Friday, 1 March 2013

How to use Porter's Value Chain Analysis

The value chain is a simple (graphical) method for identifying and describing a firms main functions and understanding how they add value.

The diagram below shows a generic value chain originally described by Porter:
Of course this value chain describes a typical business dealing in physical goods (manufacturing or distribution). The value chain for a service organisation might look completely different (see, for example, An investment management Value Chain). To get the most out of value chain analysis it is important to identify the processes that best describe each operation. Just as each business should be unique, each value chain, even at this high level, could be different.

Once you've mapped out the core functions within the organisation, you can then consider each function in more detail, considering factors such as people, processes, technology, costs, strengths, weaknesses, etc, according to your purpose.

There are many uses for a Value Chain analysis, for example:
  1. Create a general yet holistic and shared level of awareness of the basic functions of a firm and how it creates and consumes value. This is a useful underpin for many other forms of strategic analysis. For example, you could create a matrix with the 7-Ss of the McKinsey 7S model along one axis and the processes from the Value Chain along the other axis for a more thorough and detailed analysis. This is also an important step when working with functional teams from within a business, as people from different functional areas tend to have incomplete or skewed views of the organisation as a whole (e.g. sales people tend to have a sales-orientated view and may be inclined to underestimate the importance of inbound logistics).
  2. Design a Target Operating Model (TOM) (see also How to design a Target Operating Model (TOM)). The Value Chain is a useful model for ensuring you've designed the Operating Model (typically, the people, process and technology dimensions) of an entire organisation (including both the core operating functions as well as the supporting functions).
  3. Do a gap analysis and design a strategy to close that gap: using the same framework for describing both your existing operation (1 above) and your Target Operating Model (2 above) makes it easier to identify the gaps between the two. Then you can put plans in place to close those gaps. This alone can be sufficient to create a transformation strategy (although I'd always advise taking some external factors into consideration before getting too far down this track).
  4. Ensure complete coverage in major change programmes: when engaged in major change programmes, such as a post-acquisition integration, a value chain model provides a useful checklist to ensure you've considered the impact and implications for all functions within the organisation(s). For increased consistency, you could create your project's work breakdown structure along the same lines as the value chain. Of course, for an integration exercise, you'd first need to describe both organisations using the same value chain, which in itself could increase understanding of the fit between the two organisations.
The diagram shown above was drawn with StratNavApp.com, the free online collaborative tool for strategists - try it now for free.

See also: