Value Chain - Definition
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What is the Value Chain?
A value chain is a model that states what activities need to be performed to deliver the value proposition to a customer, client, or end user.
The value chain of companies that manufacture goods follow several steps including:
- formulating the concept of a product,
- arranging inventory or raw materials,
- production process,
- promotional activities, and
- the final distribution of product.
Elements of a Value Chain
Michael Porter divides the operations of a business into two groups: primary and support. There will be variations in particular activities depending on the nature of the industry. There are 5 elements involved in primary activities, and each one of them contributes significantly to the value adding process:
- Inbound logistics that covers functions such as receiving, warehousing, and storing inventory.
- Operations that convert raw materials into final goods.
- Outbound logistics that enable distribution of final product to customers.
- Marketing and sales for promoting the product, and making target customers aware of its features, attributes, etc. through advertising.
- Services that ensure product quality and maximize customer satisfaction through customer service, product maintenance, repairs, refunds, etc.
Support activities main aim is to enhance the efficiency of primary activities. If there is an increase in the efficiency of any of the given support activities, it will lead to offering benefits to at least one primary activity indeed. A company records these support activities as overhead costs on its income statement, and the four support activities are:
- Procurement: The way a firm procures raw materials.
- Technological development: Used by a firm during its research and development process.
- Human resources management: It aims to recruit new employees in order to create, design, and sell the product to final customers.
- Infrastructure: It involves how the company operates, and includes areas such as planning, finance, accounting, and quality control.
Key points to remember
- Value chain makes a business more efficient, and helps it in adding maximum value at least costs possible.
- The ultimate objective of a value chain is to achieve core competence.
- Value-chain theory consists of 5 primary activities and 4 support activities of a company.
Academic research for Value Chain
- From value chain to value constellation: Designing interactive strategy., Normann, R., & Ramirez, R. (1993). From value chain to value constellation: Designing interactive strategy. Harvard business review, 71(4), 65-77. [PDF] Exploiting the virtual value chain, Rayport, J. F., & Sviokla, J. J. (1995). Exploiting the virtual value chain. Harvard business review, 73(6), 75. [PDF]
- The innovation value chain, Hansen, M. T., & Birkinshaw, J. (2007). The innovation value chain. Harvard business review, 85(6), 121.
- Knowledge value chain, Chyi Lee, C., & Yang, J. (2000). Knowledge value chain. Journal of management development, 19(9), 783-794.
- Globalisation and unequalisation: what can be learned from value chain analysis?, Kaplinsky, R. (2000). Globalisation and unequalisation: what can be learned from value chain analysis?. Journal of development studies, 37(2), 117-146.
- From value chain to value network:: Insights for mobile operators, Peppard, J., & Rylander, A. (2006). From value chain to value network:: Insights for mobile operators. European management journal, 24(2-3), 128-141.
- Modelling the innovation value chain, Roper, S., Du, J., & Love, J. H. (2008). Modelling the innovation value chain. Research policy, 37(6-7), 961-977.
- The mobile commerce value chain: analysis and future developments, Barnes, S. J. (2002). The mobile commerce value chain: analysis and future developments. International journal of information management, 22(2), 91-108.
- 'Green'value chain practices in the furniture industry, Handfield, R. B., Walton, S. V., Seegers, L. K., & Melnyk, S. A. (1997). Greenvalue chain practices in the furniture industry. Journal of Operations Management, 15(4), 293-315.
- Spreading the gains from globalization: what can be learned from value-chain analysis?, Kaplinsky, R. (2004). Spreading the gains from globalization: what can be learned from value-chain analysis?. Problems of economic transition, 47(2), 74-115.