Value Chain: Explanation, Guide, Importance & Real Examples

  1. Overview of Value Chain
  2. Understanding Value Chain Activities
  3. Step By Step Guide to Analyze the Value Chain
  4. Real World Examples of Value Chain
  5. Importance
  6. Background and History
  7. Explanation of Value Chain Map
  8. Explanation of Value Chain Node
  9. What is Value Chain Analysis
  10. Potential Future Trends in Value Chain Management
  11. Pros / Benefits of Porter’s Value Chain
  12. Cons / Drawbacks of Porter’s Value Chain
  13. Difference Between Value Chain and Supply Chain
  14. Other Business Concepts related to Porter’s Value Chain
  15. What is Value Stream Management (VSM)
  16. How to Derive the Profit Margin using Value Chain Analysis
  17. FAQs of Porter’s Value Chain

Overview of Porter’s Value Chain

The value chain analysis is a business concept that describes all activities essential to deliver products or services from start to end. It consists of a series of interconnected activities that contribute to the production, marketing, delivery, and support of a product or service. The value chain concept also describes various supporting activities that essential throughout these activities, such as strategic planning, quality management, finance, recruitment, technology, and procurement.

Understanding Value Chain Activities

Value chain analysis is a value-based internal assessment to obtain a competitive advantage. The goal is to determine the internal links of the activities in the company and improve efficiency in each activity. Customer satisfaction retains based on the value of the products or services. Successful companies produce products or services which have greater value for their customers than what it cost for production.

Advanced Explanation on Value Chain – EVERYTHING that you need to know
Value Chain Analysis Diagram

Primary Activities

1. Inbound Logistics

2. Operations

3. Outbound Logistics

Outbound logistics activity is the management of finished products, including their storage, handling, and distribution to customers. This encompasses activities such as order fulfillment, warehousing, transportation, and delivery.

For a manufacturing company, their immediate customer would be the wholesaler. The end customer may receive the product through the distribution channels of wholesalers and retailers. Distribution of the finished good from the company to their immediate customer is treated as the outbound logistics.

4. Marketing and Sales

Every product has a target market of potential consumers which known as the “target market”. Marketing and sales activities are focused on promoting, selling, and distributing products or services to target markets. This includes market research, advertising, branding, sales promotions, and pricing strategies. The significance of marketing and sales lies in creating awareness, generating demand, and driving revenue growth. Simply this activity focus on how well the company presented and sold the product to the potential target market.

Duty of the sales professionals in the company to make sure the product awareness is there on the target audience. A mix of marketing strategies can be used to fulfill this activity.

Examples: brand building, marketing, promotion, salesforce, tenders, quotations, target market selection, customer relationships, and product pricing.

5. Services

After-sales support is crucial for the long term survival of the business. Service activities encompass post-sale support and customer assistance, aiming to enhance customer satisfaction and loyalty. This includes services such as installation, maintenance, repairs, and customer support. Providing excellent service is essential for building long-term relationships with customers and fostering brand loyalty. For example, a software company offers regular updates, technical support, and training to help users maximize the value of its products.

Comments from the unsatisfied customers can easily damage the reputation of the product. The company should focus on the right processes to take care of the customer inquiries which raise after the sales. Solid after-sales services are essential to enhance or maintain the value of the product after it has been sold and delivered.

Examples: repair, periodic scheduled maintenance services, warranty, guarantee, training, and after-sale services.

Support Activities of the Value Chain

1. Procurement

Procurement refers to the process of acquiring goods and services necessary for the operation of the business. This is not only the purchasing inputs or not only related to the raw materials. Procurement activity covers sourcing suppliers, negotiating contracts, and managing vendor relationships. Effective procurement practices are crucial for obtaining high-quality inputs at the best possible prices, thereby impacting the cost structure and competitiveness of the company.

Further examples are: Tendering processes, advertising, procurement criteria definition, offer the contract/purchase order, and budget management.

2. Technology Development

This activity is related to research and development (R&D), innovation, and technological infrastructure development. Technology helps to streamline the entire value chain. Investing in technology development is essential for staying competitive, improving product quality, and creating new market opportunities.

This will lead to an increase in the efficiency in activities, which leads to a competitive advantage. These activities related to the effort that the company is making to improve the products and the processes. For instance, a software company investing in R&D to develop cutting-edge software solutions gains a competitive edge in the market and satisfies evolving customer needs.

Examples: enterprise resource planning (ERP) solutions, product research for enhancements, research for new products, and improving the technology used in existing activities/processes.

3. Human Resource Management

The company cannot survive in the market without having talented, skilled employees in the organization structure. This activity is related to the recruitment, training, development, and retention of employees within the organization. Further this also includes programs, and implementing performance management systems. Effective human resource management is vital for building a skilled and motivated workforce, fostering innovation, and achieving organizational goals.

Staff satisfaction should be measured in a periodical manner to reduce turnover. Also, staff should be motivated based on fringe benefits and other facilities. The company finds and retains the highest level of talent at the firm. Technological and consulting companies depend heavily on their talented employees.

Examples: recruitment, on-boarding, development, training, retention programs, and off-boarding.

4. Firm Infrastructure

Firm infrastructure encompasses activities that support the entire organization, including strategic planning, finance, accounting, and legal functions. This includes organizational structure, internal control systems, governance, compliance, and the culture of the company. This also related to activities such as accounting, finance, legal, control, audit, quality management, and general (strategic) management. For example, a multinational corporation maintaining robust financial and legal departments ensures transparency, accountability, and compliance with regulatory requirements across its global operations.

This is the place where business decisions made. The effectiveness of these decisions is based on the capacity of the activities of firm infrastructure. These are the most powerful source of competitive advantage for the company.

Examples: strategic management, finance, legal, customer relationship, public relations, and quality control.

Step By Step Guide to Analyze the Value Chain

  • Inbound Logistics: Assess how efficiently raw materials are sourced, transported, and stored.
  • Operations: Evaluate the effectiveness of manufacturing or service delivery processes.
  • Outbound Logistics: Examine the efficiency of product distribution and delivery to customers.
  • Marketing and Sales: Review strategies for promoting products or services and generating sales.
  • Service: Assess the quality and effectiveness of post-sale customer support and service.
  • Procurement: Evaluate supplier relationships, cost-effectiveness of procurement processes, and supply chain resilience.
  • Technology Development: Assess investments in research, development, and technology to improve product quality and operational efficiency.
  • Human Resource Management: Evaluate workforce capabilities, training programs, and employee satisfaction levels.
  • Firm Infrastructure: Examine organizational structure, leadership, and support functions such as finance, legal, and IT.

Real World Examples of Porter’s Value Chain

  • Toyota Production System (TPS): Toyota revolutionized the automotive industry with its lean manufacturing principles, which are a key aspect of its value chain. By continuously improving processes, minimizing waste, and empowering employees to contribute ideas for efficiency gains, Toyota has achieved high levels of productivity and quality while reducing costs.
  • Primary Activities
    • Inbound Logistics – An automobile manufacturer procuring steel, rubber, plastic, and electronic components from various suppliers worldwide to assemble vehicles.
    • Operations – A textile factory weaving cotton fibers into fabric, dyeing it, and then cutting and sewing it into garments.
    • Outbound Logistics – A consumer electronics company packaging smartphones after manufacturing and then distributing them through retail stores and online channels.
    • Marketing and Sales – A furniture manufacturer conducting market research to identify trends, then branding and advertising their products through digital and print media, and selling them through both their own website and retail partners.
    • Service – An industrial equipment manufacturer providing installation services, maintenance contracts, and technical support for their machinery after sale.
  • Secondary Activities
    • Procurement – An aircraft manufacturer sourcing specialized materials such as titanium alloys and carbon fiber composites from global suppliers for constructing airplane components.
    • Technology Development – A pharmaceutical company investing in R&D to develop new drug formulations and manufacturing processes to improve efficacy and reduce production costs.
    • Human Resource Management – An electronics manufacturer hiring skilled engineers, technicians, and assembly line workers, and providing them with training programs to enhance their skills and productivity.
    • Infrastructure – An energy company building and maintaining a state-of-the-art refinery for processing crude oil into various petroleum products like gasoline, diesel, and jet fuel.
    • Firm Infrastructure – An agricultural machinery manufacturer developing strategic plans to expand into emerging markets, managing finances to invest in new production facilities, and ensuring compliance with environmental regulations.
  • Walmart: Walmart is known for its efficient supply chain management, which is a critical component of its value chain. Through technologies like RFID (Radio-Frequency Identification) and a sophisticated inventory management system, Walmart optimizes its inventory levels, reduces stockouts, and minimizes holding costs. Additionally, its strong vendor relationships enable it to negotiate favorable terms and maintain low prices for customers.
  • Primary Activities
    • Inbound Logistics – A clothing retailer receiving shipments of apparel from manufacturers and distributors at its distribution center.
    • Operations – A grocery store stocking shelves, organizing displays, and managing checkout processes to ensure smooth operations and efficient customer service.
    • Outbound Logistics – An online retailer packaging customer orders and arranging for shipping through various carriers to deliver products to customers’ doorsteps.
    • Marketing and Sales – A department store running advertising campaigns, offering promotions, and hosting sales events to attract customers and drive sales both in-store and online.
    • Service – A electronics retailer providing warranty support, technical assistance, and repair services for products purchased by customers.
  • Secondary Activities
    • Procurement – A home goods retailer sourcing products from manufacturers and wholesalers domestically and internationally to replenish inventory.
    • Technology Development – An e-commerce platform investing in website development, mobile apps, and digital marketing tools to enhance the online shopping experience for customers.
    • Human Resource Management – A chain of supermarkets hiring and training staff for various roles such as cashiers, stock clerks, and customer service representatives to meet operational needs.
    • Infrastructure – A chain of convenience stores investing in building and maintaining physical store locations, including facilities, equipment, and IT systems for inventory management and point-of-sale operations.
    • Firm Infrastructure – A luxury retailer developing strategic partnerships with high-end brands, managing financial resources to invest in store renovations and expansions, and ensuring compliance with regulatory requirements in each location.
  • Apple Inc.: Apple’s value chain is characterized by its tight control over design, manufacturing, and distribution. By vertically integrating key aspects of its supply chain, such as chip design, hardware assembly, and software development, Apple maintains a high level of quality and innovation while differentiating its products in the competitive tech market. Additionally, its retail stores and online presence contribute to a seamless customer experience.
  • Primary Activities
    • Inbound Logistics – A hardware manufacturer receiving shipments of electronic components such as processors, memory chips, and displays from suppliers to use in assembling computers.
    • Operations – A software development company coding, testing, and deploying software applications, such as a new mobile app or enterprise software solution.
    • Outbound Logistics – A consumer electronics company packaging smartphones after manufacturing and then distributing them through retail stores and online channels.
    • Marketing and Sales – A tech startup running digital marketing campaigns, attending industry conferences, and conducting product demonstrations to attract customers and drive sales of its innovative software product.
    • Service – A cloud computing provider offering technical support, system maintenance, and software updates to clients using its platform for hosting applications and data storage.
  • Secondary Activities
    • Procurement – A semiconductor company sourcing raw materials such as silicon wafers and chemicals for chip fabrication processes from suppliers worldwide.
    • Technology Development – A biotechnology firm investing in research and development to discover new drugs, develop advanced medical devices, or improve existing healthcare technologies.
    • Human Resource Management – A cybersecurity company hiring skilled engineers, data analysts, and ethical hackers, and providing them with ongoing training to enhance their expertise in cybersecurity solutions and services.
    • Infrastructure – A telecommunications company building and maintaining a network infrastructure of towers, cables, and data centers to provide high-speed internet and telecommunications services to customers.
    • Firm Infrastructure – A multinational technology corporation developing strategic plans to expand into emerging markets, managing finances to invest in research and development projects, and ensuring compliance with intellectual property laws and regulations.
  • McDonald’s: McDonald’s excels in its service delivery through efficient operations management, a crucial aspect of its value chain. From standardized processes in food preparation to streamlined order fulfillment and customer service, McDonald’s focuses on speed, consistency, and customer satisfaction across its global network of restaurants.
  • Primary Activities
    • Inbound Logistics – A hotel chain receiving deliveries of linens, toiletries, and food supplies from suppliers to ensure smooth operations and guest satisfaction.
    • Operations – A healthcare provider offering medical services such as consultations, diagnostic tests, and treatments to patients at its clinics and hospitals.
    • Outbound Logistics – A courier service packaging and delivering parcels and documents to customers’ homes and businesses on time.
    • Marketing and Sales – A digital marketing agency promoting its services through online advertising, social media campaigns, and content marketing to attract clients and generate leads.
    • Service – An IT support company providing technical assistance, troubleshooting, and system maintenance to businesses that subscribe to its managed services.
  • Secondary Activities
    • Procurement – A catering company sourcing ingredients, kitchen equipment, and packaging materials from suppliers to prepare and deliver meals for corporate events and private functions.
    • Technology Development – A software-as-a-service (SaaS) provider investing in research and development to enhance its cloud-based platform for project management and collaboration.
    • Human Resource Management – A consulting firm recruiting and training consultants with expertise in various industries and domains to deliver high-quality advisory services to clients.
    • Infrastructure – A telecommunications company building and maintaining a network infrastructure of towers, cables, and data centers to provide reliable phone and internet services to residential and business customers.
    • Firm Infrastructure – A financial services firm developing strategic plans to expand into new markets, managing finances to invest in technology upgrades and regulatory compliance, and ensuring adherence to industry standards and best practices.
  • Mayo Clinic: Mayo Clinic’s value chain is centered around patient-centric care and clinical excellence. By integrating medical services, research, and education, Mayo Clinic delivers high-quality healthcare outcomes while maintaining operational efficiency. Its collaborative approach among physicians, researchers, and administrators ensures a seamless patient experience and continuous improvement in healthcare delivery.
  • Primary Activities
    • Inbound Logistics – A hospital receiving medical supplies such as medications, surgical equipment, and disposable supplies from pharmaceutical companies and distributors.
    • Operations – A medical clinic providing patient care services including consultations, diagnostic tests (like blood tests or X-rays), treatments, and surgeries.
    • Outbound Logistics – A pharmacy dispensing prescription medications to patients and managing the delivery of medications to home-bound or elderly patients.
    • Marketing and Sales – A healthcare network promoting its services through advertising campaigns, community outreach programs, and physician referrals to attract patients seeking specialized care.
    • Service – A home healthcare agency offering skilled nursing care, physical therapy, and personal care services to patients recovering from surgery or managing chronic illnesses in their own homes.
  • Secondary Activities
    • Procurement – A medical equipment manufacturer sourcing raw materials and components to produce medical devices such as MRI machines, ultrasound equipment, and prosthetic limbs.
    • Technology Development – A pharmaceutical company investing in research and development to discover new drugs, vaccines, and treatments for various diseases and medical conditions.
    • Human Resource Management – A healthcare staffing agency recruiting and training healthcare professionals such as doctors, nurses, and allied health workers to fill temporary or permanent positions in hospitals and clinics.
    • Infrastructure – A healthcare system investing in building and maintaining hospital facilities, medical equipment, and information technology systems to support patient care delivery and administrative functions.
    • Firm Infrastructure – A health insurance company developing strategic plans to expand its network of healthcare providers, managing financial resources to cover medical claims and administrative costs, and ensuring compliance with healthcare regulations and standards.

Importance of Porter’s Value Chain

Background and History of Value Chain

Explanation of Value Chain Map

Explanation of Value Chain Node

What is Value Chain Analysis

Pros / Benefits of Porter’s Value Chain

Cons / Drawbacks of Porter’s Value Chain

Difference Between Value Chain and Supply Chain

What is Value Stream Management (VSM)

Value Stream Management (VSM) is a strategic approach to optimize and streamline the end-to-end process of delivering value to customers. It involves analyzing, visualizing, and improving the flow of work across all stages of product development and delivery, from concept to deployment. VSM focuses on identifying and eliminating waste, improving efficiency, and maximizing value creation by aligning people, processes, and technology towards delivering high-quality products or services that meet customer needs effectively.

How to Derive the Profit Margin using Value Chain Analysis

The firm’s margin or profit depends on its “effectiveness” in performing above primary and support activities efficiently. The difference between the “amount” that the customer willing to pay for the products and the cost of the activities in the value chain is the profit margin of the company. Hence, the profit margin can be increased by the following ways,
1. Reduce the cost of the activities (streamline the primary and support activities)
2. Increase the value of the product through technology development

It would be easy for a company to eventually achieve economies of scale by optimizing the entire value chain.

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