Value Chain
A value chain describes the full chain of a business's activities in creating a product or service, from the initial receipt of materials through its delivery to the customer.
The value chain framework has five primary activities: inbound operations, operations, outbound logistics, marketing and sales, and customer service, and four secondary activities: procurement and purchasing, human resource management (HRM), technological development, and company infrastructure.
Value chain analysis occurs when a business identifies its primary and secondary activities and evaluates the efficiency of each point. This analysis can reveal linkages, dependencies, and other patterns.
Primary Value Chain Activities
The tasks that are deemed part of the primary activities in the value chain contribute to a product's or service's physical creation, sale, maintenance, and support. These include the following:
Inbound operations: This is the internal handling and management of resources coming from outside sources, such as external vendors and other supply chain sources. These outside resources flowing in are called inputs and may include raw materials.
Operations: These are activities and processes that transform inputs into outputs, the product or service being sold to customers for a higher price than the cost of materials and production, generating a profit.
Outbound logistics: This is the delivery of outputs to customers. Processes involve systems for storage, collection, and distribution to customers. This includes managing a company's internal systems and external systems from customer organisations.
Marketing and sales: Activities such as advertising and brand building, which seek to increase visibility, reach a targeted audience, and communicate why a consumer should purchase a product or service.
Customer service: Customer service and product support activities reinforce a long-term relationship with those who have purchased a product or service.
Secondary Activities
Secondary activities in the value chain are tasks that don’t directly result in the final product looking the way it does. However, these are vital parts that contribute to the primary activities being able to function. These activities include:
Infrastructure: Any administrative, finance, management, planning, or legal operations needed to support primary activities
Technology development: Any technological improvements made to existing machinery, hardware, or software in the name of supporting primary activities
Human resource management: The process of hiring and managing workers
Procurement: Purchases related to buying raw materials or any fixed assets (for example, vendor fees and selection)
Benefits of Value Chain Analysis
The value chain framework helps organisations identify sources of their positive or negative cost efficiency. Conducting a value chain analysis can help businesses with the following:
- Support decisions for various business activities.
- Diagnose points of ineffectiveness for corrective action.
- Understand linkages and dependencies between different activities and areas. For example, issues in HRM and technology are broadly impactful.
- Optimise activities to maximise output and lower costs.
- Establish a cost advantage over competitors.
- Understand core competencies and areas of potential improvement.
Analysing a business value chain remains essential for organisations to achieve higher efficiency and competitive advantage. Companies achieve operational enhancement and cost-effectiveness by studying their primary and secondary activities, which leads to process optimisation.
The Value Chain Analysis
Popularised by Professor Michael Porter of Harvard Business School, the analysis was introduced as a framework to help businesses analyse their internal processes by breaking them down into primary and support activities.
It is mainly used to optimise business performance to:
Drive Efficiency: By identifying inefficiencies and areas for improvement.
Boost Customer Value: By showing how each stage contributes to the final product or service.
Gain a Competitive Edge: By analysing where value is created in your business and leverage this knowledge for strategic advantage.
Respond to Market Changes: By helping your business to adapt quickly by reevaluating and adjusting processes and strategies.
Develop or Refine Strategic Plans: Giving detailed insights into how various activities contribute to your strategic goals, aiding in effective decision-making and resource allocation.
Steps in a Value Chain Analysis
The steps in a value chain analysis consists of the following:
Step 1: Map your value chain
Step 2: Analyse each activity
Step 3: Identify improvement opportunities
Step 4: Develop strategic actions
Step 5: Implement and monitor changes
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Victor is an Executive Consultant and Success Coach with a Master’s degree in Marketing from the International Institute of Marketing. As a certified NQF8 Marketer, he leverages his academic expertise and extensive experience to help individuals and businesses unlock their potential. Victor specializes in developing equity growth strategies and solving complex enterprise challenges with his team’s support.
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