Reviewed by Aug 27, 2020| Updated on
What is a Value Chain?
A value chain is a business concept defining the broad spectrum of actions necessary to produce a product or service. In businesses that manufacture products, a supply chain involves the steps that include taking a product from creation to delivery, and everything in between—such as sourcing of raw materials, production processes, and marketing activities.
An organisation performs an overview of the value-chain by evaluating the specific processes involved in each phase of its operation. The aim of a value-chain analysis is to maximise the efficiency of production so that a business can produce maximum value at the least possible cost.
Understanding the Value Chain
Because of ever-increasing competition for unbeatable prices, exceptional goods and consumer loyalty, companies need to constantly analyse the value they generate to maintain their competitive edge. A value chain will help a company identify inefficient areas of its company, then adopt strategies that will optimise its processes for optimal productivity and profitability.
Besides ensuring that production processes are smooth and effective, companies need to keep consumers feeling confident and safe enough to remain loyal. Analysis of the value chains will also assist with this.
Components of a Value Chain
Porter divides the operations of a company into two divisions in his definition of a value chain: "primary" and "support," whose sample operations are listed below. Activities unique to each group can differ by industry.
The primary activities are composed of five elements, all of which are necessary to add value and to establish competitive advantage:
- Inbound logistics: It includes activities like receiving, warehousing, and managing inventory.
- Operations: The process of converting raw materials into finished products.
- Outbound logistics: Procedures to distribute a final product to a customer.
- Marketing and sales: Visibility enhancement techniques and targeting specific customers, such as advertisement, promotion, and quality.
- Service: Brand management services and user experience improvements, such as customer care, repairs, repair, refund, and swap.
Support activities have the function of helping to make the primary activities more successful. If you increase the efficacy of each of the four support activities, at least one of the five primary activities profits. Such service operations are commonly referred to as payroll expenses on a company's statement of profits.