What is value chain in business?
In today’s global economy, businesses face intense competition and rapidly changing market trends.
So, companies constantly seek new ways to create and deliver value to their customers to stay ahead in the changing environment.
One approach that has gained significant attention in recent years is the value chain concept.
The value chain helps companies identify the main activities that create value for their customers.
In this article, you will discover what the value chain is, how it works, and how you can use it to gain an advantage in your industry.
Understanding Value Chain in Business – What Is Value Chain in Business
A value chain is a concept that explains how businesses create value for their customers.
It is a series of activities that a company performs to deliver a product or service to the market.
In other words, it’s a step-by-step process that businesses use to turn inputs into valuable outputs that customers are willing to pay for.
So, the value chain concept is based on the idea that each activity in the chain adds value to the final product.
Hence, companies can create a more efficient and effective process for delivering customer value by optimizing each stage.
The value chain is often used as a strategic tool.
It enables businesses to better understand the activities and costs of creating a product or service.
So, they can gain a competitive edge when they focus on value creation and continually refine their processes over time.
Furthermore, the value chain includes all the activities involved in creating, producing, and delivering customer products and services.
These activities can be divided into two main categories: primary activities and support activities.
Primary Activities
Primary activities are the core activities in creating, producing, and delivering goods and services to customers.
These activities add value to the product or service and are directly related to the company’s revenue generation.
Five primary activities make up the value chain, and they are:
Inbound Logistics
The first primary activity is inbound logistics.
It is mostly about receiving, storing, and distributing raw materials and other inputs required for production.
So, inbound logistics includes transportation and inventory management.
Efficient inbound logistics can help companies reduce costs and waste and optimize the flow of inputs through the production process.
Operations – What Is Value Chain in Business
Operations are the second primary activity.
This includes all the activities involved in producing goods or services, such as manufacturing etc
So, this activity is where the inputs (raw materials, labour, etc.) are transformed into the final product or service that will be sold to customers.
Efficient operations can help companies improve quality, reduce costs, and increase production capacity.
Outbound Logistics
Outbound logistics is the third primary activity.
It includes storing, transporting, and distributing finished products or services to customers.
So, the activities performed here are transportation, warehousing, and order fulfilment.
Companies can make use of efficient outbound logistics to improve customer service, reduce delivery time, and maximize the flow of finished products to customers.
Marketing and Sales – What Is Value Chain in Business
Marketing and sales are the fourth primary activity.
It involves promoting, selling, and distributing products or services to customers.
In other words, advertising, sales promotions, and market research will be done in this activity.
Companies can use effective marketing and sales to build brand awareness, attract new customers, and increase sales.
Service
Service is the fifth primary activity.
It involves all the activities that provide customer support and maintenance services after selling a product or service.
Some examples of those activities include technical support, warranty, and customer service.
Companies can use effective service to improve customer satisfaction, build brand loyalty, and increase repeat sales.
Support Activities – What Is Value Chain in Business
Support activities are those activities that are not directly involved in the creation or delivery of a company’s product or service.
However, they are necessary to support and enable the primary activities.
So, these support activities are essential for a company to operate efficiently and effectively and to create value for its customers.
Support activities can be broken down into four main categories:
Procurement
Procurement is obtaining the goods and services a company needs to operate.
It involves identifying the required resources, finding potential suppliers, selecting the best supplier, and others.
Effective procurements can help a company to obtain high-quality materials and services at the best possible price.
As a result, it can reduce costs and improve profitability.
Additionally, a company can use procurement to secure a reliable supply chain, which is essential for meeting customer demand.
Human Resources – What Is Value Chain in Business
HR is responsible for managing the workforce of an organization, including recruitment, training, performance management, and employee relations.
So, it is considered a support activity because it doesn’t generate direct revenue for the business.
Unlike sales, marketing, or production, HR isn’t involved in creating products or generating revenue through sales.
However, without a strong HR function, a business may struggle to attract and retain top talent and manage employee performance.
Additionally, they will struggle to create a positive workplace culture.
In other words, HR plays a vital role in ensuring that a business has the right people in the right position.
So, these people are motivated, productive, and engaged in their work.
This, in turn, can significantly impact the business’s success as a whole.
Technology Development
Technology development involves creating and implementing new technologies to improve business processes and increase efficiency.
Although it may not directly generate revenue for a business, it can greatly impact a company’s bottom line.
So, businesses implement new technologies to streamline their operations, reduce costs, and improve the quality of their products or services.
For example, a company may develop a new software program that automates certain tasks.
As a result, it will give employees more time to focus on high-value work.
Infrastructure – What Is Value Chain in Business
Infrastructure refers to the physical facilities and systems a business relies on to operate, such as buildings, equipment, and utilities.
Hence, it can involve various activities, such as building and marinating office buildings, manufacturing facilities, warehouses, and distribution centres.
Infrastructure can also be utilities such as electricity, water, telecommunications, and transportation systems like roads and railways.
So, it may not directly generate revenue for the business like other support activities.
However, it is critical in enabling other parts of the business to operate effectively.
For example, without a reliable and efficient transportation system, a business may struggle to move goods and materials to and from its facilities.
As a result, it could significantly impact the business’s ability to produce and sell products and, ultimately, its revenue.
General Administration
General administration refers to the activities involved in managing an organization or business.
So, it can be seen as a support activity because it supports the overall functioning of an organization.
For example, managing finances is crucial for keeping the organization afloat, but it is not directly related to its core activities.
Similarly, maintaining an accurate record is important for compliance and legal purposes, but it doesn’t directly generate revenue.
Significance of Value Chain in Business – What Is Value Chain in Business
The value chain is a framework that helps a business understand the various activities in creating a product or service.
So, this is how they add value to the customer.
Hence, the significance of the value chain lies in its ability to help businesses identify areas where they can improve their operations.
And then create a competitive advantage.
For example, a company that manufactures and sells bicycles may analyze its value chain and discover that it can reduce costs.
So, they source materials from a different supplier or streamline their manufacturing process.
Additionally, the value chain can help businesses differentiate themselves from competitors.
They can identify areas where they can offer unique value to customers.
For example, a company that offers personalized customer service can charge a higher price for its products than its competitors.
Overall, the value chain is an important tool for businesses to optimize their operations and create customer value.
Ultimately, it can lead to increased profitability and market share.
Strategies for Managing the Value Chain in Business – What Is Value Chain in Business
Effective value chain management can help a company gain a competitive advantage.
The following are some strategies for managing the value chain:
Cost Leadership.
This strategy focuses on reducing costs at each value chain stage, from sourcing raw materials to delivering the finished product.
So, the goal is to offer products or services at lower prices than competitors.
As a result, it can help a company gain a competitive advantage in price-sensitive markets.
For example, you own a fast-food restaurant and want to implement a cost leadership strategy.
So, you might look for ways to reduce costs in the early stage of the value chain:
- Inbound logistics: you might negotiate lower prices with suppliers for raw materials like meat, bread, and vegetables.
- Operations: you might streamline the cooking process to reduce labour costs and improve efficiency
- Marketing and sales: you might use cost-effective marketing channels like social media and email to reach customers
- Service: You should invest in training your staff to provide excellent customer service.
This can help in retaining customers and positive word-of-mouth referrals.
You will attract price-sensitive customers when you can offer your products at a lower price while maintaining quality than competitors.
As a result, you can gain a competitive advantage in the market.
Differentiation – What Is Value Chain in Business
Further, differentiation is a strategy that focuses on creating a unique and valuable product or service that stands out from competitors.
So, the goal is to offer something customers perceive as different or better than what’s available elsewhere.
For example, you own a coffee shop and want to implement a differentiation strategy.
Hence, you might look for ways to create a unique and valuable experience for your customers:
- Inbound logistics: you might source high-quality coffee beans from a specific region known for its unique flavour profile
- Operations: you might train your baristas to create unique latte art designs that are visually appealing and Instagram-worthy
- Outbound logistics: you might offer online ordering and delivery services to make it more convenient for customer to get their coffee fix
- Marketing and Sales: you might use social media to showcase your unique offerings and build a loyal following
- Service: you might offer free samples of new and interesting coffee blends to get customers excited about trying something new
Creating a unique and valuable experience for your customers can differentiate your coffee shop from the competitor.
This can also attract a loyal following.
Outsourcing
Outsourcing is a strategy that involves giving certain activities in the value chain to an external party.
So, the goal is to use the expertise of outside specialists to improve quality, reduce costs, and increase flexibility.
For example, you own a software development company and want to use an outsourcing strategy.
You might look for ways to delegate certain activities to third-party providers:
- Inbound logistics: Outsource the procurement of hardware and software components to a specialized vendor.
- Operations: You may outsource product testing and quality assurance to a third-party provider with specialized expertise.
- Marketing and sales: You may outsource marketing activities to a specialized agency with expertise in digital marketing.
- Service: You may outsource customer support activities to a specialized call centre with multilingual support.
Outsourcing can enable you to focus on your core value and create a more efficient and effective organization.
However, you need to evaluate outsourcing costs and benefits carefully.
Additionally, you should select the right vendor with the right skills.
This is to ensure that the quality of the product or service is not messed up.
Vertical Integration – What Is Value Chain in Business
Next, there is vertical integration.
Vertical integration is a strategy that controls multiple stages in the value chain.
So, the goal is to gain more control over the production process and to capture a larger share of the value created by the product or service.
For example, you own a furniture company and want to use a vertical integration strategy.
You might look for ways to control more stages of the value chain:
- Inbound logistics: you might acquire a forest or timberland to ensure a steady supply of raw materials like wood.
- Operations: you may own sawmills and manufacturing to control the production process and improve efficiency.
- Outbound logistics: you may own a fleet of trucks to transport finished products to retailers or customers.
- Marketing and sales: you may own retail stores to sell your products directly to consumers and to build brand awareness
- Service: you may offer in-house customer service and repair services to enhance the customer experience.
So, you can create a more seamless experience for your customers by controlling more stages of the value chain.
However, you need to carefully check the costs and benefits of vertical integration.
Additionally, you need to ensure that you have the resources and expertise to manage each stage of the value chain.
Furthermore, vertical integration can also lead to potential conflicts of interest.
Therefore, you need to weigh these factors as well.
Collaboration
Collaboration is working closely with other organizations or individuals to achieve common goals or objectives.
Managing the value chain means collaborating with suppliers and other partners.
This is to create a more effective process for creating and delivering products or services.
One of the main benefits of collaboration in the value chain is that it can help to streamline the entire process.
Additionally, collaboration in the value chain can help improve communication and build stronger relationships between organizations.
This can be particularly important in industries where different players in the value chain greatly depend on each other.
So, by working together, organizations can build trust and understanding.
As a result, it can lead to more effective problem-solving.
How to Analyze Stages for Their Value Creation Potential – What Is Value Chain in Business
To create value in your business value chain, you would need to analyze each stage of activities involved.
This an approach that understands how each stage adds value to creating and delivering a product or service.
Here are some steps that can help in this process:
Identify the Different Stages of Activity
First, you will start by identifying the stages involved in creating and delivering the product or service.
This may include product design, development, sales, and customer support.
Break Down Each Stage into its Component Activities – What Is Value Chain in Business
Within each stage, identify the specific activities that take place.
For example, within product design and development, activities may include market research, concept development, and testing.
Determine the Value-Creation Potential of Each Activity
For each activity, consider how it adds value to the final product or service.
Ask questions like:
- Does this activity enhance the quality of the product or service?
- Is it improving efficiency or reducing cost?
- Does it improve the customer experience?
Assess the Cost of Each Activity – What Is Value Chain in Business
Also, consider the costs associated with each activity, including time, resources, and materials required to complete it.
So, this may involve conducting a cost-benefit analysis to determine the general cost-effectiveness of each activity.
Determine How Each Activity Contributes to the Overall Value Chain
Furthermore, consider how each activity is connected to the other stages in the value chain and how it contributes to overall value creation.
For example:
- How do product design and development contribute to the manufacturing process?
- How does customer support contribute to the overall customer experience?
Identify Opportunities for Optimization and Improvement
Overall, based on your analysis of each stage, identify areas where improvements can be made to enhance value creation potential and reduce costs.
So, this may involve optimizing processes, improving efficiency, or outsourcing certain activities to suppliers.
Conclusion on What Is Value Chain in Business
The value chain enables businesses to analyze and optimize their operation and improve productivity.
To perform it, one needs to break down a business process into parts and check each stage for its value-creation potential.
This way, businesses of all sizes and industries can easily identify areas where they can improve their operations, reduce costs, and create more value for customers.
Therefore, with a value chain, you can enhance your competitive advantage and position yourself for long-term success
So, all you need to do is to focus on value creation and keep working on your process over time.
Ultimately, this will build a strong foundation for growth and success.
