Value chain

Value chain

 

The are two important but different value chain concepts.

 

The industry value chain is the chain of contributions of different firms to the solution to the customer's need.

The firm value chain is the chain of activities performed by or on behalf of the firm to deliver its product.

Industry value chain

 

It is almost never the case that a single firm contributes everything necessary to address a customer’s need and deliver value to that customer. Many firms are involved.

 

Consider the example of providing mobile phone service.



 

Generally, entrepreneurial teams are able to choose their position in the industry value chain. This choice should both build on the team’s strengths and allow it to make investments that build sustainable competitive advantage.





The industry value chain allows us to position the firm in the industry.



Understanding all of the pieces that go together to provide a solution to the customer will allow a new venture to position itself intelligently.

 

The firm’s value chain

 

The firm value chain is a helpful way to determine what resources are involved in delivering value.



  

Primary activities outline the directly value-adding activities of the firm. This traces the flow of goods, services, and customer/supplier contact through the process. One must think creatively and generally about process, e.g.,  inbound logistics can include R&D (for a pharma company), etc.

 

Value chain analysis views the organization as a sequential process of value-creating activities. The goal is to break down product or service into multiple activities that go into its creation and delivery.

This analysis provides a framework for systematic analysis of choices that support a strategic position.

It helps you understand the drivers of both:

·             Cost (relative emphasis in spending)

·             Willingness to pay (sources of benefits to customer)

This allow identification of key distinctions vis-à-vis competitors.

It is used to understand whether or not key activities reinforce each other and support the firm’s overall strategy.

Retail example: 

 

Value chain analysis is a tool entrepreneurs can use to decide which activities should be done internally (because building the relevant capabilities would build sustainable competitive advantage) and which activities are candidates for out-sourcing.
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