What is value chain?

A value chain is a concept describing the full chain of a business’s activities in the creation of a product
or service – from the initial reception of materials all the way through its delivery to market, and
everything in between.

The value chain framework consist of five primary activities – inbound operations, outbound logistics,
marketing and sales, service – and four secondary activities- procurement and purchasing, human
resource management, technological development and company infrastructure.

M. Porter introduced the generic value chain model in 1985.

1.1 graph of Porter’s value chain

The value chain provides a useful tool for managers to examine systematically where value may be
added to their organizations. This tool is useful in that it examines key elements in the production of a
good or service, as well as areas in which value may be added in support of those primary activities.

How do value chains work?

The value chain framework helps organizations identify and group their own business functions into
primary and secondary activities. Analyzing these value chain activities, subactivities and the
relationships between them helps organizations understand them as a system of interrelated functions.
Then, organizations can individually analyze each to assess whether the output of each activity or
subactivity can be improved – relative to the cost, time and effort they require.

When an organization applies the value chain concept to its own activities, it is called a value chain
analysis. Value chain analysis (VCA) is a process where a firm identifies its primary and support activities
that add value to its final product and then analyze these activities to reduce costs or increase
differentiation.

The primary activities of the value chain

Primary activities consist of five components, and all are essential for adding value and creating
competitive advantage:
 1. Inbound Logistics – include functions like receiving, warehousing, and managing inventory.
2. Operations – include procedure for converting raw materials into a finished product.
3. Outbound Logistics – include activities to distribute a final product to a consumer.
4. Marketing and Sales – include strategies to enhance visibility and target appropriate customers
– such as advertising, promotion, and pricing.
5. Service – includes programs to maintain products and enhance the consumer experience – like
costumer service, maintenance, repair, refund, and exchange.

Support Activities

The role of support activities is to help make the primary activities more efficient. When you increase
the efficiency of any of the four support activities, it benefits at least one of the five primary activities.
These support activities are generally denoted as overhead costs on a company’s income statement:

1. Procurement – concerns how a company obtains raw materials.

2. Technological development – is used at a firm’s research and development (R&d0 stage – like
designing and developing manufacturing techniques and automating processes.
3. Human Resource (HR) management – involves hiring and retaining employees who will fulfill the
firm’s strategy and help design, market, and sell the product.
4. Infrastructure – includes company systems and the composition of its management team – such
as planning, accounting, finance, and quality control.

1.2 Graph of primary activities and its support activities