Loading the player...

What is '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 the finished 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.

BREAKING DOWN 'Value Chain'

A value chain is a company model that segments 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 touchpoints so that total value exceeds the total costs 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, which encompasses all efforts to convert raw materials into a finished product.

Outbound logistics form the third activity in the value chain and occurs after all operations are completed and the product is ready for the customer. Activities required to deliver a product to the end user are considered part of outbound logistics. Marketing and sales are the fourth part of the value chain and include all strategies to enhance the visibility of the product, satisfy consumer needs with the product, and facilitate the sale of the product.  Activities include channel selection, advertising, and pricing. Service is the fifth and final step in a company's value chain and describes all activities that create better consumer experiences, such as customer service, refund and exchange programs, and warranty and repair services.

Companies can harness a competitive advantage at any one of the five activities in the value chain. Creating outbound logistics that are highly efficient, for example, reduces a company's shipping costs and allows it to either realize more profits or pass the savings to the consumer by way of lower prices.

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 (HR) 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.

RELATED TERMS
  1. Raw Materials

    Raw materials are commodities companies use when producing or ...
  2. Logistics

    Logistics is the overall process of managing the way resources ...
  3. Contract Logistics

    Contract logistics is the outsourcing of resource management ...
  4. Outbound Cash Flow

    Outbound cash flow is any money a company or individual must ...
  5. Chained Payment

    A chained payment is a parallel method of payment that involves ...
  6. Basic Materials Sector

    The basic materials sector is a category of stocks for companies ...
Related Articles
  1. Small Business

    Value chain analysis: The basics

    Value chain analysis establishes an action plan to understand and implement activities that create values to a firm's clients, resulting in firm profits.
  2. Personal Finance

    Why You Should Consider A Career In Supply Chain Management

    Supply chain managers ensure that increasingly global companies can coordinate distant sources of materials, labor, and manufacturing to successfully bring products to market.
  3. Personal Finance

    Supply Chain Management Jobs Are Booming

    There has been huge growth in supply chain management, both in the number of positions open and the range of responsibilities assigned to those positions.
  4. Insights

    Chain Launches Blockchain Open Source Developer Platform (MSFT, NDAQ)

    San Francisco-based blockchain technology solutions provider Chain, Inc., has recently released ‘Chain Core Developer Edition,’ a free and open source version of its distributed ledger platform ...
  5. Investing

    Want ETFs But Hate To Buy And Hold? Try Active ETFs

    Choosing between passive and active ETFs depends on your beliefs about active management's value.
  6. Small Business

    How To Expand Your Business Internationally

    A guide to the risks and rewards of expanding a business abroad.
  7. Investing

    Market value versus book value

    Understanding book value and market value is helpful in determining a stock's valuation and how the market views a company's growth prospects in the future.
  8. Investing

    Dollar General Buying Dollar Express Chain

    At a time when many retailers have been closing stores, Dollar General (NYSE: DG) has been adding them at a furious pace. The discount chain plans to open 1,000 new locations in 2017, after ...
  9. Investing

    Alibaba-Backed Best Inc. to Launch $930M US IPO

    Chinese logistics company Best Inc. is gearing up to launch a nearly $1 billion IPO in the US.
  10. Investing

    IBM Planning to Use Blockchain to Track Diamonds

    IBM's latest blockchain initiative will track the supply chain in the jewelry industry.
RELATED FAQS
  1. What is the difference between a value chain and a supply chain?

    Learn the difference between a value chain and a supply chain, and why a company would want to maximize the value of both. Read Answer >>
  2. Value chain analysis: What are the advantages and disadvantages?

    Learn about the five activities that make up a generic value chain, and understand the advantages and disadvantages of value ... Read Answer >>
  3. What are examples of key operating activities in a company?

    Discover the things that make up a company's operating activities, including examples of some the key operating activities ... Read Answer >>
  4. What is the difference between prime cost and conversion cost?

    Understand the difference between prime costs and conversion costs, and learn how each type is used in analyzing business ... Read Answer >>
  5. What is the prime cost formula?

    Prime costs are the costs directly attributed to the production of a product. Before calculating prime costs, direct costs ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center