A value chain consists of the full range of activities that businesses go through to bring a product or service from its conception to its delivery to the end customer. These include sourcing and procurement, production, and all associated logistics, as well as the marketing, sales and after-sales service. The value chain analysis allows companies to analyse where value is added to the final product.
Definition of a Value Chain
The term ‘value chain’ refers to the activities you undertake to develop and deliver a product or service to your customers. This diagram shows the Porter value chain image, which describes the specific activities within an organisation that together add value to the product or service they provide. Porter wrote about the value chain in his book, Competitive Advantage, in 1985. The five competitive forces activities include inbound logistics, operations, outbound logistics, sales and marketing, and service. They are supported by four competitive strategies activities, including firm infrastructure, human resource management, technology development and procurement.
How a Value Chain Operates
A value chain operates by analysing how connected activities of a business generate value for the customer. This is the first step which is about receiving and handling inputs. Operations are converting inputs received from the inbound logistics into finished goods and services. Outbound logistics storage and distribution of finished goods and services; marketing and sales are making the finished goods and services available to customers.
After-sales service is the process of taking care of customers. For example, a business making corporate gift boxes might get materials via inbound logistics, put them together and personalise them via operations, ship finished orders to customers via outbound logistics, bring in customers through sales and marketing, and support those customers afterwards through its service function.
Primary and Support Activities in the Value Chain
Primary Activities
The five primary activities are:
- Inbound logistics: The movement and storage of materials or other inputs incoming to the facility or site.
- Process: Transformation of inputs to finished goods or services.
- Outbound logistics: Storage and distribution of the completed products.
- Marketing and sales: Display of the product and assisting customers in making decisions about purchasing it.
- Service: The use or support of the offering after it has been purchased.
Support Activities
Support activities enable the primary functions to operate effectively:
- Firm infrastructure: Management, finance, legal, accounting, and quality systems.
- Workforce and employee management: On-boarding, training, performance management and career development.
- Technology development: Research, software, automation and process optimization.
- Procurement: The buying in of the materials, equipment and external services needed for the business.
Key Benefits of Value Chain Analysis
A structured analysis can help businesses:
- Spot the waste: Companies are often able to identify excess processes, inefficiencies, waste of time, effort and energy.
- Improve differentiation: A review may highlight opportunities to improve quality, innovation, customer experience or other factors which differentiate your offering.
- Control Costs: Awareness of cost drivers gives you a sense of how effectively your resources are being used.
- Strengthen supply chains: Make supply chains more resilient by identifying and understanding the suppliers, delivery network and operational dependencies.
How to Conduct a Value Chain Analysis
Businesses can approach the analysis through a few practical steps:
- Mould the activities: Identify the activities which are featured on the offer.
- Compare costs and value: Determine what the effort of each activity costs and how much value it delivers to your customers.
- Identify linkages: Determine the impact between activities. For instance, better technology may lead to shorter processing times or efficiency in operation.
- Discover opportunities: Find ways in which the business can eliminate inefficiencies, enhance differentiation or improve its performance.
- Strategy: Determine if the changes are in line with the organisation’s general competitive strategy of being either cost efficient or differentiated.
Conclusion: Why Value Chain Analysis Matters
When you understand your value chain it helps your organisation look outside of its core departments and identify how all activities can work together to create value for your customer. An organisation that consistently reviews its value chain may also find it can be more effective or make more strategic decisions.
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