test

• For each significant problem, ask: What other activity does this affect?
• Then ask: What caused this problem upstream?
• And: What consequence does it create downstream?

This helps reveal leverage points. A small improvement upstream may create significant benefits throughout the system.

Cost Advantage

Value Chain Analysis can help identify opportunities to reduce cost. But the objective should not simply be: Cut costs. The better question is: Which costs can be reduced without damaging customer value or strategic capability? Potential opportunities include:

• reducing waste;

• automating repetitive work;

• consolidating purchasing;

• redesigning processes;

• improving inventory management;

• reducing rework;

• optimising transportation;

• eliminating duplication.

A cost reduction that damages quality or customer experience may destroy more value than it creates.

Differentiation Advantage

The value chain can also reveal where an organisation can differentiate itself. Potential sources include:

• superior product quality;

• faster delivery;

• better customer service;

• greater customisation;

• better technology;

• stronger relationships;

• superior reliability;

• unique purchasing capabilities.

The key question is: Which activities allow the organisation to do something customers value better than competitors? That is where value chain analysis connects with competitive advantage.

Linking the Value Chain to VRIO

An activity being performed well doesn't automatically create sustainable competitive advantage. Ask:

• Is the underlying capability valuable?
• Is it rare?
• Is it difficult to imitate?
• Is the organisation structured to capture the value?

Those are VRIO questions. For example: A company may have an excellent logistics process. If every competitor can purchase the same logistics technology and hire the same providers, the capability may create temporary efficiency but not a sustainable advantage.

• The value chain tells you where the capability operates.
• VRIO helps determine whether that capability can create sustained advantage.

Improving the Value Chain

Once you identify important gaps, consider the strategic levers available.

• Redesign
  • Change how the activity is performed. Example: Redesign order processing to eliminate duplicate approvals.
• Automation
  • Use technology to reduce manual work. Example: Automate inventory replenishment based on demand data.
• Outsourcing
  • Use an external specialist. Example: Outsource non-core logistics to a specialist provider.
• Insourcing
  • Bring a strategically important activity in-house. Example: Develop internal data analytics capabilities rather than relying entirely on external consultants.
• Integration
  • Connect activities that currently operate independently. Example: Integrate sales forecasts with production planning.
• Elimination
  • Remove an activity that creates little value. Example: Eliminate redundant reporting that doesn't influence decisions.
• Investment
  • Strengthen a strategically important activity. Example: Invest in customer-service technology because service quality is central to the company's differentiation strategy.

A Worked Example: Meal-Kit Company

Imagine a meal-kit company that has strong customer demand but declining profitability. The company initially assumes the problem is marketing. A value chain analysis reveals something different.

Procurement

• The company purchases ingredients from multiple suppliers.
• Problem: Limited purchasing coordination creates inconsistent pricing.

Inbound Logistics

• Ingredients arrive at several facilities.
• Problem: Poor scheduling creates excess inventory and spoilage.

Operations

• Meals are assembled and packaged.
• Problem: High labour requirements and inconsistent processes create rework.

Outbound Logistics

• Orders are delivered directly to customers.
• Problem: Last-mile delivery costs are high.

Marketing & Sales

• Customer acquisition is strong.
• Strength: Effective digital marketing generates demand.

Service

• Customer complaints are increasing.
• Problem: Many complaints relate to missing or incorrect ingredients.

Now connect the activities: Poor procurement coordination → Inconsistent inventory → Production substitutions and errors → Incorrect customer orders → Higher service costs → Customer dissatisfaction. The apparent customer-service problem is partly an upstream operations problem.

From Analysis to Strategic Alternatives

The value chain suggests several potential alternatives.

Alternative 1: Centralise Procurement

Use greater purchasing scale to reduce input costs and improve consistency.

Alternative 2: Standardise Operations

Redesign meal assembly and packaging processes to reduce errors and labour requirements.

Alternative 3: Invest in Technology

Integrate procurement, inventory, production, and order management.

Alternative 4: Redesign Delivery

Partner with a logistics provider or redesign delivery zones to reduce last-mile costs.

The alternatives should then be evaluated against:

• cost savings;

• customer impact;

• implementation difficulty;

• investment requirements;

• strategic importance;

• risk;

• speed of impact.

The value chain has identified where to look. It has not automatically identified what to do.

Prioritising Value Chain Improvements

You will rarely have enough resources to improve everything.

Prioritise opportunities using four questions:

1. Customer Impact

How strongly does the activity affect something customers value?

2. Economic Impact

How strongly does improving the activity affect:

• revenue;

• cost;

• margin;

• working capital; or

• profitability?

3. Strategic Importance

Could this activity create or strengthen competitive advantage?

4. Feasibility

Can the organisation realistically improve it? A useful prioritisation matrix is:

	High Feasibility	Low Feasibility
High Impact	Prioritise	Strategic Investment
Low Impact	Quick Win	Deprioritise

The goal is not to improve every activity. It is to identify the highest-leverage opportunities.

Winning the Room: Presenting Value Chain Analysis

A traditional value chain diagram can become complicated quickly. Showing every activity may demonstrate that the team knows the framework. It may not demonstrate that the team understands the business. Instead, identify:

Where Value Is Created

What does the organisation do particularly well?

Where Value Is Lost

Where are customers experiencing problems, or where is the organisation consuming unnecessary resources?

Where Value Can Be Strengthened

Which improvements could create the greatest strategic or economic impact? For example:

Three Value Chain Priorities

• Procurement
  • Fragmented purchasing increases ingredient costs.
• Operations
  • Manual processes create errors and rework.
• Technology
  • Disconnected systems prevent accurate demand and inventory planning.

Strategic Implication

Integrating procurement, inventory, and production planning could reduce waste while improving order accuracy and customer experience. That is more persuasive than showing ten boxes.

Coach's Lens

I often tell teams: Don't map the value chain because the framework tells you to. Map it because you want to find the leverage points. A leverage point is an activity where a relatively focused intervention can produce a meaningful improvement elsewhere in the system. The strongest teams don't simply identify: "This activity is inefficient." They explain: This activity is causing problems downstream, and fixing it will improve cost, customer experience, and competitive position. That is strategic thinking.

Common Mistakes

• Treating the Value Chain as a Process Map: A process map tells you what happens. A value chain analysis asks: Why does it matter?
• Listing Activities Without Evaluating Them: "The company has procurement, operations, marketing, and service." That is a description. Identify value, cost, performance, and strategic importance.
• Assuming Every Activity Must Add Customer Value: Some activities are necessary support activities. The question is whether they contribute effectively to the organisation's value proposition.
• Focusing Only on Cost: The cheapest process is not always the best process. Consider customer value and strategic capability.
• Ignoring Links Between Activities: Problems often originate upstream and appear downstream. Look for the connections.
• Fixing Symptoms Instead of Root Causes: Late deliveries may be a logistics problem. They may also be caused by poor forecasting, scheduling, technology, or procurement.
• Treating Every Improvement as Equally Important: Prioritise the activities with the greatest customer, economic, strategic, and feasible impact.
• Assuming Efficiency Creates Sustainable Advantage: An efficient process may be valuable without being rare or difficult to imitate. That is where VRIO becomes important.
• Ignoring Support Activities: Technology, people, procurement, and infrastructure can have enormous effects on primary activities.
• Assuming Outsourcing Is Automatically Better: Outsourcing may reduce cost. But it may also reduce control, quality, flexibility, or strategic capability.
• Assuming Automation Always Creates Value: Automation is useful when it improves the economics or customer experience. Automating a bad process can simply make the bad process faster.
• Stopping at the Analysis: The purpose of Value Chain Analysis is to identify where the organisation can improve. Always ask: What should we do differently because of what we learned?

MAD Skills Drill

Choose a company or business case.

Step 1: Define the Value Proposition

Complete: Customers choose this organisation because __________. Identify the one or two attributes customers value most.

Step 2: Map the Value Chain

Identify the major activities involved in:

• acquiring inputs;

• producing or delivering the offering;

• reaching customers;

• selling;

• servicing customers;

• supporting the organisation.

Step 3: Identify the Gaps

For each major activity, ask:

• What should happen?

• What actually happens?

• What is the performance gap?

Step 4: Trace the Problem

Choose one important gap. 

• Ask: What causes it?
• Then: What does it cause downstream?

Build an impact chain.

Step 5: Identify the Leverage Point

Which activity could be improved to create the greatest overall impact?

Step 6: Generate Strategic Actions

Consider whether the activity should be:

• redesigned;

• automated;

• outsourced;

• insourced;

• integrated;

• eliminated;

• strengthened through investment.

Step 7: Prioritise

Evaluate your proposed improvement based on:

• customer impact;

• economic impact;

• strategic importance;

• feasibility.

Step 8: Deliver the Insight

You have 90 seconds to explain: Where value is created → where it is lost → what is causing the problem → where the leverage point is → what the organisation should do. Don't simply present the value chain. Explain the story the value chain reveals.

Chapter Summary

Value Chain Analysis helps move the case analysis inside the organisation. It examines how activities contribute to:

• customer value;

• cost;

• quality;

• speed;

• differentiation;

• competitive advantage;

• profitability.

The most valuable analysis doesn't simply map activities. It identifies: Where value is created → where value is lost → why the gap exists → where the leverage point is → how value can be strengthened. Value chain activities are interconnected. An apparently isolated problem may have upstream causes and downstream consequences. The strongest solutions therefore look for system-level improvements, not isolated fixes. Value Chain Analysis also connects naturally to other tools:

• Five Forces explains competitive pressure.

• SWOT identifies strategic position.

• Value Chain identifies where value and cost are created.

• VRIO examines whether capabilities can create sustainable advantage.

• Financial Analysis determines whether improvements create economic value.

Together, these tools create a more complete picture of how an organisation competes.

Key Takeaways

✓ Value Chain Analysis examines the activities through which an organisation creates and delivers value.

✓ Primary activities directly contribute to creating and delivering the offering; support activities enable those activities to perform effectively.

✓ Start with the customer value proposition before mapping activities.

✓ Evaluate activities based on customer value, cost, performance, and strategic importance.

✓ Look for performance gaps rather than simply listing activities.

✓ Trace problems upstream to identify root causes and downstream to understand consequences.

✓ Value creation and value capture are not always the same thing.

✓ The strongest opportunities often occur at the connections between activities.

✓ Consider redesign, automation, outsourcing, insourcing, integration, elimination, and investment as possible improvement levers.

✓ Prioritise improvements based on customer impact, economic impact, strategic importance, and feasibility.

✓ An efficient activity is not automatically a sustainable competitive advantage; connect important capabilities to VRIO.

✓ In the presentation, show where value is created, where it is lost, and where the highest-leverage improvement lies.

Bottom Line

Don't map the value chain just to show that you understand the framework. Use it to find the activities that create value, destroy value, and offer the greatest opportunity to strengthen the organisation's competitive position.

Looking Ahead

Value Chain Analysis can reveal the activities and capabilities that allow an organisation to create value, lower cost, improve performance, or differentiate itself. But an important question remains: Which of those capabilities can create a sustainable competitive advantage? The next chapter introduces VRIO Analysis, which helps determine whether an organisation's resources and capabilities are Valuable, Rare, difficult to Imitate, and supported by the Organisation, and therefore whether they can become a source of sustained competitive advantage.