Value Chain

The concept of the value chain, introduced by Michael Porter in 1985, is a powerful analytical tool for businesses seeking to understand and optimize the process of value creation. Essentially, a value chain dissects a company’s activities into a series of strategically relevant actions that work together to provide value to customers. By analyzing each step – from raw material acquisition to the final product or service delivery – businesses can identify opportunities for adding value, reducing costs, and gaining competitive advantages.

At its core, the value chain is divided into two types of activities: primary and support activities. Primary activities are directly involved in creating and delivering the product or service. They include inbound logistics (receiving and warehousing of raw materials), operations (production processes), outbound logistics (storage and distribution of the finished product), marketing and sales (strategies to enhance buyer’s experience), and service (activities that maintain the product’s value, like customer support).

Support activities, on the other hand, provide the necessary background to the primary activities. These include infrastructure (company systems and structures), human resource management (employee recruitment, hiring, and training), technology development (improving product and processes), and procurement (purchasing inputs).

By examining each of these activities, companies can see where value is added in the process and where inefficiencies lie. This analysis leads to a better understanding of cost drivers and potential differentiators. For instance, a company might find that improving its inbound logistics can significantly reduce costs, or that enhancing after-sales services can increase customer loyalty and create a competitive edge.

In today’s global and digital marketplace, the value chain concept has evolved. Companies now consider not just their internal activities but also how they fit into a larger value system, which includes suppliers, distributors, and customers. Understanding this broader network is crucial for businesses aiming to optimize their value creation and capture.

In summary, the value chain is a strategic tool that helps businesses dissect their activities, understand how value is created, and identify opportunities for improvement. It’s about looking at the bigger picture of how each activity contributes to the overall success and competitiveness of the company.