Value Chain

Updated on March 21, 2024
Article byKhalid Ahmed
Edited byKhalid Ahmed
Reviewed byDheeraj Vaidya, CFA, FRM

Value Chain Meaning

Value chain (VC) refers to the sequence of activities and processes a business undertakes to add value to its product or service at every stage from its inception to delivery. It helps to understand and improve business activities that create value. This, in turn, increases the value of the final product for the customers and brings in profit to the business.

Value Chain

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American academic Michael porter set forth the concept of the value chain. Many businesses study their value chain activities to create a competitive edge in the market. Value Chain analysis enables companies to evaluate their primary and support functions to improve business efficiency. It also helps them provide the best experience and value to their customer. Businesses use Value Chain analysis at the firm-level, industry-level, or global level.

Key Takeaways

  • Value chain refers to activities involved in adding value to the product at each stage of its processing, from inception to distribution and beyond.
  • Value Chain analysis helps companies to invest in useful activities and eliminate wasteful activities.
  • It helps businesses create greater value at a lower cost, thereby enhancing their competitive advantage and profit margins.
  • Value Chain consists of two major categories of activities—primary and supporting. The latter includes activities that improve the efficiency of the former.
  • Types of Value Chain are firm-level, industry-level, and global value chains.

Value Chain in Business Explained

A value chain is a series of activities a company performs to create value for its customers. It helps the company turn its raw materialsRaw MaterialsRaw materials refer to unfinished substances or unrefined natural resources used to manufacture finished goods.read more into a valuable finished product. The company adds value at every step—product conception, raw material procurement, manufacturing, packaging, marketing, and delivery. As a result, the value of the final product is greater than the cost of creating it.

This difference between the value produced and the cost of producing that value is referred to as profit marginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more. The higher the value, the greater the profit margin for the business. Also, a valuable product offers more utility to customers and is more desirable. This gives a competitive advantage to the company offering the product.

Thus, VC analysis aids in understanding activities that create more value. As a result, businesses invest more in such activities and do away with unnecessary ones to gain a competitive advantage and increase their profit margin.

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Elements of Value Chain

Michael Porter’s value chain concept appeared in his book The Competitive Advantage: Creating and Sustaining Superior Performance. The book explains the company’s methods of creating or adding value to its products. It also illustrates various critical elements required to develop its competitive strategy.

The VC model or framework consists of five main activities directly related to creating a valuable product:

#1 – Inbound logistic operations

It includes all activities related to the transportation, receipt, storage, and monitoring of raw materials and parts.

#2 – Operations

These are the actions undertaken to convert the input or raw materials and components into finished goods.

#3 – Outbound logistics

It consists of activities associated with packaging, loading, transportation or shipping, sorting, and distribution of the final products to customers.

#4 – Marketing and sales

It involves all actions linked to the finished goods’ pricing, promotion, and brand awarenessBrand AwarenessBrand Awareness is a measure of consumer’s brand recall and brand recognition.read more like advertising in print, electronic and social media platforms.

#5 – After sale services

These actions, like quality checking, maintenance, and customer service, come into play once the goods or services have been sold to the customer.

Sub-Activities to Improve Efficiency

Furthermore, VC also includes four sub-activities that improve their efficiency. They are also an integral part of the VC.

#1 – Procurement

All the activities of obtaining the raw material, machinery, components, and services come under it.

#2 – Human resources management

It includes hiring the workforce via recruitment, induction, and training. Also, it consists of activities related to retaining and managing the staff.

#3 – Technological innovation

It consists of activities connected to market research, design and innovation, research and developmentResearch And DevelopmentResearch and Development is an actual pre-planned investigation to gain new scientific or technical knowledge that can be converted into a scheme or formulation for manufacturing/supply/trading, resulting in a business advantage.read more, and process development of products.

#4 – Business infrastructure

It includes the firm’s management and leadership along with the planning and accounts department.

Types of Value Chain  

VC activities can be restricted to a company or industry or may be distributed over several locations globally. Based on that, there are three types of VCs.

#1 – Firm-level value chain

Under this type of VC, the focus is on business units. It includes all the business activities a firm undertakes to enhance the value of its product and improve its competitive advantageCompetitive AdvantageCompetitive advantage refers to an advantage availed by a company that has remained successful in outdoing its competitors belonging to the same industry by designing and implementing effective strategies that allow the same in offering quality goods or services, quoting reasonable prices to its customers, maximizing the wealth of its stakeholders and so on and as a result of which the company can make more profits, build a positive brand reputation, make more sales, maximize return on assets, etc.read more and thereby its profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more.

#2 – Industry-level value chain

It includes a broad range of activities involved in various stages of a product’s production, from procurement to final delivery. Industry-level value chain analysis helps to assess possibilities of potential mergers and acquisitions and entry into a new market.

#3 – Global value chain

Under this category of VC, the businesses operating on a global platform carry out activities connected to designing, developing, assembling or marketing at different locations around the globe. The most suitable example of this is Apple Inc., which manufactures iPhones in East and Southeast Asia due to the cheap and abundant supply of labor.

Examples

To comprehend the concept of VC better, let’s go through the value chain examples below.

Example #1

A simple example of the VC would be the products sold at the local grocery shop. Suppose a company DEF Inc. produces potato chips. It procures raw materials like potato, onion, artificial flavor, baking powder, and ginger-garlic paste from the respective suppliers.

It then adds value to the product manufacturing at every stage to produce a tasty and healthy potato snack. After the chain of activities related to adding value is completed, the end product is packed well. The value of the potato chips packet will be more than its raw materials.

The chips are then delivered to numerous groceries and retailers at high prices and in attractive packages. Thus, the final value-added chips pack has given good profits to the company. In addition, it has given the value of high-quality and hygienic products to the customers.

It was made possible by using innovative technology to oversee the entire production process, from cutting potatoes to packing potato chips. Hence the VC gave good profits and value to the company and its brand.

Examples #2

The most famous coffee retailer Starbucks has an impeccable VC, which benefits the company, investors, customers, and coffee growers alike. Its VC consists of various activities that add value to its coffee. The primary activities in its VC are:

  • Inbound logistics: Starbucks has invested millions of dollars on the import of carefully bred and selected coffee beans from all over the world.
  • Operations: Its proprietary roasting and packaging add value, making its coffee unique and delicious. As a result, it offers the company a competitive advantage.
  • Outbound logistics: The roasted beans are sent to distribution centers. Starbucks operate some distribution centers and also use the services of other logistics companies for the same.  
  • Marketing and Sales: Starbucks uses minimal marketing and relies on word-of-mouth publicity and its unique style of delivery of coffee and highest quality of services to promote its coffee products.
  • Services to customers: It uses its in-store customer service to interact with customers, understand their needs, address their concerns, and give them their best services.

Besides these primary activities, Starbucks undertakes support activities that give its coffee an edge over its competitors. For example, it independently handles all procurement of its beans, uses technology to develop relationships with its customers, provides benefits to its employees, and maintains excellent stores globally. 

Thus, Starbucks’ continuous value addition to its product at every stage has earned it the name, fame, profit, and loyal customers, investors, and suppliers.

Frequently Asked Questions (FAQs)

What are value chain activities?

Value Chain activities are primary activities and secondary activities that add value to the product at every stage.

What is a value chain example?

Tesla, which utilizes the concept of Value Chain for producing cars, has become the most valued electric car company globally. This is because it adds value to its product at every stage of product development till the delivery of the vehicle to customers. As a result, it has boosted its profit, held the investors glued to the company, and made customers and suppliers happy.

What is value chain analysis?

It is a method of assessing each activity in every stage of the Value Chain to know the strength and the shortfall of the entire process. It helps in the reduction of cost and increases the uniqueness of the product from that of the competitors.

How to do value chain analysis?

To perform the Value Chain analysis, do the following:

• First of all, understand the primary and the secondary activities of the product.
• Then, calculate the input cost for adding the value to the product at each stage of the Value Chain.
• After that, assess the utility of VC in providing better opportunities, innovative products, and successful product differentiation.
• Finally, focus on the competitive advantage.

This article has been a guide to Value Chain & its Meaning. Here we explain Porter’s value chain analysis in business along with its elements, activities, & examples. You can learn more about accounting from the following articles –

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