What Is a Value Chain? Purpose, How to Use It, and How It Differs from a Supply Chain — Explained Clearly

A value chain is a way of thinking that views a company’s business activities as a series of flows of value creation. This article briefly explains the basic meaning of a value chain, the purpose of analysis, and why it is important in business. It also explains the differences from supply chains, specific analysis procedures, and application examples by industry, providing hints for strengthening one’s own company’s competitiveness. Understanding this chain of value — the value chain — is indispensable for grasping the strengths and weaknesses of a business and formulating management strategy.

What Is a Value Chain? A Way of Thinking That Views a Company’s Business Activities as a Chain of Value

The definition of a value chain is a management framework that views a company’s business activities as a series of flows up to when value is provided to customers.

It was proposed by management scholar Michael Porter and published in his book “Competitive Advantage.”

It analyzes how each activity generates added value — from the procurement of raw materials to when products and services reach customers.

By visualizing this flow, it is possible to grasp where the strengths and weaknesses lie in the entire organization, and it helps in formulating strategies for building competitive advantage.

Rather than viewing individual activities in isolation, it is important to envision the entire management activities of the organization as a chain of value creation.

The Decisive Difference Between a Value Chain and a Supply Chain Is the “Value Creation” Perspective

Value chains and supply chains are easy to confuse, but their perspectives differ.

While a supply chain places its main emphasis on managing and optimizing the “flow of goods” from raw material procurement to when products reach consumers, a value chain stands from the perspective of how “added value” is created in each process.

Comparing the two, a supply chain is a concept primarily aimed at optimizing logistics and inventory management. A value chain, on the other hand, is a broader management strategy framework that also includes activities such as marketing and services and aims for value improvement of the entire business.

A related term is the engineering chain, which refers to the flow of technical processes such as product planning, design, and development.

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The 2 Activities That Constitute a Value Chain

The constituent elements of a value chain broadly classify a company’s activities into two: “primary activities” and “support activities.” This structure is a fundamental element for understanding how a business generates value.

Primary activities are the functions involved in the series of flows until products or services are directly delivered to customers, and directly contribute to value creation. Support activities, on the other hand, play the role of supporting the primary activities and are activities that indirectly contribute to value creation.

By clearly classifying these activity domains and analyzing each function and coordination, it becomes possible to systematically grasp the strengths and weaknesses of the company’s overall business.

“Primary Activities” for Delivering Products and Services to Customers

Primary activities are classified into five processes including the physical creation, sales, transfer to customers, and after-service of products and services.

Specifically, it starts with “inbound logistics” — procurement and inspection of raw materials. This is followed by “operations” — processing these into products, and “outbound logistics” — managing finished products in warehouses and delivering them to customers.

There are also the processes of “sales and marketing” — advertising, promotion, and sales promotion activities — and “sales” — actually selling through sales activities.

Finally, “service (after-service)” such as product repair and maintenance is provided.

This series of activities forms the direct flow of value provision that begins with product planning, reaches the customer’s hands, and continues thereafter.

“Support Activities” for Smoothly Advancing Primary Activities

A company’s activities are broadly divided into “primary activities” and “support activities.” Support activities play the role of supporting primary activities and strengthening the value creation foundation of the entire company. In the value chain analysis proposed by Michael Porter, “procurement,” “technology development,” “human resource management,” and “firm infrastructure” are cited as the main elements constituting these support activities.

“Procurement” refers to the activity of procuring raw materials, parts, and consumables from outside, as well as services and goods needed for corporate activities.

“Technology development” includes a wide range of technology-related activities such as product and service development, improvement of existing technologies, and efficiency improvement of production processes. Engineering activities such as research, design, and quality control also fall under this category.

“Human resource management” refers to all activities related to personnel, including recruiting and developing employees, building and operating evaluation systems, payroll calculation, and social insurance procedures.

“Firm infrastructure (management)” covers activities such as corporate planning, finance, legal affairs, and general affairs — supporting the entire company’s infrastructure and enabling smooth corporate operations.

These support activities are closely coordinated with individual primary activities and are positioned as functions indispensable to improving the efficiency of the entire business and generating added value.

4 Benefits Gained from Value Chain Analysis

By conducting value chain analysis, companies can gain many benefits. This analysis is a method of decomposing a company’s business activities from the perspective of value creation and visualizing strengths and weaknesses.

Specifically, there are four major benefits: clarification of the cost structure, objective grasp of the company’s own strengths and weaknesses, discovery of differentiation points from competitors, and optimal allocation of management resources.

By understanding how the value chain generates value, waste can be reduced and strengths can be further strengthened.

As a result, it becomes possible to enhance the competitiveness of the business and realize expansion of added value and improvement of profit margins.

The Cost Structure for Each Business Activity Becomes Clear

One benefit of conducting value chain analysis is the ability to visualize which parts of business activities incur how much cost.

Through cost analysis that carefully identifies personnel costs, raw material costs, expenses, and so on for each activity, the overall cost structure that was previously vague becomes clear. This makes it possible to specifically identify challenges such as bottlenecks that are compressing profits and inefficient business processes.

If the areas where waste is being generated can be grasped, targeted cost reduction measures can be taken, directly contributing to improving the overall profitability of the business.

The Company’s Own Strengths and Weaknesses Can Be Objectively Grasped

The ability to objectively grasp the company’s own strengths and weaknesses by decomposing and evaluating business activities into primary and support activities is also a major benefit.

For example, it is possible to clarify where the company’s strengths lie — activities where it has an advantage compared to competitors — in terms of aspects such as in-house technological development capability, specific manufacturing processes, or customer service.

At the same time, weaknesses also come to the surface — such as inefficient activities that generate high costs but produce little added value, and areas where the company is inferior to competitors.

Accurately understanding the company’s characteristics in this way becomes an important foundation for formulating future business strategy.

Differentiation Points from Competitors Are Found

By comparatively analyzing the company’s own value chain against that of competitors, differentiation points in the market can be discovered.

Analyze which activities competitors are focusing on and what kind of advantages they are building, and compare them against the company’s own activities.

As a result, the company’s own unique strengths and conversely domains where competitors have a thin presence come into view.

Based on this information, it becomes possible to further strengthen the company’s own strengths to make its competitive advantage unshakeable, or to formulate new strategies that exploit competitors’ weaknesses. This allows concrete pathways to be mapped out for escaping from price competition and being chosen by customers for unique value.

Optimal Allocation of Management Resources Can Be Judged

Value chain analysis serves as a guideline for judging the optimal allocation of limited management resources (people, goods, money, information) — where to concentrate them. Once the activities that are the company’s own strengths become clear through analysis, investing intensively in those areas further enhances competitive advantage.

On the other hand, for activities judged to be weaknesses or activities that are more efficient to outsource to external parties than to conduct in-house, options such as considering outsourcing can be organized.

In this way, by reviewing the entire business activities and restructuring resource allocation based on management strategy, productivity improvement and sustained growth of the entire company are realized.

5 Steps for Putting Value Chain Analysis Into Practice

We explain the specific methods and procedures for putting value chain analysis into practice in 5 steps.

By utilizing this framework, it is possible to systematically evaluate the company’s own business activities and explore the sources of competitive advantage.

Rather than conducting the analysis individually, it is effective to incorporate multiple perspectives through study sessions gathering members from related departments.

Evaluating each activity that constitutes the value chain one by one and steadily advancing from challenge extraction to formulating improvement measures is important.

By following these 5 steps, it will be possible to connect to practical strategy formulation.

Step 1: Identify the Company’s Business Activities and Diagram Them

The first step in analysis is to identify all of the company’s business activities and organize them along the value chain framework.

First, classify the business flow into primary activities (inbound logistics, operations, outbound logistics, sales and marketing, service, etc.) and support activities (HR, technology development, procurement, etc.).

Next, write out the specific work content included in each activity. At this point, using templates and visualizing in the form of diagrams or tables makes the overall structure easier to understand.

Describe each activity in clear, easy-to-understand language, and if necessary, organize the work by dividing it into more detailed layers, which improves the accuracy of subsequent analysis.

Step 2: Calculate the Costs for Each Activity

Once the identification of business activities is complete, the next step is to grasp how much cost each activity incurs.

Referring to financial statements and departmental expense data, costs such as personnel costs, raw material costs, depreciation, and advertising expenses are allocated to each of the identified activities. While it may sometimes be difficult to accurately allocate all costs, calculating figures as close to the actual situation as possible is important.

This work allows quantitative grasp of points such as which activities account for the majority of costs and which activities have low added value relative to their cost, leading to identification of challenges.

Step 3: Analyze the Strengths and Weaknesses of Each Activity

After grasping costs, the qualitative aspects of each activity — that is, “strengths” and “weaknesses” — are analyzed. This analysis is conducted through comparison with competitors and industry standards.

For example, from perspectives such as specific technological capability, brand image, customer relationships, and efficiency of business processes, areas where the company excels are evaluated as “strengths,” and areas where it is inferior or where improvement is needed are evaluated as “weaknesses.”

It is important to also take into account external factors such as changes in market environment and customer needs. Through this evaluation, the sources of the company’s value creation and the areas requiring business transformation are progressively clarified.

Step 4: Evaluate Competitive Advantage with VRIO Analysis

To evaluate whether the “strengths” identified in Step 3 lead to sustained competitive advantage, a framework called VRIO analysis is used.

VRIO analysis is a method that evaluates management resources that are strengths from four perspectives: “Value (economic value),” “Rarity (scarcity),” “Inimitability (difficulty of imitation),” and “Organization.”

When a strength is valuable to customers, is scarce, is difficult for other companies to imitate, and when an organizational structure capable of leveraging it is in place, that strength becomes a source of sustained competitive advantage.

This analysis makes it possible to identify the company’s core competencies that should truly be focused on.

Step 5: Formulate Improvement Measures Based on the Analysis Results

In the final step, the analysis results to date are integrated and specific improvement measures are formulated.

For activities identified as weaknesses and challenges causing high costs, solutions such as reviewing business processes, introducing IT systems, and utilizing outsourcing are considered.

On the other hand, for strengths evaluated as sources of sustained competitive advantage through VRIO analysis, further investment is made and strategies to make their advantage unshakeable are formulated.

Rather than finishing analysis in one round, establishing a management structure for regular review and working toward reconstruction of the value chain as necessary is indispensable for business growth.

[By Industry] Examples of Value Chain Activities and Keys to Success

While the concept of a value chain is universal, the specific activity content differs greatly depending on the characteristics of the industry.

Here, we take up three industries — manufacturing, retail, and services — and introduce activity examples of value chains for each and analysis examples toward success.

By using specific examples from the industry to which your own company belongs as a reference, the points for applying value chain analysis more practically should become visible.

Understanding the characteristics by industry and thinking about how to apply them to the company’s own business activities is important.

Manufacturing Industry: A Mechanism for Efficiently Producing High-Quality Products

The value chain in the manufacturing industry centers on a series of processes such as research and development, component procurement, manufacturing, quality control, outbound logistics, sales, and after-service.

For manufacturers, value creation depends on how efficiently high-quality products can be produced and delivered to customers.

For example, Toyota’s “kanban system” is a representative case that thoroughly eliminated waste in each process of manufacturing and logistics, realizing high productivity and quality.

In recent years, as exemplified by NEC’s application of advanced ICT and software technologies to the mobility domain, there has also been active movement to generate new added value by combining services with conventional hardware manufacturing such as automobiles.

Retail Industry: Store Operations and Product Assortment That Enhance Customer Experience Value

The value chain in retail is primarily composed of product purchasing (merchandising), inventory management at logistics centers, delivery to individual stores, store operations, marketing, and sales activities.

For retail stores such as supermarkets and apparel, product assortment that meets customer needs and providing a comfortable purchasing experience hold the key to value creation.

For example, Nitori and IKEA handle everything from product planning through manufacturing, logistics, and sales in an integrated manner, suppressing costs without going through wholesalers or trading companies and providing high value.

In addition, with the spread of EC platforms like Mercari, the conventional distribution structure is also changing, and strategies that fuse online and offline are required.

Service Industry: Unique Service Delivery Processes and Building Customer Relationships

In the service industry, which deals in intangible products, the development of the service itself, marketing, the service delivery process, and building relationships with customers form the core of the value chain.

For example, Starbucks, in addition to activities such as sourcing and roasting high-quality coffee beans, generates unique “experience” added value through sophisticated store spaces and employee customer service.

At consulting firms and insurance companies, specialized knowledge is the source of value; at medical institutions and pharmacies, appropriate information provision to patients is.

In the pharmaceutical industry in particular, a complex and long chain of value exists — from long-term research and development, rigorous manufacturing and quality control, through to medical representative (MR) activities providing information to medical institutions.

Frequently Asked Questions

What is the “VRIO analysis” that appears in the procedure?

It is a method for determining whether the company’s own strengths truly translate into sustained competitiveness. The acronym is formed from the first letters of the following four perspectives.

• Value (economic value): Is it valuable to customers?
• Rarity (scarcity): Is it something scarce that other companies do not have?
• Inimitability (difficulty of imitation): Is it difficult for other companies to imitate?
• Organization: Is there an organizational structure capable of leveraging it?

What are the key points of a value chain in the manufacturing industry?

How efficiently high-quality products can be produced is important. Recently, the movement to enhance added value by combining not just products (hardware) but also services (software) has also become increasingly important.

Summary

A value chain is an effective framework for viewing business activities as a chain of value, analyzing the company’s own strengths and weaknesses, and building competitive advantage.

This way of thinking is not limited to specific industries — it is applicable to every business, from manufacturing and service industries to primary industries such as agriculture, fisheries, and food processing, through to the energy industry. The Ministry of Economy, Trade and Industry has also pointed out its importance.

In recent years, from a sustainability perspective, effective utilization of resources such as natural gas and water, and reduction of environmental impact, are increasingly required to be considered throughout the entire value chain.

A perspective of reviewing each business process without omission and continuously optimizing the value creation process is indispensable.