Determine competitive advantage according to the company value chain analysis model

Value chain analysis is a process. In which a company identifies the primary and support activities that add value to the final product. And then analyze these activities to reduce costs or increase differentiation.
The value chain represents the internal activities a company needs to perform when converting inputs into outputs.

Understand tools

Value chain analysis is a strategic tool used to analyze a company’s internal operations. The goal of Value Chain Analysis is to identify which activities are most valuable to the company. And which activities can be improved to provide a competitive advantage. In other words, by looking at internal operations. Analysis reveals a company’s competitive advantage or disadvantage.
A company that competes through differential advantage will try to perform its activities better than its competitors. If they compete through cost advantage, they will try to perform lower-cost activities than their competitors. When a company is able to produce goods at a lower cost, it makes a profit.

Use the Value Chain Analysis tool

There are two different approaches on how to perform the analysis. It depends on the type of competitive advantage the company wants to create. The table below lists all the steps necessary to achieve a cost advantage. Or differentiation using value chain analysis.
Types of competitive advantages
Concerns about costs Differentiation advantage
This approach is used when organizations strive to be cost competitive and want to understand the sources of cost advantages or disadvantages and what drives those costs (e.g., Amazon, Wal-mart, McDonald’s, Ford, Toyota) Companies trying to create superior products or services use a differentiation advantage approach (e.g., Apple, Google, Samsung, Starbucks)
  • Step 1. Identify main activities and support activities.
  • Step 2. Establish the relative importance of each activity in the total cost of the product.
  • Step 3. Determine cost elements for each activity.
  • Step 4. Identify links between activities.
  • Step 5. Identify opportunities to reduce costs.
  • Step 1. Identify activities that create value for customers.
  • Step 2. Evaluate differentiation strategies to improve customer value.
  • Step 3. Identify the best sustainable differentiator.

Cost advantage

To achieve a cost advantage, a company must go through five analytical steps:

Step 1: Identify the company’s main and supporting activities

All activities to produce goods or services must be clearly identified and separated from each other. This requires complete knowledge of the company’s operations. Because value chain activities are not organized in the same way as within the company
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Managers whose job is to define activities in the value chain must consider how the work is accomplished. From there, we can provide value to customers.

Step 2: Establish the relative importance of each activity in the total cost of the product

The total cost of producing a product or service must be broken down and tied to each activity. Activity-based costing is used to calculate costs for each process. Activities that are a major source of costs or are performed inefficiently must be addressed first.

Step 3: Determine cost factors for each activity

Only by understanding what factors drive costs can managers focus on improving them. Costs for labor-intensive activities will be driven by working hours, work speed, salary, etc. Different activities will have different cost factors.

Step 4: Identify links between activities

Cost reductions in one activity can lead to further cost reductions in subsequent activities. For example, fewer components in product design. Can lead to fewer defective parts and lower service costs. Therefore, identifying the links between activities will lead to a better understanding of cost improvements. How will it affect the entire value chain? Sometimes, reducing costs in one activity results in higher costs for other activities.

Step 5. Identify opportunities to reduce costs

When the company knows the inefficient operations and cost factors. They can plan how to improve them. Too high wages can be dealt with by increasing the rate of production. Or outsource to countries with low wages or more automation.

Differential advantage

Value chain analysis is performed in cases when a company competes on differentiation rather than cost. This is because the source of differential advantage comes from creating superior products. Adding more features and meeting different customer needs leads to a higher cost structure.
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Step 1. Identify activities that create value for customers

After identifying all activities in the value chain. Managers must focus on those activities that contribute the most to creating customer value. For example, successful Apple products do not primarily come from great product features. Which from successful marketing activities.

Step 2. Evaluate differentiation strategies to improve customer value

Managers can use the following strategies to increase product differentiation and customer value:
  • Add more product features;
  • Focus on customer service and responsiveness;
  • Increased customization;
  • Provide additional products.

Step 3. Identify the best sustainable differentiator

Typically, superior differentiation and customer value will be the result of multiple interrelated activities and strategies employed. Their best combination should be used to pursue sustainable differential advantage.
Through this article, we hope that Administrators have a better understanding of the Value chain analysis tool to find competitive advantage. If your business needs training or guidance on using analytical tools to plan business strategies, please contact Apexcorp immediately.
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