The Value Chain: Understanding Its Definition, Model, Analysis, and Examples

Last updated 03/19/2024 by

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Summary:

The concept of the value chain was introduced by Michael Porter in his book “Competitive Advantage: Creating and Sustaining Superior Performance” in 1985. It is a model that helps businesses identify how they can create the most value for customers while minimizing costs. The value chain is an essential tool for businesses looking to remain competitive in today’s global marketplace.

What is value chain?

The value chain is the set of activities that a company carries out to create value for its customers. These activities can be broken down into two categories: primary activities and support activities. Primary activities are the activities directly involved in the creation and delivery of a product or service, while support activities are those that enable the primary activities to take place.

Primary activities in the value chain include inbound logistics, operations, outbound logistics, marketing and sales, and service. Inbound logistics refer to the processes of receiving, storing, and distributing inputs. Operations refer to the processes of transforming inputs into outputs. Outbound logistics refer to the processes of storing and distributing outputs. Marketing and sales refer to the processes of promoting and selling products or services. Service refers to the processes of providing after-sales support to customers.

Support activities in the value chain include procurement, technology development, human resource management, and firm infrastructure. Procurement refers to the processes of purchasing the inputs needed for the production process. Technology development refers to the processes of improving the technology used in the production process. Human resource management refers to the processes of recruiting, training, and managing employees. Firm infrastructure refers to the processes of managing the overall organization.

Understanding how value is created in each stage of the value chain is critical for businesses to optimize their operations and reduce costs.

Model of value chain

The value chain model is a framework that helps businesses understand the activities that contribute to the creation of value. The value chain model consists of five primary activities and four support activities.

The five primary activities in the value chain model are inbound logistics, operations, outbound logistics, marketing and sales, and service. Inbound logistics refer to the processes of receiving, storing, and distributing inputs. Operations refer to the processes of transforming inputs into outputs. Outbound logistics refer to the processes of storing and distributing outputs. Marketing and sales refer to the processes of promoting and selling products or services. Service refers to the processes of providing after-sales support to customers.

The four support activities in the value chain model are procurement, technology development, human resource management, and firm infrastructure. Procurement refers to the processes of purchasing the inputs needed for the production process. Technology development refers to the processes of improving the technology used in the production process. Human resource management refers to the processes of recruiting, training, and managing employees. Firm infrastructure refers to the processes of managing the overall organization.

By breaking down a company’s activities into primary and support activities, the value chain model helps businesses understand how each activity contributes to the overall value created by the company.

Analysis of value chain

Value chain analysis is the process of identifying the activities that create the most value for the customer and the activities that generate the most cost. It is a critical tool for businesses to identify areas for improvement and competitive advantage.

There are two types of value chain analysis:

Internal Value Chain Analysis: This type of analysis focuses on the activities within a company. It involves identifying the value created by each activity and the cost incurred by each activity. This type of analysis can help businesses identify areas for improvement and cost reduction.
External Value Chain Analysis: This type of analysis focuses on the activities that occur outside of a company. It involves identifying the value created by the suppliers, distributors, and other partners in the value chain. This type of analysis can help businesses identify potential partners and opportunities for collaboration.

By analyzing the value chain, businesses can identify areas where they can reduce costs, improve efficiency, and create more value for their customers. This can lead to a competitive advantage and increased profitability.

Examples of value chain

Here are some examples of companies that have successfully used the value chain model to create value for their customers:

Walmart: Walmart’s value chain is focused on minimizing costs to provide customers with the lowest prices possible. Walmart’s primary activities include inbound logistics, operations, outbound logistics, and marketing and sales. Walmart’s support activities include procurement, technology development, human resource management, and firm infrastructure.
Apple: Apple’s value chain is focused on innovation and design. Apple’s primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service. Apple’s support activities include procurement, technology development, human resource management, and firm infrastructure.
Amazon: Amazon’s value chain is focused on providing customers with a convenient and efficient shopping experience. Amazon’s primary activities include inbound logistics, operations, outbound logistics, and marketing and sales. Amazon’s support activities include procurement, technology development, human resource management, and firm infrastructure.

Frequently asked questions

What is the purpose of the value chain?

The purpose of the value chain is to help businesses identify how they can create the most value for customers while minimizing costs.

How can businesses use the value chain model to improve their operations?

By analyzing each stage of the value chain, businesses can identify areas where they can reduce costs, improve efficiency, and create more value for their customers.

What are the primary activities in the value chain model?

The primary activities in the value chain model are inbound logistics, operations, outbound logistics, marketing and sales, and service.

What are the support activities in the value chain model?

The support activities in the value chain model are procurement, technology development, human resource management, and firm infrastructure.

Key takeaways

The value chain is the set of activities that a company carries out to create value for its customers.
The value chain model breaks down a company’s activities into primary and support activities to help businesses analyze and improve their operations.
Value chain analysis is the process of identifying the activities that create the most value for the customer and the activities that generate the most cost.
By analyzing the value chain, businesses can identify areas where they can reduce costs, improve efficiency, and create more value for their customers.
Examples of companies that have successfully used the value chain model include Walmart, Apple, and Amazon.

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