What is Value Chain development, human resource (HR)

management, and company infrastructure.

A value chain is a high-level model developed by
Increasing the efficiency of any of the four
Michael Porter used to describe the process by
support activities increases the benefit to at least
which businesses receive raw materials, add
one of the five primary activities. These support
value to the raw materials through various
activities are normally denoted as overhead costs
processes to create a finished product, and then
on a company's income statement.
sell the finished product to customers.
Companies conduct value-chain analysis by https://www.investopedia.com/terms/v/valuechai
looking at every production step required to n.asp
create a product and identifying ways to increase
What Is a Value Chain Analysis?
the efficiency of the chain. The overall goal is to
deliver maximum value for the least possible With ever-increasing competition for unbeatable
total cost and create a competitive advantage. prices, exceptional products and customer
loyalty, businesses must continually evaluate the
BREAKING DOWN Value Chain
value they create. One of the most valuable
A value chain is a company model that segments tools, the value chain analysis, provides
the flow of production activities into five businesses an advantage over their competition.
categories. Each one of these categories is an
Chartered Global Management Accountant
opportunity for a company to maximize efficiency
(CGMA) discusses the benefits of a value chain
and create a competitive advantage. The aim of
analysis: "Value chain analysis can help
the value chain is to increase profits by creating
organisations to gain better understanding of key
value at each of the five touchpoints so that total
capabilities and identify areas for improvement.
value exceeds the total costs associated with the
It can help them to understand how competitors
product.
create value; and help organisations to decide
Primary Activities of the Value Chain whether to extend or outsource particular
activities."
All five primary activities are essential in adding
value and creating a competitive advantage. The A business begins by identifying each part of its
first activity in the value chain is inbound production process, noting steps that can be
logistics, which includes all receiving, eliminated and other possible improvements. In
warehousing, and inventory management of raw doing so, businesses can determine where the
materials ready for production. The second best value lies with customers, and expand or
activity is operations, which encompasses all improve said value, resulting in either cost
efforts to convert raw materials into a finished savings or enhanced production. At the end of
product. the process, customers can enjoy high-quality
products at lower costs.
Outbound logistics form the third activity in the
value chain and occurs after all operations are What is a value chain?
completed and the product is ready for the
A value chain is the full range of activities –
customer. Activities required to deliver a product
including design, production, marketing and
to the end user are considered part of outbound
distribution – businesses conduct to bring a
logistics. Marketing and sales are the fourth part
product or service from conception to delivery.
of the value chain and include all strategies to
For companies that produce goods, the value
enhance the visibility of the product, satisfy
chain starts with the raw materials used to make
consumer needs with the product, and facilitate
their products, and consists of everything added
the sale of the product. Activities include channel
before the product is sold to consumers.
selection, advertising, and pricing. Service is the
fifth and final step in a company's value chain Value chain management is the process of
and describes all activities that create better organizing these activities in order to properly
consumer experiences, such as customer service, analyze them. The goal is to establish
refund and exchange programs, and warranty communication between the leaders of each
and repair services. stage to ensure the product is placed in the
customers' hands as seamlessly as possible.
Companies can harness a competitive advantage
at any one of the five activities in the value Porter's value chain
chain. Creating outbound logistics that are highly
efficient, for example, reduces a company's Harvard Business School's Michael E. Porter was
shipping costs and allows it to either realize more the first to introduce the concept of a value
profits or pass the savings to the consumer by chain. Porter, who also developed the Five Forces
way of lower prices. Model to show businesses where they rank in
competition in the current marketplace,
Support Activities of the Value Chain discussed the value chain concept in his book
"Competitive Advantage: Creating and Sustaining
Support activities facilitate the efficiency of the
Superior Performance" (Free Press, 1998).
primary activities in a value chain. The four
support activities are procurement, technological
"Competitive advantage cannot be understood by another. Businesses can then identify
looking at a firm as a whole," Porter wrote. "It opportunities to reduce costs.
stems from the many discrete activities a firm
Differentiation advantage: Identifying the
performs in designing, producing, marketing,
activities that create the most value to customers
delivering and supporting its product. Each of
is the priority. These can include using relative
these activities can contribute to a firm's relative
marketing strategies, knowing about products
cost position and create a basis for
and systems, answering phones faster, and
differentiation."
meeting customer expectations. The next step is
In his book, Porter splits a business's activities evaluating these strategies to improve the value.
into two categories: primary and support. Focusing on customer service, increasing options
to customize products or services, offering
Primary activities include the following:
incentives, and adding product features are some
Inbound logistics are the receiving, storing and of the ways to improve activity value. Lastly,
distributing of raw materials used in the businesses should identify differentiation that can
production process. be maintained and adds the most value.

Operations is the stage at which the raw Goals and outcomes

materials are turned into the final product.
According to Investopedia, the primary goal of
Outbound logistics are the distribution of the final using the value chain analysis is creating or
product to consumers. strengthening your business's competitive
advantage.
Marketing and sales involve advertising,
promotions, sales-force organization, distribution "If a company can create an advantage ...
channels, pricing and managing the final product through a value chain analysis, it captures a
to ensure it is targeted to the appropriate competitive advantage and increases its overall
consumer groups. profit," the article explains. "To capture a
competitive advantage, a company maps out its
Service refers to the activities needed to maintain specific activities within the five generic value
the product's performance after it has been chain activities and looks for ways to create
produced, including installation, training, efficiencies."
maintenance, repair, warranty and after-sale
services. Ideally, value chain analysis will help you identify
areas that can be optimized for maximum
The support activities help the primary efficiency and profitability. It is important, along
functions and comprise the following: with the mechanics of it all, to keep customers
feeling confident and secure enough to remain
Procurement is how the raw materials for the
loyal to your business. By analyzing and
product are obtained.
evaluating product quality and effectiveness of
Technology development can be used in the services, along with cost, your business can find
research and development stage, in how new and implement strategies to improve.
products are developed and designed, and in
https://www.businessnewsdaily.com/5678-value-
process automation.
chain-analysis.html
Human resource management includes the
Porter's Value Chain
activities involved in hiring and retaining the
proper employees to help design, build and How does your organization create value?
market the product.
How do you change business inputs into business
Firm infrastructure refers to an organization's outputs in such a way that they have a greater
structure and its management, planning, value than the original cost of creating those
accounting, finance and quality-control outputs?
mechanisms.
This isn't just a dry question: it's a matter of
Conducting the analysis fundamental importance to companies, because it
addresses the economic logic of why the
According to Strategic Management Insight, there
organization exists in the first place.
are two approaches to the value chain analysis:
cost and differentiation advantage. Manufacturing companies create value by
acquiring raw materials and using them to
Cost advantage: After identifying the primary and
produce something useful. Retailers bring
support activities, businesses should identify the
together a range of products and present them in
cost drivers for each activity. For a more labor-
a way that's convenient to customers, sometimes
intensive activity, cost drivers could include how
supported by services such as fitting rooms or
fast work is completed, work hours, wage rates,
personal shopper advice. And insurance
etc. Businesses should then identify links
companies offer policies to customers that are
between activities, knowing that if costs are
underwritten by larger re-insurance policies.
reduced in one area, they can be reduced in
Here, they're packaging these larger policies in a
customer-friendly way, and distributing them to a purchase from you instead of your
mass audience. competitors. The benefits you offer, and
how well you communicate them, are
The value that's created and captured by a
sources of value here.
company is the profit margin:
 Service – These are the activities related
Value Created and Captured – Cost of Creating
to maintaining the value of your product
that Value = Margin
or service to your customers, once it's
The more value an organization creates, the been purchased.
more profitable it is likely to be. And when you
Support Activities
provide more value to your customers, you build
competitive advantage. These activities support the primary functions
above. In our diagram, the dotted lines show that
Understanding how your company creates value,
each support, or secondary, activity can play a
and looking for ways to add more value, are
role in each primary activity. For example,
critical elements in developing a competitive
procurement supports operations with certain
strategy. Michael Porter discussed this in his
activities, but it also supports marketing and
influential 1985 book "Competitive Advantage,"
sales with other activities.
in which he first introduced the concept of the
value chain.  Procurement (purchasing) – This is
what the organization does to get the
A value chain is a set of activities that an
resources it needs to operate. This
organization carries out to create value for its
includes finding vendors and negotiating
customers. Porter proposed a general-purpose
best prices.
value chain that companies can use to examine
all of their activities, and see how they're  Human resource management – This is
connected. The way in which value chain how well a company recruits, hires, trains,
activities are performed determines costs and motivates, rewards, and retains its
affects profits, so this tool can help you workers. People are a significant source of
understand the sources of value for your value, so businesses can create a clear
organization. advantage with good HR practices.

Elements in Porter's Value Chain

Rather than looking at departments or accounting

cost types, Porter's Value Chain focuses on
systems, and how inputs are changed into the
outputs purchased by consumers. Using this
viewpoint, Porter described a chain of activities
common to all businesses, and he divided them
into primary and support activities, as shown
below.

Primary Activities

Primary activities relate directly to the physical

creation, sale, maintenance and support of a
product or service. They consist of the following:  Technological development – These
activities relate to managing and
 Inbound logistics – These are all the processing information, as well as
processes related to receiving, storing, protecting a company's knowledge base.
and distributing inputs internally. Your Minimizing information technology costs,
supplier relationships are a key factor in staying current with technological
creating value here. advances, and maintaining technical
excellence are sources of value creation.
 Operations – These are the
transformation activities that change  Infrastructure – These are a company's
inputs into outputs that are sold to support systems, and the functions that
customers. Here, your operational allow it to maintain daily operations.
systems create value. Accounting, legal, administrative, and
general management are examples of
 Outbound logistics – These activities
necessary infrastructure that businesses
deliver your product or service to your
can use to their advantage.
customer. These are things like collection,
storage, and distribution systems, and Companies use these primary and support
they may be internal or external to your activities as "building blocks" to create a valuable
organization. product or service.

 Marketing and sales – These are the Using Porter's Value Chain
processes you use to persuade clients to
To identify and understand your company's value Tip 1:

chain, follow these steps. Your organization's value chain should reflect its overall generic business
strategies . So, when deciding how to improve your value chain, be clear about
whether you're trying to set yourself apart from your competitors or simply have a
Step 1 – Identify subactivities for each lower cost base.
primary activity Tip 2:

For each primary activity, determine which You'll inevitably end up with a huge list of changes. See our article
on prioritization  if you're struggling to choose the most important changes to
specific subactivities create value. There are make.
three different types of subactivities: Tip 3:

 Direct activities create value by This looks at the idea of a value chain from a broad, organizational viewpoint. Our
separate article on value chain analysis  takes different look at this topic, and
themselves. For example, in a book uses an approach that is also useful at a team or individual level. Click here  to
publisher's marketing and sales activity, explore this.

direct subactivities include making sales

calls to bookstores, advertising, and Key Points
selling online. Porter's Value Chain is a useful strategic management tool.

 Indirect activities allow direct activities It works by breaking an organization's activities down into strategically relevant
pieces, so that you can see a fuller picture of the cost drivers and sources of
to run smoothly. For the book publisher's differentiation, and then make changes appropriately.
sales and marketing activity, indirect
subactivities include managing the sales https://www.mindtools.com/pages/article/newST
force and keeping customer records. R_66.htm

 Quality assurance activities ensure that

direct and indirect activities meet the
necessary standards. For the book
publisher's sales and marketing activity,
this might include proofreading and
editing advertisements.

Step 2 – Identify subactivities for each

support activity.

For each of the Human Resource Management,

Technology Development and Procurement
support activities, determine the subactivities
that create value within each primary activity.
For example, consider how human resource
management adds value to inbound logistics,
operations, outbound logistics, and so on. As in
Step 1, look for direct, indirect, and quality
assurance subactivities.

Then identify the various value-creating

subactivities in your company's infrastructure.
These will generally be cross-functional in nature,
rather than specific to each primary activity.
Again, look for direct, indirect, and quality
assurance activities.

Step 3 – Identify links

Find the connections between all of the value

activities you've identified. This will take time,
but the links are key to increasing competitive
advantage from the value chain framework. For
example, there's a link between developing the
sales force (an HR investment) and sales
volumes. There's another link between order
turnaround times, and service phone calls from
frustrated customers waiting for deliveries.

Step 4 – Look for opportunities to increase

value

Review each of the subactivities and links that

you've identified, and think about how you can
change or enhance it to maximize the value you
offer to customers (customers of support
activities can be internal as well as external).