What is a value chain?
A value chain shows the different activities businesses undertake to create, market and distribute their products or services. Developed by Harvard Business School economist Michael Porter, the value chain is used worldwide as a strategic management tool, further helping anyone starting a business, including small business owners , or creating a business website, see what exactly drives costs and where, so that they may make appropriate changes. It can be a part of your business plan.
According to Porter’s value chain, there are multiple stages including researching the product, sourcing materials, manufacturing and then launching the product or service to the market. By documenting and analyzing each part of the value chain, businesses may also optimize a certain stage to maximize profits, streamline operations or minimize losses.
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How does a value chain work?
Businesses must know how each activity in the value chain works and how it relates to the other components. Porter identifies two main categories in a value chain, known as primary and secondary activities.
In a value chain, primary activities directly relate to a product or service’s creation and production. These activities include:
Inbound operations: How outside inventory is received, managed and stored. Inbound operations include handling materials from vendors, storing source material for a product or managing existing inventory.
Operations: How raw materials turn into a final product. For example, if a furniture-making company receives wood, they’d turn the raw material into a sellable table.
Outbound logistics: How a product is shipped to a customer. Outbound logistics includes sorting the products, packaging them to be shipped and their delivery.
Marketing and sales: How a product or service is promoted and sold. Marketing and sales include building brand awareness and managing other forms of pre-sale customer communication.
Service: How a company engages with customers post-sale. Service may come in the form of customer support, client follow-ups, product installation, as well as product repairs. These types of services increase customer loyalty, client satisfaction, and improve overall customer experience.
Secondary activities in a value chain support the primary activities mentioned above and may include:
Procurement and purchasing: How a business strengthens inbound operations and vendor relationships. Activities include finding cheaper sellers, acquiring new vendors who sell higher-quality raw materials or negotiating vendor contracts.
Human resources management: How a business manages its employees who affect each value chain stage. Activities include hiring, training, retaining, and developing employees.
Infrastructure: How a business manages its overhead. These activities include accounting, finances, legal and quality control.
Benefits of using a value chain
Helps increase profitability of primary activities using targeted secondary activities to eliminate waste and cut down on inefficiencies.
Gives invaluable insights through value chain analysis. Shows you where your output is most effective and where else it can be refined.