A value chain is a combination of activities that a company undertakes in order to move a service or product along its lifecycle, such as design, marketing, distribution and customer support.
The ultimate goal of a company is to create value, primarily in the form profit. Understanding the stages of the value chain will help a company to make the necessary changes. The value chain is complex because it involves so many suppliers and activities.
Definition and examples of a value chain
A value chain outlines in detail the steps that a company takes to deliver a product or service. The value chain includes all the workers and firms that are involved in bringing products from conception to distribution.
Michael Porter, an economist at Harvard Business School, developed the concept of value chains to focus on how each phase impacts a company’s bottom-line. Value chain aims to combine activities in a way that will increase sales at lower costs. You can increase the value of your product and impress customers by analyzing the value chain. Then, you can reinvest into specific parts of the chain to continue growing your business. 1
Starbucks is a good example of a company that has used the value chain as a way to increase its sales internationally. Starbucks has cafes in more than 60 countries. Each one is known for its well-known appeal. Starbucks uses its value chain to identify the most and least expensive activities. This information is then used to make changes and increase profits.
Even small businesses can identify their value chains and focus on cheaper practices to increase profits.
- Alternate name: Value system
What is a value chain?
The value chain outlines the workers and suppliers who take a service or product from conception to distribution. The value chain is composed of both primary and secondary activities which affect the value of a product to the customer as well as the company.
1
- Inbound Logistics: Gathering inventory and market data
- Operation: Create finished products from raw material
- Outbound Logistics: Distributing goods to clients
- Sales and marketing: Promotion and advertising of products to potential customers
- After sales services: Train customer service representatives in order to assist clients with installation, returns, etc.
These secondary activities are necessary to support the primary action of creating a product. They include infrastructure, management, technology, and procurement. These secondary activities are essential to the success and marketing of primary activities. For example, a business cannot market and sell its product without market research and product design.
Note:
It is important to understand your business’s operating margin and profit margin. This will allow you to ensure that the lowest input results in the highest output. You can easily identify where an expensive component of the process may lead to a decrease in margins by describing the value chain. This will allow you to take steps to reduce expenses.
Review the Starbucks value-chain to understand how it encourages stable growth. Starbucks’ value-chain is fairly straightforward. Small businesses could use it as an example. Harvard Business School’s case study identified Starbucks’ primary activities, which included:
- Inbound Logistics: Establishing close relationships with suppliers of coffee beans from around the globe and negotiating the best price.
- 2
- Outbound Logistics: Selling in stores, through licensed dealers, and using the Starbucks mobile application and Starbucks cards.
- Marketing: Emphasis on “Starbucks Experience” in order to create loyal customers.
- After sales service: Train team members in customer service, and create recognizable cafes.
Starbucks has a number of secondary activities that contribute to its annual revenue, which is expected to reach $23 billion by 2020. These include employee benefits, a well-designed café, and a mobile app with an intuitive interface.
Types of value chains
Manufacturing and distribution processes in your business may be classified as either a typical or global value chain.
A typical value-chain records the activities and participants within a single geographical location or company. A small business operating in a single state, or a large company operating within one country, might use a typical chain.
Duke University defines a global supply chain as a collection of activities and key players that are spread across firms and countries. 4 Starbucks, for example, is a good example, because it imports coffee beans from different countries and distributes them to Starbucks stores around the globe.
The Key Takeaways
- A value chain is a document that documents the business activities and players involved in bringing a product or service to market, from conception to distribution.
- Value chains are made up of primary activities and secondary activities.
- You can create more value by reducing your expenditures when you understand your value chain.
