What is a Value Chain?

A value chain is a business model that describes the full range of activities needed to create a product or service. For companies that produce goods, a value chain comprises the steps that involve bringing a product from conception to distribution, and everything in between—such as procuring raw materials, manufacturing functions, and marketing activities.

A company conducts a value-chain analysis by evaluating the detailed procedures involved in each step of its business. The purpose of a value-chain analysis is to increase production efficiency so that a company can deliver maximum value for the least possible cost.

Because of ever-increasing competition for unbeatable prices, exceptional products, and customer loyalty, companies must continually examine the value they create in order to retain their competitive advantage. A value chain can help a company to discern areas of its business that are inefficient, then implement strategies that will optimize its procedures for maximum efficiency and profitability. In addition to ensuring that production mechanics are seamless and efficient, it's critical that businesses keep customers feeling confident and secure enough to remain loyal. Value-chain analyses can help with this, too.

Michael E. Porter, of Harvard Business School, introduced the concept of a value chain in his book, Competitive Advantage: Creating and Sustaining Superior Performance. He wrote: "Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product." In other words, it's important to maximize value at each specific point in a firm's processes.

In his concept of a value chain, Porter splits a business's activities into two categories, "primary" and "support," whose sample activities we list below.

Specific activities in each category will vary according to the industry. Starbucks (SBUX) offers one of the most popular examples of a company that understands and successfully implements the value-chain concept. There are numerous articles about how Starbucks incorporates the value chain into its business model.

Another example is privately held grocery store Trader Joe's, which also has received much press about its tremendous value and competitive edge.

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