Concept of Value Chain

The value chain is a concept introduced by Michael Porter that describes the full range of activities a company performs to deliver a valuable product or service to the market. It highlights how each activity contributes to creating value for customers and achieving competitive advantage. Understanding the value chain helps businesses identify key areas for improvement, cost reduction, and differentiation in order to enhance overall efficiency and profitability.

Meaning of Value Chain

A value chain is the sequence of activities undertaken by a company to design, produce, market, deliver, and support its products or services. Each step in this chain adds value, either by enhancing the product’s utility, reducing costs, or improving customer experience. By analyzing these activities, businesses can identify strengths, inefficiencies, and opportunities to create additional customer value.

Elements in Porter’s Value Chain:

Rather than looking at departments or accounting cost types, Porter’s Value Chain focuses on systems, and how inputs are changed into the outputs purchased by consumers. Using this viewpoint, Porter described a chain of activities common to all businesses, and he divided them into primary and support activities, as shown below.

1. Primary Activities

Primary activities relate directly to the physical creation, sale, maintenance and support of a product or service. They consist of the following:

• Inbound logistics– These are all the processes related to receiving, storing, and distributing inputs internally. Your supplier relationships are a key factor in creating value here.

• Operations– These are the transformation activities that change inputs into outputs that are sold to customers. Here, your operational systems create value.

• Outbound logistics– These activities deliver your product or service to your customer. These are things like collection, storage, and distribution systems, and they may be internal or external to your organization.

• Marketing and sales– These are the processes you use to persuade clients to purchase from you instead of your competitors. The benefits you offer, and how well you communicate them, are sources of value here.

• Service– These are the activities related to maintaining the value of your product or service to your customers, once it’s been purchased.

2. Support Activities

These activities support the primary functions above. In our diagram, the dotted lines show that each support, or secondary, activity can play a role in each primary activity. For example, procurement supports operations with certain activities, but it also supports marketing and sales with other activities.

• Procurement (purchasing)– This is what the organization does to get the resources it needs to operate. This includes finding vendors and negotiating best prices.

• Human resource management– This is how well a company recruits, hires, trains, motivates, rewards, and retains its workers. People are a significant source of value, so businesses can create a clear advantage with good HR practices.

• Technological development– These activities relate to managing and processing information, as well as protecting a company’s knowledge base. Minimizing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation.

• Infrastructure– These are a company’s support systems, and the functions that allow it to maintain daily operations. Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage.

Companies use these primary and support activities as “building blocks” to create a valuable product or service.

Using Porter’s Value Chain:

To identify and understand your company’s value chain, follow these steps.

Step 1 – Identify subactivities for each primary activity

For each primary activity, determine which specific subactivities create value. There are three different types of subactivities:

• Direct activitiescreate value by themselves. For example, in a book publisher’s marketing and sales activity, direct subactivities include making sales calls to bookstores, advertising, and selling online.

• Indirect activitiesallow direct activities to run smoothly. For the book publisher’s sales and marketing activity, indirect subactivities include managing the sales force and keeping customer records.

• Quality assuranceactivities ensure that direct and indirect activities meet the necessary standards. For the book publisher’s sales and marketing activity, this might include proofreading and editing advertisements.

Step 2 – Identify subactivities for each support activity

For each of the Human Resource Management, Technology Development and Procurement support activities, determine the subactivities that create value within each primary activity. For example, consider how human resource management adds value to inbound logistics, operations, outbound logistics, and so on. As in Step 1, look for direct, indirect, and quality assurance subactivities.

Then identify the various value-creating subactivities in your company’s infrastructure. These will generally be cross-functional in nature, rather than specific to each primary activity. Again, look for direct, indirect, and quality assurance activities.

Step 3 – Identify links

Find the connections between all of the value activities you’ve identified. This will take time, but the links are key to increasing competitive advantage from the value chain framework. For example, there’s a link between developing the sales force (an HR investment) and sales volumes. There’s another link between order turnaround times, and service phone calls from frustrated customers waiting for deliveries.