Value analysis and value chain are two distinct but related concepts used in business to understand and improve how value is created and delivered.
Understanding the Value Chain
A value chain provides a comprehensive view of all the activities a company performs to bring a product or service from its initial concept to the final customer. According to the reference, "A value chain is used to describe all the business activities it takes to create a product from start to finish (eg, design, production, distribution, and so on)."
Think of it as a step-by-step process illustrating how value is added at each stage of a product's lifecycle. By analyzing this chain, businesses can identify where efficiencies can be gained or costs can be reduced. The reference notes that "A value chain analysis gives businesses a visual model of these activities, allowing them to determine where they can reduce costs."
Key Components of a Value Chain
Value chains are typically broken down into two main categories of activities:
- Primary Activities: These are the direct steps involved in creating and delivering the product or service. Examples include:
- Inbound Logistics (receiving, storing raw materials)
- Operations (transforming inputs into the final product)
- Outbound Logistics (distributing finished goods)
- Marketing & Sales (attracting and persuading customers)
- Service (post-sale support and maintenance)
- Support Activities: These activities underpin the primary activities and help them function effectively. Examples include:
- Procurement (purchasing inputs)
- Technology Development (R&D, process automation)
- Human Resource Management (recruiting, training, compensating)
- Firm Infrastructure (management, legal, finance)
By mapping these activities, companies can gain insights into cost drivers and sources of competitive advantage.
Exploring Value Analysis
Value analysis, also known as value engineering when applied during product design, is a systematic method to improve the "value" of goods, services, or processes by examining function. Value, in this context, is typically defined as the ratio of function to cost.
The core idea is to achieve the required function at the lowest possible cost without sacrificing quality, reliability, or performance. It's not simply about cutting costs but about optimizing the relationship between what something does and what it costs.
Principles and Process of Value Analysis
Value analysis teams often follow a structured process:
- Information Gathering: Understand the product, service, or process and its costs.
- Function Analysis: Identify the primary and secondary functions it performs. Ask: "What does it do?"
- Creative Speculation: Brainstorm alternative ways to perform the necessary functions.
- Evaluation: Analyze the feasibility and cost-effectiveness of the alternatives.
- Recommendation: Propose the best solution that maintains or improves function while reducing cost.
- Implementation: Put the approved changes into action.
Value analysis is often applied to existing products or processes to find cost savings or functional improvements.
Comparing Value Analysis and Value Chain
While distinct, these concepts are complementary:
| Feature | Value Chain | Value Analysis |
|---|---|---|
| Focus | Entire sequence of activities creating value | Function vs. Cost relationship of specific elements |
| Scope | Company-wide processes | Specific products, components, or processes |
| Goal | Understand cost drivers, find efficiencies, identify competitive advantage across activities | Achieve required function at minimum cost |
| Application | Strategic analysis, process mapping | Product/process improvement, cost reduction |
Value Chain Analysis helps a company understand the overall landscape of its operations and identify areas where improvements (like cost reduction) are needed. Value Analysis is a tool that can then be applied within specific activities identified in the value chain to optimize the function and cost of particular components, processes, or services.
