See Also:
Valuation Methods
Value Drivers: Building Reliable Systems to Sustain Growth
Porters Five Forces of Competition
Responsibility Center
Cost Driver
Value Chain Definition
Value chain refers to the functional activities of a business that add value to its customers. The concept was created around 1985 by Michael Porter, Harvard Business School professor. According to Porter, it consists of primary activities and support activities, all of which add value to the products or services offered by the business. Ideally, the company’s products pass through the activities of the value chain and along the way each activity adds value to the products.
When managing the value chain system, the idea is to optimize the chain so as to maximize value while minimizing cost. A business must use its value chain activities to create value, and then capture that value. The value created by this chain should exceed the sum of the values added by each individual activity.
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Porters Value Chain Analysis
Value chain analysis is an important strategic tool for business management. This model allows a business manager to identify the activities that add value to the business and those that do not.
The idea is to divide the activities into primary activities (those activities that relate to core operations, sales, marketing, and customer service), and support activities, which are activities related to human resource management, firm infrastructure management, information technology and technology development, and procurement. And then to identify which activities add value and which don’t. Presumably each activity adds some value.
For the activities that add value, the business manager must identify the costs associated with each activity as well as the value drivers for that activity. Furthermore, the purpose of the analysis is to ensure that the value created by the activities exceeds the cost to perform those activities. Improving the performance of the functional activities involves trying to maximize the value created by the activities while minimizing the cost to do so. For each activity, and for the value chain as a whole, the objective of the value chain analysis is to find ways to create and capture value.
Typical Primary and Support Activities Include:
Primary Activities
Typical primary activities include the following:
- Inbound logistics
- Operations
- Outbound logistics
- Marketing and sales
- Service
Support Activities
Typical support activities include the following:
- Management of firm infrastructure
- Human resource management
- Technological development
- Procurement
Value Chain and Competitive Advantage
When analyzing a value chain in terms of competitive advantage, the idea is to compare the aspects of the business’s chain to the aspects of the value chains of competitors. The value-creating activities in a company’s value chain contribute to competitive advantage when they meet one of two criteria.
- The activity is not performed by competitors
- The activity is performed superiorly than similar activities performed by competitors
Value Chain and Supply Chain
See the supply chain as a system of interconnected value chains. Each business along the supply chain contributes value to the supply chain via its value chain. According to Michael Porter, a value system is the interconnected system of value chains along a supply chain. Participating in a strong value system can increase the competitive advantage of a business.
The concept of the value system is similar to the value chain but on a broader scale. The idea is to maximize value created by the value system while minimizing costs. Therefore, analyze the entire system with the objective of creating and capturing value throughout the entire system. Optimizing a value system for increased efficiency and lower cost makes the overall system more valuable than the sum of its contributing value chains and adds value to the end consumer of the products.
If you don’t want to leave any value on the table, then download the Top 10 Destroyers of Value whitepaper.
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