What is VCA?
Value chain analysis (VCA) provides insights into the “value chain” of an enterprise to ascertain how much and at which stage value is added to its goods and/or services.
According to the traditional Porter’s VCA model, VCA helps to identify the companies’ primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation. The illustration below demonstrates primary and secondary activities:
In order to obtain the cost advantage, the steps to follow Porter’s value chain analysis would include the following:
- Step 1. Identify the firm’s primary and support activities.
- Step 2. Establish the relative importance of each activity in the total cost of the product.
- Step 3. Identify cost drivers for each activity.
- Step 4. Identify links between activities.
- Step 5. Identify opportunities for reducing costs.
In order to obtain differentiation advantage, the steps would include the following:
- Step 6.Identify the customers’ value-creating activities
- Step 7. Evaluate the differentiation strategies for improving customer value.
- Step 8. Identify the best sustainable differentiation.
However, in today’s modern enterprises, the traditional approach to value chain analysis is not always relevant. This is due to the fact, that today’s modern businesses are based more heavily on the intangible assets. For example, Uber, a company that provides e-commerce services for car hire, owns barely any tangible assets. The company is based in few locations with employees and generates profits by providing online services. In such cases, human capital becomes extraordinarily valuable together with other intangible assets such as applications, online platforms, customer data etc. Therefore, the way to approach such organizations would rather include newer models of Value Chain Analysis. Below, we provide an illustration of the Business Model Canvas focused on Intangible assets. If you would like to know more about how these models are applied, see “How to Apply VCA” page.