Value chain

The value chain is a very important instrument that is used to carry out the analysis of different activities that a company carries out in order to identify its sources of competitive advantage. A value chain is a high-level model developed by Michael Porter used to describe the process by which companies receive raw materials, add value to raw materials through various processes to create a finished product and then sell that final product to customers. Companies perform a value chain analysis when they look at the production steps needed to create a product and identify ways to increase chain efficiency.

Related topics

Supply Chain

What is the value chain?

The value chain is a tool used to strategically analyze the competitive advantage that a company has, it is possible to examine and make company divisions with respect to its strategic activities.

Origin of the value chain

The origin of the value chain was born in 1985. It was created by Professor Michael E. Porter of Harvard University, who introduced value chain analysis in his book Competitive Advantage. To write the book, he used an analysis that had already been used by McKinsey & Co, but it differed because Porter carried out more in-depth studies in the analysis with the objective of improving the profitability that companies had.

What is the value chain for?

The value chain serves to create and generate different competitive advantages. It serves to optimize the production process because the details and steps in which a particular company operates can be observed.

Its main objectives are the search for efficiency, the reduction of product costs, the harmonious functioning of companies and the maximum use of resources. It also makes it possible to find different advantages in terms of strategies because they can develop proposals that are unique within the market and competition.

Elements

With respect to the value chain, there are four important aspects or elements that are needed to positively influence the landscape of a company or the chain. The first of them is to look for a suitable integration or to give a degree of integration, and with this it is sought to define all those activities that are carried out in the company, house or in other companies that can be of independent origin.

The second very important element is also the industrial landscape. This scenario refers to all the industrial sectors that are related to each other and which are the places where the company competes thanks to a perfectly defined and coordinated strategy. The objective of the industrial panorama is to try to achieve the goals that have been set previously.

The third element that can influence the value chain is known as the segment landscape. This element refers to elements that can affect both, the specific product and the buyers who consume it.

And finally, we have a fourth element that is known by the name of geographical panorama. This element is related to and linked to the way in which all countries, counties, provinces, cities or regions where the company is always competing based on a strategy that has already been perfectly coordinated.

Activities

• Internal logistics: activities that are related to the purchase and disposal of inputs or raw materials for the production process or preparation of the product or service. Some of its activities are the reception of inputs, storage, distribution of inputs for the production process, handling of materials, control of inventories of raw materials, handling of returns of inputs.
• Marketing and Sales: these are the marketing strategies to promote the products. It is done by means of campaigns to look for the results that are wanted, promotions are created to improve the growth of the products.
• External logistics: it is the transfer, stockpiling and storage of the product that has already been finished, it also includes the organization and planning that are related to the delivery of the product or service until it arrives at the hands of the client.
• Marketing and sales: they are related to the marketing of products and to the selection and proper management of distribution, planning and execution of all advertising for the product.
• Services: are activities related to warranties, spare parts policies, loyalty links between companies and customers.

Importance of the value chain

The value chain is important because it is a tool of analysis, for the correct elaboration of a strategic planning giving to the product an added value and making it different from those that are in the competition in order to generate a competitive advantage over the rivals that exist in the market, obtaining in this way the greatest amount of product in the market and in this way lead it.

Examples

Value chain for a clothing store:

• Logistics: it receives the merchandise that is going to be sold taking into account aspects such as reception, storage, segmentation or return to suppliers.
• Sales: includes the entire process of placing products to customers who enter the establishment.
• Marketing: is responsible for setting prices, campaigns, discounts and material to attract potential customers.
• After-sales service: to guarantee the satisfaction of the buyer even after payment, in order to achieve their loyalty.