Value chain
The value chain is a tool proposed by Michael E. Porter (1985) for identifying methods of creating more customer value. According to him, value chain is a set of inter-linked value-creating activities performed by an organization. These activities begin with inputs, go through processing and continue up to outputs marketed to customers. The value chain identifies two types of activities that can create value and cost in a business. They are shown in following figure:
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| Value Chain Analysis |
Primary Activities
They consist of following five activities:
- Inbound logistics: It is the activity of bringing materials into the business. It consists of receiving and storing raw materials; material handling, stock control, material, transport etc.
- Operations: It is the activity of converting raw materials into finished products; manufacturing, packaging, assembling, testing etc.
- Outbound logistics: It consists of order processing and physical distribution; collect, store and distributes products to customers.
- Marketing and sales: It consists of pricing, promotion and selling products to satisfy customer needs.
- Service: It consists of installation, repairs, spares and training. These activities help to enhance and maintain value of product.
Support Activities
The support activities of the value chain are as follows:
- Procurement: It involves all the activities related to processes for purchasing inputs.
- Technology development: It involves all the activities related to acquiring new technologies and research and development for innovation.
- Human resource management: It involves all the activities related to acquisition, development, utilization and maintenance of human resources.
- Infrastructure: It involves all the activities related to infrastructure building, such as strategic planning, quality control, accounting, finance, information management, organization design etc.
The value chain analysis identifies separate activities performed to produce, market, deliver and support a product. The firm’s task is to examine its costs and performance in each value-creating activity and to look for ways to improve it. The firm should estimate its competitors’ costs and performances as benchmarks against which to compare its own costs and performance.
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