What Is A Value Chain?
Value chain consists of coordinated activities that, through specific processes , generate products with intangible and market values. The concept was created by the famous professor Michael Porter , therefore, it is also known as Porter’s value chain.
So why is it important to understand what the value chain is?
First, every company is inserted in a market , in which it interacts and on which it depends to have access to the necessary inputs to produce.
It is in this market that she also finds people interested in her products, do you agree?
Thus, the value chain concept serves to map everything that happens from the input of inputs into a factory, through its transformation and subsequent profit generation.
To understand even better, let’s see below where and how this idea took shape.
How And When Did The Concept Of Value Chain Come About?
We have just learned that the term value chain was coined by Michael Porter , the prominent professor at Harvard University’s business school.
It was used for the first time in 1985, at the launch of the book “Competitive Advantage”, which was a kind of continuation of the work “Competitive Strategy”, launched in 1980.
Although these concepts have already been revised and updated in certain aspects, they continue to be valid as a business analysis tool .
This is because, by mapping the elements of a value chain, a company is able to understand the connections between them and define strategies more accurately.
What Is The Purpose Of The Value Chain?
You must have noticed the link between the value chain and competitiveness .
For Master Porter, a company only becomes competitive when it generates value for its customers at a minimal cost.
The objective behind analyzing a business from the value chain in which it is inserted is to know exactly how this value is generated , its costs and expenses.
But look: it’s not just a budget mechanism.
Porter’s value chain primarily aims to identify the links that link activities within a company.
For this, the author divides these activities into two types: primary and support activities, as we will see shortly.
What Are Primary Activities In The Value Chain?
A factory, whatever it may be, always needs a production line , in which the products it distributes “come to life”.
This is an example of a primary activity, which, in the proposed hierarchy for the value chain, is in the “Operations” stage.
In short, primary activities are essential for generating value for the customer, without which an industry cannot continue to produce.
Let’s get to know them better now.
An important detail about the primary activities is that they are always arranged in the same order:
- Inbound Logistics → Operations → Outbound Logistics → Marketing and Sales → Services → MARGINS
In this case, margins basically refer to the profit generated for the company from the value it generates for its customers.
Check, then, how each of these activities is characterized and the links that unite them in a value chain.
Inbound Or Inbound Logistics
You may have noticed that the value chain is about processes .
Therefore, it basically evaluates the inputs in a production line, what happens in that line and the final result.
However, before the processes take shape, there is a whole logistics network activated to make them possible.
Remember what we said at the beginning, about the differences between the value chain and the supply chain?
For this is where the distinction between them lies.
The supply chain , in fact, is one of the objects of analysis of inbound logistics, one of the primary activities in a value chain.
Operations activities, on the other hand, concern the “core” of the value chain.
It is through them that the inputs obtained by inbound logistics have their value transformed by the production processes.
It is in operations that machinery, equipment, packaging and other indispensable resources come into play.
It is also where activities related to creation take shape in order to add value to unfinished materials.
However, the end of the manufacturing operation is just the beginning of another sequence of processes , this time of distribution.
But this is an attribution of the people and infrastructure that make up the outbound logistics, as we will see below.
Outbound Or Outbound Logistics
While it is possible and some factories do (the term “factory price” comes from there), most industries depend on a distribution network to bring their products to the final consumer.
The role of outbound or external logistics activities is precisely to distribute what is manufactured on the assembly lines.
As in all other activities, this must be done taking into account the competitive strategies so defended by Michael Porter.
That is, seeking the lowest price for the highest profit .
Marketing And Sales
It is not enough to develop a good product if people do not know what it is for, its characteristics and, above all, the value it adds .
That’s the job of people who work in marketing and sales .
Its activities focus on promotion, advertising and profit optimization through prospecting and customer loyalty.
Let’s say, for example, that a production line manufactures 100 units of a good.
From there, it will be up to those involved in marketing and sales to make efforts so that all these units are sold in the shortest possible time at the best price that can be practiced.
Service activities are intended to add even more value to products or services after they are acquired.
Also, it wouldn’t be smart to sell products and then abandon people who have questions or problems with their use.
An example of this activity is after-sales services , indispensable in segments that offer high added value goods, such as home appliances and vehicles.
In this sense, an automaker that provides its customers with a network of authorized repair shops invests in service activities.
This type of primary activity comprises services such as SAC , ombudsman and technical support, among others.
An assembly line could not function without an infrastructure that provides manpower, work material and a clean and safe environment.
This is the basic assignment of support activities in the value chain.
While the people involved in the primary activities directly deal with the goods, their production and sale, the support people are responsible for supporting these activities.
Although the professionals who support the primary activities are not involved in the production itself, they are just as important as those on the front line.
In the value chain, its activities are subdivided into four categories .
See what they are below.
The routines of primary activities depend on a series of back-up services so that they can continue.
Although the term infrastructure can refer to the part of machines, vehicles and equipment, in fact, it serves more to designate management and control activities .
In this way, all administrative and support activities for sectors such as finance, legal and accounting must be listed.
A factory or service company could not remain active without accounting to take care of its taxes and labor charges.
Likewise, companies need managers to support decision-making processes , as well as point out possible failures or suggest improvements at the operational and managerial levels.
If people are the most important resource in every company, it would not be an exaggeration to say that HR activities are also among the most important.
Its focus is on developing strategies for hiring and retaining talent , as well as supporting the definition of job and work accidents with sick leave, and unpaid leave for personal matters. In the latter case, the firm may cut the employee’s salary programs .
It also takes care of the admission and dismissal processes, as well as the policies related to benefits and payments.
HR professionals work in synergy with all those who make up the primary activities, meeting their demands and suggesting solutions according to their goals.
Manufacturing processes change all the time, even more so now, in the midst of digital transformation .
Therefore, it is necessary for an industry to have professionals capable of keeping up with the advances in technology.
This applies to all sectors of a company, no matter what type of activity they are related to.
From infrastructure to services, everyone needs to have resources and tools in line with the most modern on the market.
Identifying trends, suggesting solutions and new resources in the form of software and systems is one of the missions of professionals in technological development activities.
Acquisition / Purchases
There would be no inbound logistics if it did not have qualified professionals to go to the market and purchase the best inputs .
This is the basic assignment of purchasing activities, in which the company identifies the best opportunities and suppliers with the most competitive prices.
In this way, the company can gain a competitive edge that will be reflected in more aggressive prices .
As it is an activity that is directly related to the inputs of the manufacturing processes, it has a decisive weight for the performance of other activities.
Its professionals also work in synergy with the sales, inventory and operations sectors, which can provide data in order to facilitate the search for cheaper and quality inputs .
5 Advantages Of Implementing The Value Chain
At this point, there seems to be no doubt about the importance of mapping the entire value chain involved in your business, right?
Note that, for this, it is very important to use tools such as the SWOT matrix and Porter’s 5 Forces.
After all, the value chain encompasses elements that are internal to the company, as well as external factors.
For this reason, when mapping your value chain, you will have a real analytical tool to position your business at an advantage.
Discover the competitive advantages that a company gains when it knows exactly how its value chain works.
1. Competitive Advantage Over The Competition
It is not by chance that the term value chain appears in the book “Competitive Advantage”.
After all, one of the ideas in identifying it is that, by doing so, the company will be able to know exactly where to reduce costs and expenses without compromising the quality of the products.
You don’t even have to go far to conclude that producing more with less is always something desirable and positive, right?
Therefore, when processes generate value at minimal cost, what Master Porter calls a competitive advantage over the competition emerges.
In this context, the company gains something very valuable that no one else could offer: the self -knowledge of its own activities.
2. More Knowledge About The Business Context
The philosopher Socrates said, “Know yourself and you will know the universe and the gods”.
It is no exaggeration to say that knowing the value chain that permeates the life cycle of products and services is a form of domination.
Note that the most successful companies are the ones that best take advantage of opportunities that come from outside without giving up their essence.
Of course, all of them have been able to take advantage of the competitive advantages that have accompanied them since their foundations, and that includes the careful architecture of the value chain.
3. More Accurate Budget Control
We have seen that controlling the value chain is, in a way, maintaining discipline over the costs and expenses of a business.
By recognizing what the primary and supporting activities are, as well as what are linked to each, it is possible to define more accurate budgets.
It also becomes possible to cut costs so that there is no loss in quality, delivery times and relationships with suppliers and partners.
Returning to what we highlighted at the beginning, although the value chain looks like a method of budget control, in fact, it can be a way to help in its elaboration.
4. Less Error-Prone Decisions
In the context of digital transformation and concepts such as Big Data , decision-making becomes more dependent on data than ever before .
Thus, those at the head of a value chain need information to decide what to do, how, when, where and with whom.
A prime example of this is the delivery giant UPS which, with the support of technology and massive data, has achieved an incredible feat in its operations.
In short, she found that, to save fuel, her vehicles should never turn left on their routes.
Have you ever thought if you could do the same in your company?
5. Your Business Is Less Subject To Unforeseen Events
The UPS example serves to illustrate how the value chain can be controlled and turn into a company’s competitive advantage.
By drastically cutting costs, UPS not only increased its profit margin, but also protected itself from market fluctuations .
Imagine, in this case, that an increase in the price of a barrel of oil sends fuel prices up.
When demand for inputs decreases, the delivery company gains resources and, above all, reduces exposure to external factors.
What Does It Take To Implement The Value Chain?
The first step to successfully implement the value chain is to have the arms and minds capable of mapping it correctly.
You can, for example, hire auditing and consulting services to assess the quality of your services and to identify what are the inputs and outputs in your business.
It is also worth counting on professionals certified by the Association of Business Process Management Professionals International (ABPMP International), the main global reference in process management .
How To Use The Value Chain In Practice?
As we have seen, mapping the value chain is equivalent to identifying processes , quantifying them and, based on that, finding ways to improve them.
This is what companies do that model their processes and then automate part or all of them.
To this end, they assemble process diagrams, through which they recognize possible weaknesses and possible opportunities for improvement .