Value Chain
Candlefocus EditorThe value chain concept offers a structured way to think about how businesses optimize the different processes needed to successfully bring a product or service to market. It also defines how value is generated at each step while optimizing cost and efficiency.
The five main activities in the value chain are inbound logistics, operations, outbound logistics, marketing, and sales. Inbound logistics involves the management of how raw materials are acquired and are transported to the first step of production. Operations include actual production process of creating the product or service. Outbound logistics involve the delivery of product from the last process of production to the market. Marketing involves promotion and communication of products to the consumers. Finally, sales involve actual transactions of the product or service to the consumers.
The four support activities are technology development, human resource management, procurement, and firm infrastructure. Technology development refers to the continual development and improvement of the process involved in production. Human resource management involves the recruitment, training, and developing a quality workforce. Procurement deals with the acquisition of external resources from suppliers. Firm infrastructure includes the governance, leadership, and organizational capabilities of the firm.
The foundation of the value chain concept is that a business should be able to identify activities within their business that can be used to generate and differentiate value. By breaking down each individual step within a firm’s processes, it can create a competitive advantage by leveraging its internal capabilities to optimize costs and quality. Companies can use the value chain to evaluate each step in its process, identify bottlenecks, and create new methods for productivity. For example, a company might realize its inbound logistics phase is costly and inefficient. After recognizing this, the company can devise a plan to optimize this part of the process in order to increase production and reduce costs.
The value chain concept is an extremely useful tool to aid in business decisions such as setting pricing strategies, concentrating resources, and enhancing production processes. When used properly, it can help companies create competitive advantage, increase productivity and efficiency, reduce costs, and provide the highest possible value to customers. Whether you are an entrepreneur or a successful CEO, the value chain concept provides a useful lens through which you can evaluate your business and strive for success.