Value chain: definition, use and example

Value chain: definition, use and example


Thanks to the value chain, a manager can make strategic decisions for his company based on the analysis of its strengths and weaknesses. The value chain concept was introduced by Michael Porter as a decision support tool. It helps to find the right direction for the company by identifying the activities that create value for the customer, as well as the main expenses of the company.

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Summary:

Definition of the value chain

What is the point of analyzing the value chain?

What are the elements that make up the value chain?

Example of a value chain

How to use Porter’s value chain?

Definition of the value chain

The value chain is a strategic tool that makes it possible to detect the activities that generate the most value in order to highlight successful commercial offers. The value chain highlights the activities through which companies differentiate themselves from the competition, those on which they can position themselves to develop their added value and sustain themselves.

What is the point of analyzing the value chain?

The goal of a company is to create products or services that meet a need or a demand expressed by its customers while generating a margin. The value chain defines the overall margin generated by the entire production process, including support functions. Porter’s value chain analysis allows us to consider the company from the point of view of the mesh of its activities connected to each other. It therefore considers the company both as a whole and in all of its internal functions.
This study allows the analysis of the costs of the various activities of the company and the relevance of the interfaces which they maintain between them. Examination of the value chain thus allows more detailed and efficient strategic decision-making, as well as the improvement of the general organization of the company. It will help the entrepreneur to harmonize and optimize the internal structuring of his company.

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The examination of the different functions existing within the company favors a more precise view of each activity to define those which bring value to the finished product. Please note that this is not a financial benefit, but an added value provided by each production step or function. This study of Porter’s value chain offers the opportunity to determine the activities that do not add value, or even destroy it. Any loss in value decreases the company’s margins. These functions must therefore be the subject of a more precise examination in order to determine internal optimization action plans or to consider outsourcing.

The analysis of the value chain also makes it possible to identify the competitive advantage existing in the company and to develop strategies so that it stands out within its market.

What are the elements that make up the value chain?

The activities integrated in the value chain are of two types. These are:

  • Main activities.
  • Secondary activities.

The main functions

The main activities are varied and directly concern the creation and sale of the product:

  • Supply, i.e. all inventory-related activities (reception, storage, distribution).
  • Production, i.e. the transformation of raw materials to produce the final product, compliance with deadlines and quality, or the personalization of the product.
  • Marketing, which includes the activities of transportation, collection, storage and distribution of finished products. It is, for example, possible to create value when the delivery is done quickly or when the customer follow-up is personalized.
  • Marketing, that is to say the activities which allow the good or the service to be known by the customers. A business strategy must be developed in response to identified customer needs.
  • Services, namely all activities whose purpose is to increase the value of a product (installation service, for example) and to maintain it (guarantee offer or quality after-sales service in particular).
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Support functions

Support functions are secondary activities that support the main functions. It’s about :

  • Infrastructures: these activities bring together all the services that make the company work (administrative, accounting, etc.). This function can create value when a database allowing all the services to follow and know their customers is put in place.
  • Human resources: these include the missions related to the management and monitoring of personnel (recruitment, remuneration, training, etc.). The recruitment or retention of the right people allows for the creation of certain value.
  • Research and development: these services are intended to innovate and integrate new technologies within the company.
  • Purchasing, that is to say the activities that allow the company to invest in order to produce its goods and services. They must, for example, select the raw materials necessary for the company’s activity. In this context, the exclusivity of a product brings real value creation.

Example of a value chain

A company is made up of a set of activities organized around its promise and whose common objective is to keep this promise. Many activities create value in this way. This is particularly the case at Amazon, which integrates primary and secondary activities into its value chain.

Amazon’s main activities:

  • Logistics: the brand has strong capacities to receive, sort and store its goods. She can also automate certain tasks and boost her delivery chain to be faster.
  • Marketing: Amazon has a marketplace that offers a wide choice of products. The notoriety of the platform is well established.
  • Services: the brand’s after-sales service is efficient and it is very easy to return unsuitable products. Amazon has also innovated with Prime and express delivery.

Amazon support activities:

  • Infrastructure: Amazon has centralized its missions and internalized the essential functions. The sign is in constant search of automation.
  • Human resources management: the various activities are managed in each country.
  • R&D (research and development): Amazon has a competitive advantage linked to innovation thanks to robotic inventory management.
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How to use Porter’s value chain?

Porter’s value chain provides an understanding of where the major expense items are and where value is created. It thus distinguishes between activities that generate value and those that create little or even destroy it.

Analyze your value chain

Analyzing the value chain is essential for business leaders seeking to understand what values ​​consumers are willing to pay for. By identifying them, it is easier to respond to customer demand.

The value chain makes it possible to compare the costs related to the activities of the company and their final value. It is thus possible to identify the sources of its competitive advantage, then to decide how to maintain and improve them.

To analyze its value chain, it is necessary to:

  • Distinguish primary functions from support functions.
  • Identify the processes of each activity.
  • Evaluate the processes and activities that generate added value.
  • Score each activity.
  • Reallocate resources to gain competitive advantage.

Adapt your business strategy

The value chain is a great decision-making tool that allows the entrepreneur to opt for a winning strategy, for example, decide to set up in a new market or seek to differentiate themselves from the competition.

Several strategies can be implemented:

  • Reduce costs and reduce your margin.
  • Communicate massively on a subject to differentiate yourself and outflank the competition.
  • Orient its structure towards a niche market.
  • Define the key skills that allow you to survive in a competitive environment.
  • Outsource services that offer little value.
  • Identify areas of diversification.

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