Value Chain Analysis

Value Chain Analysis breaks a business into the specific activities that create value, from inbound logistics to after-sales service, so you can see exactly which steps earn their cost and which just add margin drag.

A row of support functions runs across the top, with the primary activities carrying the product along the bottom, and the margin marked at the end.

Support activities run across the top of the chain; primary activities carry the product to the customer along the bottom; the gap between value and cost is the margin.

Reach for this when…

Margins are shrinking and nobody can point to the exact activity causing it.
You're deciding what to outsource and need more than a hunch.
Two competitors sell the same product at different prices and you don't know why.

How to run it

List your primary activities: inbound logistics, operations, outbound logistics, marketing and sales, service.
List the support activities that enable them: infrastructure, HR, technology, procurement.
Cost and value each activity separately, not the business as a whole.
Mark which activities customers actually pay more for, and which are just table stakes.
Cut, automate, or outsource activities that cost more than they're worth; invest in the ones that differentiate you.

A worked example

Situation. Maryam Al Suwaidi ran Sahra Alpaca Textiles, an alpaca wool manufacturer in Dubai, United Arab Emirates, competing against cheaper imported wool blends.

Applied. Mapping her value chain, she found her outbound logistics and quality inspection were costing more than competitors for no customer benefit, while her raw material sourcing, importing fibre directly from Andean herders in Peru instead of through a broker, was the one activity customers actually valued and paid a premium for.

Result. She streamlined the logistics step, automated inspection, and put the savings into deepening those direct herder relationships in Peru. Her premium line grew while her cost per unit fell.

Andina Textiles' real edge was inbound logistics: direct sourcing from local herders.

The catch

The chain treats activities as separate boxes, but real value often comes from the links between them, a fast handoff between sourcing and production, say, which the model doesn't show well. It's also easy to spend weeks mapping and never act.

An activity that costs the most isn't automatically the one to cut - check whether customers actually pay for it first.

Origin: Michael Porter

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