Value Chain Analysis: Cutting Costs or Increasing Value Perception?
Conducting a value chain analysis is one of the most powerful processes a business can undertake. You can evaluate primary and secondary business functions and identify ways to improve efficiency, increase value and stand out from the crowd.
According to Michael Porter, companies can increase their profits by using value chain analysis in two different ways:
- Cost leadership: Cutting production costs and streamlining processes to increase profitability
- Competitive differentiation: Increasing perceived value by offering a unique or highly valued service
Regardless of how you choose to use value chain analysis, the logic behind each method remains the same: the more value a company creates, the more profit it can make.
If you choose cost advantage, you need to find a way to optimize and cut the cost of primary and support activities in your value chain. You might choose to outsource talent, replace certain human activities with automation or look for cheaper delivery services.
If you choose competitive differentiation, you must capitalize on increasing the value perception of those products that your customers are most willing to pay for.
For example, when Steve Jobs began building Macs in the 80s in his garage, he wasn't doing it for customers—it was for himself.
Just over a decade later, Jobs famously quipped: “People don’t know what they want until you show it to them.”
How has your business benefited from using Value Chain Analysis?