Value Chains Explained

A value chain is the collection of steps a company takes to convert products from concepts
to market-ready solutions. The company’s goal is to find processes that set it apart from
competitors. The company implements these processes to build value and sell its solutions
and services for a profit. Each step of the value chain is supposed to build more value for the
company than it costs to perform. That gap is where profit is found.

Every company has a value chain. Only some have taken the time to actually study these
chains, however. The purpose of studying a value chain is to help a company make money
by identifying strengths and weaknesses in its current business models. As a result, it can
become more efficient by reducing unnecessary costs and producing more value.
Essentially, studying your value chain can help make your company more profitable by
increasing income and reducing expenses.

Components of a Value Chain

While every company’s individual value chain will look different, they all can be broken
down into primary and secondary activities. Each step of an individual value chain falls
under one or more of these activities. Understanding how these activities are linked can
help you examine your company’s actual sources of value.

Primary Activities

Value chains have five primary activities. These are the main activities that capture value —
without them, a company can’t actually make a profit. These five activities are:

1. Inbound logistics: This is the management and acquisition of a company’s raw

materials, including supplier relationship management.
2. Operations: This is the process of converting raw materials into a completed product
or service.
3. Outbound logistics: This is the distribution of a product or service to customers, such
as shipping physical products or providing services at a physical location.
4. Marketing and sales: This includes targeting customers to build demand and make
sales through value selling.
5. Service: This encompasses things that generally enhance the consumer experience,
such as offering repairs, refunds, and customer service.

These five activities as a whole are intended to create value for the company that’s greater
than the cost of performing them. As a result, they lead to profit for the business. For
example, operations convert raw materials into the products customers want to buy, raising
their value. Meanwhile, marketing and sales can convince more customers to buy products
at higher price points, increasing the value of each sale.

Secondary Activities

After the primary activities, companies consider secondary activities in their value chain.
These four activities include:
 1. Procurement: This is the acquisition of resources for the business, including
negotiating with vendors. It’s deeply connected to inbound logistics.
2. Human resources: This includes hiring and developing employees to fulfill business
needs. Human resource management underpins all other activities.
3. Infrastructure: Infrastructure includes all the systems and structures the company
needs to function, from physical property to accounting and legal operations.
4. Technological development: This includes the design and development of
techniques, processes, and tools to improve the business. It’s heavily connected to
all the primary activities for companies that are working to improve.

These four activities are intended to support the primary activities of a company. They don’t
generate value on their own, but they multiply the value companies receive from primary
activities.

For instance, excellent procurement can decrease the cost of operations. Similarly,
infrastructure can improve inbound and outbound logistics, leading to a higher profit margin
overall.

Benefits of Value Chains

Value chains already exist — you don’t need to implement a value chain because it’s already
present. However, you can manage and study your value chain. Take control and see many
different benefits, including:

 Improved product planning and development: Provide a clear view of your

company’s competitive advantages.
 More effective guided proposals: Provide information about your actual costs.
  Standardized processes: Use the most efficient methods to streamline systems and
operations.
 Reduced costs across the value chain: Identify unnecessary expenses.
 Improved profitability: Capture more value at each step.

Examples of Value Chains

Every company has a value chain in place. How these chains break down depends on the
kind of goods or services a company provides. Here are two examples of standard value
chains.

Car Manufacturer Value Chain Example

A car manufacturer’s mission is to build and sell as many cars as possible. Any manufacturer
is primarily a goods-based business, so most manufacturing value chains will look like this:

1. Inbound logistics: Acquiring and storing parts to make cars.

2. Operations: Putting cars together.
3. Outbound logistics: Shipping cars to dealerships and storing unsold cars.
4. Marketing and sales: Running ads, sales, and performing product placement to
boost the brand’s reputation.
5. Services: Offering warranties, repairs, and support to customers who have bought
cars.

Lawn Care Service Value Chain Example

A lawn care service is an entirely service-based business. That means that the operations
and outbound logistics elements look a little different from product-based companies.

1. Inbound logistics: Acquiring and storing lawn chemicals and equipment to perform
lawn care services.
2. Operations: Caring for people’s lawns.
3. Outbound logistics: Transporting lawncare tools to and from customer homes and
employing experienced lawn care professionals.
4. Marketing and sales: Marketing services to local customers, such as by offering
discounts for referrals.
5. Services: Offering free consultations, extra services for loyal customers, and doing
top-quality work in general.

Value Chain Analysis

Value chain analysis is the process of studying your company’s value chain to find its
strongest competitive advantages. When you know what links in your value chain generate
the most (and least) value, you know where to focus your attention. You can protect high-
value elements from change while working to improve the value you receive from struggling
links.
A complete value chain analysis needs to take into account every element of your
company’s chain. It takes time and research, but it pays dividends. Here’s how to properly
analyze your own company’s value chain.

Value Chain Analysis Steps

There are three steps involved in value chain analysis. You can apply these steps to any kind
of business.

1. Determine Your Primary and Support Activities

While the examples above demonstrate general value chain activities, you should go into
depth. You can break down every action your company performs and determine whether
it’s a primary or secondary activity. Remember, primary activities directly create value, while
secondary activities increase the value of primary activities.

2. Analyze the Value and Cost of Each Activity

Analyzing cost is straightforward, though it takes time. You’ll need to determine the cost of:

 Materials involved in each step (i.e., the purchase of raw materials, the price of
running ads, the cost of shipping)
 Labor required to achieve each step (i.e., the staff and payroll required to accomplish
each activity)
 Incidental expenses generated by each step (i.e., sales fees, electrical bills for the
marketing office, tariffs, or fulfilling warranties)

The goal is to determine the total cost of each activity. Don’t leave out any money spent by
your company.

Next, analyze each activity to see what value it provides to consumers and your business.
This can be obvious, like the conversion of raw wood into a dining table. It can also be more
abstract, like providing better customer service or safer shipping.

3. Identify Chances to Improve a Competitive Advantage.

Finally, look for ways to grab a competitive advantage. Are there unnecessarily high costs?
Look for ways to lower them, like switching vendors to a nearer or less expensive
alternative. Is there a way to add additional value to your product? Research ways to do so
without significantly increasing costs.

Once you’ve performed this analysis, you can start making changes. You’ll likely find places
where you can make minor adjustments and either dramatically cut costs or improve value.
Make those changes first, then go through the rest of your list. These refinements may take
some time, but you’ll be improving your company’s results the entire time.