Value Chain Definition
A value chain is a marketing model that states what activities need to be performed (right from the scratch) for designing a product or service. In a value chain process, companies who 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.
A business firm performs a value chain analysis by determining different processes that the firm should consider in its business operations. The primary goal of value-chain analysis is to ensure smooth flow of production so that a firm can gain maximize its returns and minimize its costs.
A Little More on What is a Value Chain
As the competition in terms of product price, product quality, customer service, etc. among several companies keeps increasing day-by-day, it becomes mandatory for companies to ensure that their product is adding value to the community. This value helps in having a competitive edge over other companies. By using the value chain mechanism, a company can locate its inefficient areas, and execute strategies for making sure they offer optimum results and profits.
Besides ensuring that the production of a company is going smoothly and without any interruptions, it is crucial for the firm to use value chain method so as to instill a sense of customer loyalty towards its brand or product. The primary objective of value chain analysis is to offer the highest value for the least possible costs, and outdo its competitors..
The concept of a value chain was devised by Michael E. Porter (from Harvard Business School), and was further published in his book ‘Competitive Advantage: Creating and Sustaining Superior Performance (Free Press, 1998)’. According to Porter, it is not possible to apprehend the concept of competitive advantage merely by assessing the firm’s activities. However, it can be seen as a result of several functions performed by a firm in manufacturing, designing, promoting, marketing, distributing, delivering, and supporting the product. Maximizing value at every stage in the process of a firm is significant for being competitive.
Elements of a Value Chain
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.
Examples of Value Chains
One of the best examples of value chains will be that of Starbucks Corporation that knows the worth of the value-chain concept. One can read lots of articles regarding how Starbucks uses the value chain analysis in its business operations.
The famous Trader Joes’ grocery store is another firm that has gained recognition for its amazing value chain analysis. Though it is a private company, there are several strategies that are hard to understand for a common man. Trader Joes’ covers the five primary activities of the value chain in the following manner:
- Inbound logistics: Traders Joes’ managed the activities of receiving orders, placing them on shelves, and handling inventory during general store timings. Though it was somehow frustrating for customers, but the approach helped the firm in saving a lot on employee wages. The functions of handling logistics and shopping done by customers were performed simultaneously delivered a small yet effective message “we’re all in this together”.
Operations: A company can instill value chain in its operations in an effective manner just like Traders Joes’. The second primary activity involved in value chain is about converting raw materials into finished products, and this activity is included in the ‘operations’ category. As the supermarket sector cannot convert raw materials into finished products, they can consider using operations as some other responsibility of the grocery store. So, in case of Trader Joes’, the product development process can be considered as that operational activity.
The business firm uses its creativity when it comes to selecting products. They make sure that such products are unique in nature, and are not available anywhere else. More than 70% of its products are tagged as private-label products that have the maximum profit margins to offer. Besides sourcing products in bulk, Trader Joes’ implements its chef-partnership and taste-testing programs so as to offer premium quality and the best products to its customers.
Outbound logistics: Unlike other supermarkets, Trader Joes’ doesn’t offer home delivery service. Even then, the buyers can experience a wide array of amenities in the form of outbound logistics while shopping in the store. Trader Joes’ has strived to offer a soothing customer experience inside its stores.
The in-store tasting facility offered by Trader Joes’ tends to give it an edge over others. As the product tastings keep taking place simultaneously in store, it adds a sense of fun and excitement inside. In the tasting booths, one can taste recently launched and already existing products, and give a treat to their taste buds.
Marketing and sales: Trader Joes’ hardly followed the approach of traditional marketing. Instead, its in-store ambience is nothing less than a kind of marketing. The copywriters of the firm ensured to create product labels matching the taste of customers. The distinct branding strategy and creative culture state that the company knows what its customers want. The firm was able to do so because of identifying its target customer base, and sticking to it till date.
By using the indirect marketing approach, the firm was able to create a unique recognition for itself in the market, and therefore, maintaining its core competence.
Service: Trader Joes’ has always sought to deliver amazing customer service. In the store, one can see that for every customer, there are two employees available to serve. Irrespective of the tasks, the employees greet customers with a warm smile, are friendly, and have in-depth knowledge about any concerned areas. They ensure that customers’ doubts regarding products and services are answered right away. Also, the no-questions-asked refund program is another great thing that sets the company apart from others. So, in case, the product is not of your type, you can return it and get money back immediately.
References for “Value Chain”
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). ‘Green’value 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.