What is a value chain?
A value chain is a set of sequential processes that start at the beginning of the design process and end at the customer’s door with a completed product. Every point of the production process where value is created is identified by the chain, which includes the sourcing, manufacturing, and marketing phases.
An organization conducts a value-chain analysis by assessing the intricate processes involved at every stage of its operations. A value-chain analysis aims to improve production efficiency so that a business can provide the most value at the lowest feasible cost.
Understanding Value Chains
In the face of fierce competition for excellent pricing, superior goods, and devoted customers, businesses need to constantly assess the value they offer to maintain a competitive edge. A value chain may assist a corporation in identifying inefficient parts of its operations and then putting measures in place to improve those processes for optimal productivity and profitability.
Businesses must ensure that manufacturing processes run smoothly and efficiently and that their consumers feel comfortable and confident enough to stick around. Value-chain analysis is also helpful in this regard.
A value chain’s main objective is to produce the most significant value at the lowest possible cost to gain a competitive edge.
Context
Harvard Business School professor Michael E. Porter first conceptualized a value chain in his book Competitive Advantage: Creating and Sustaining Superior Performance. “One cannot comprehend competitive advantage by examining a firm in its entirety,” the author said. It results from the several tasks a company completes while creating, manufacturing, promoting, shipping, and providing support for its product.”
Stated differently, optimizing value at every juncture within a company’s operations is essential.
Items that Make Up a Value Chain
Porter divides a company’s operations into two categories, “primary” and “support,” which we present as typical activities in his notion of a value chain.
Depending on the industry, some actions under each category will change.
Principal Tasks
Five components make up primary activities, and each is necessary to provide value and provide a competitive edge:
Inventory management, warehousing, and receiving are examples of inbound logistics tasks.
Operations are the processes used to transform raw materials into a final product.
Activities to deliver a finished product to a customer are included in outbound logistics.
Strategies to increase awareness and target the right consumers are part of marketing and sales; they include price, promotion, and advertising.
Programs for maintaining goods and improving the customer experience are called services. These include customer service, maintenance, repair, refunds, and exchanges.
Assisting Tasks
The purpose of support activities is to increase the effectiveness of the main activities. At least one of the five primary activities benefits when the efficiency of any of the four support activities is increased. Typically, these support functions are shown as overhead expenses on an organization’s financial statement:
Purchasing is the process by which a business acquires raw materials.
Technological advancement is employed at a company’s research and development (R&D) stage to create and develop manufacturing procedures and automate operations.
Hiring and keeping staff members who will carry out the company’s business plan and assist in product creation, marketing, and sales is the responsibility of human resources (HR) management.
Infrastructure comprises the management team’s makeup and the organization’s systems, which include quality control, accounting, planning, and finance.
Illustrations of Value Chains
The Starbucks Company
One of the most well-known instances of a business that comprehends and effectively applies the value-chain concept is Starbucks (SBUX). Many articles describe how Starbucks uses the value chain as a business strategy.
Retailer Joe’s
Trader Joe’s, a privately held grocery store, is another example. It has garnered significant attention due to its exceptional value and competitive advantage. Many facets of the company’s strategy remain unknown due to its confidentiality. On the other hand, it is easy to spot examples of Trader Joe’s operations within a store that correspond with the value chain’s five main activities.
- Logistics of arrivals. Unlike traditional supermarkets, Trader Joe’s handles all its receiving, shelving, and inventory-taking during regular business hours. Even though it could irritate consumers, this approach saves a ton of money only on staff costs. Additionally, doing this repair while people are still shopping makes strategic sense because of the logistics involved.
- Functions. Here’s an example of an innovative way a business may use the value chain. “Converting raw materials into finished product” is listed as an “operations” activity in main activity number two above. However, we can use the term “operations” to refer to any other typical grocery store function, as the conversion of raw materials is not a part of the supermarket industry. Trader Joe’s depends on “product development,” so let’s replace it with that term.
The company features carefully chosen products, most of which are unavailable elsewhere. Its private-label items account for more than 80% of its offers, frequently with the most significant profit margins since Trader Joe’s can obtain them economically in bulk.
Joe’s Market. “Home.”
Taste-testing and chef partnerships are essential to Trader Joe’s ongoing product development efforts since they guarantee superior quality and continuous product improvement.
- Logistics for departure. Trader Joe’s does not provide home delivery, unlike many other supermarkets. Here, we may use the activity of outward logistics to signify the variety of facilities consumers experience once they are inside a Trader Joe’s store. The corporation has thought hard about the experience it wants us to have when visiting its shops.
Among Trader Joe’s various tactical logistics are their in-store tastings. Usually, a few product tastings go concurrently, creating a dynamic mood and frequently correlating with the seasons and holidays. The sampling stations contain new and familiar dishes cooked and served by personnel.
- Marketing and sales. Compared to its rivals, Trader Joe’s scarcely undertakes any conventional marketing. But the whole in-store encounter is a marketing ploy. The company’s copywriters create the product labels, focusing on its target market. Trader Joe’s distinctive branding and creative culture suggest that the company understands its clientele, which is to be expected given that it has selected and stuck to a target customer base.
Trader Joe’s has strengthened its competitive advantage by differentiating itself in the market through this indirect marketing of style and image.
- Assistance. Trader Joe’s places a high priority on customer service. In such shops, you often see twice as many workers as customers. The personnel is kind, informed, and well-spoken, and their main concern is you, regardless of the task they are currently working on. Workers will jump at the chance to assist you or locate the item you’re looking for. They even encourage interruptions from customers. Furthermore, the business has consistently used a refund policy that accepts returns without inquiry. If you don’t like it, you get your money back.
This list could continue on and on before ever reaching the four support tasks described above since Trader Joe’s is a tremendously successful example of applying value-chain theory to its company.
Conclusion
- A value chain is a step-by-step business concept for moving a product or service from idea to reality.
- Value chains assist in boosting a firm’s efficiency so the business can give the most excellent value for the least feasible cost.
- The eventual objective of a value chain is to establish a competitive edge for a firm by boosting productivity while keeping costs acceptable.
- The five primary operations and four supporting activities of a company are examined using the value-chain theory.
