Value Chain

What is a ‘Value Chain’

A value chain is a high-level model developed by Michael Porter used to describe the process by which businesses receive raw materials, add value to the raw materials through various processes to create a finished product, and then sell that end product to customers. Companies conduct value-chain analysis by looking at every production step required to create a product and identifying ways to increase the efficiency of the chain. The overall goal is to deliver maximum value for the least possible total cost and create a competitive advantage.

Explaining ‘Value Chain’

A value chain is a company model that breaks down the flow of production activities into five categories. Each one of these categories is an opportunity for a company to maximize efficiency and create a competitive advantage. The aim of the value chain is to increase profits by creating value at each of the five product touchpoints so the value exceeds the cost associated with the product.

Primary Activities of the Value Chain

All five primary activities are essential in adding value and creating a competitive advantage. The first activity in the value chain is inbound logistics, which includes all receiving, warehousing and inventory management of raw materials ready for production. The second activity is operations and encompasses all efforts needed to convert raw materials into a finished product or service.

Support Activities of the Value Chain

Support activities facilitate the efficiency of the primary activities in a value chain. The four support activities are procurement, technological development, human resource management and company infrastructure. Increasing the efficiency of any of the four support activities increases the benefit to at least one of the five primary activities. These support activities are normally denoted as overhead costs on a company’s income statement.

Further Reading

  • Value Chain Accounting: Review and Prospect [J] – [PDF]
  • A fuzzy goal programming approach for green supply chain optimisation under activity-based costing and performance evaluation with a value-chain structure – [PDF]
  • Meeting the challenge of wastewater irrigation: economics, finance, business opportunities and methodological constraints – [PDF]
  • Greenhouse gas protocol corporate value chain (scope 3) accounting and reporting standard – [PDF]
  • Co-evolution between Producer Service Embedded in Value Chain and Industrial Upgrade of Manufacturing [J] – [PDF]
  • Research on Value-determinants in Modularized Restruction of Industrial Value Chain [J] – [PDF]
  • Value chain analysis and financial viability of agro-processing industries in Himachal Pradesh – [PDF]
  • The Development of Services and Upgrade of Manufacturing in the Global Value Chain: A Case of Yangtze River Delta [J] – [PDF]
  • Regional competitiveness in the Latin America offshore services value chain – [PDF]