A value chain is the combination of activities a business undertakes to move a product or service along its life cycle, including design, marketing, distribution, and customer support.
A company’s end goal is value creation, particularly in the form of profit. By understanding each stage of the value chain, a business can create greater profit by making necessary changes to the process. With so many activities and suppliers involved, the value chain has many facets.
Definition and Examples of a Value Chain
A value chain documents, in detail, the various steps a business goes through to bring a product or service to the customer. The chain covers the activities, workers, and outsourced firms employed in bringing a product from concept to distribution.
Harvard Business School economist Michael Porter developed the value chain concept to pay specific attention to how impactful each phase is for a company’s bottom line. The goal of using the value chain is to create an operationally strong combination of activities that bring about higher sales prices at lower costs to the business. Analyzing your company’s value chain allows you to increase value at each stage in the chain so you can deliver a stronger product, impress customers, and build more profit. You can then reinvest in specific parts of the value chain and continue your business’ growth.
Starbucks is an example of a corporation that uses the value chain to boost its international sales presence. Starbucks operates in over 60 countries, yet each cafe has the same well-known appeal. Starbucks uses the value chain to identify its most and least costly activities, then uses this information to make changes, create more value for the customer, and create more profit for the business.
But even small businesses can identify the activities that make up their value chains so they can focus on more affordable practices—and bigger profits.
- Alternate name: Value system
How a Value Chain Works
A value chain details the activities, workers, and suppliers that take a product or service from concept to distribution. The chain is made up of primary and secondary activities that affect a product’s value to both the customer and the company.
Primary activities directly contribute to a product’s creation, including:
- Inbound logistics: Gathering and storing inventory and market data
- Operations: Creating finished products from raw materials
- Outbound logistics: Distributing products to clients
- Marketing and sales: Promoting and advertising products to potential consumers
- After-sales services: Training customer service representatives to support clients with installations, returns, etc.
Secondary activities support the primary actions to create a product, and they include infrastructure, team management, technology development, and material procurement. These supporting activities are crucial to the success of the primary activities; for example, without product design and market research, a company could not successfully market and sell a product.
Identifying a value chain is essential for understanding your business’s profit margin and operating margin so you can ensure the least input leads to the highest output. Detailing the value chain helps you easily see where an expensive part of the process could lead to decreased margins and take steps to lower expenses.
Let’s review the Starbucks value chain to see how it helps encourage stable growth. Starbucks’ value chain is relatively straightforward, so a small business could use it as a model. A Harvard Business School case study identified the primary activities behind the coffee chain, including:
- Inbound logistics: Building close relationships with coffee-bean suppliers from around the world and obtaining the best prices.
- Operations: Operating more than 30,000 stores in 83 countries.
- Outbound logistics: Selling products in stores and through licensed dealers using point-of-sale systems, the Starbucks mobile app, and Starbucks cards.
- Marketing and sales: Focusing heavily on the “Starbucks experience” to create loyal consumers.
- After-sales service: Training team members on customer service and creating recognizable, clean cafes.
Secondary activities that support Starbucks’ annual revenue creation, which topped $23 billion in 2020, include employee benefits, well-designed cafes, and an easy-to-use mobile app.
Types of Value Chains
Your business’s manufacturing and distribution process may fall into one of two distinct types of value chains: a typical value chain or a global value chain.
A typical value chain records the business activities and players within a single geographic location or firm. For example, a small business that operates solely in one state would use a typical value chain, as might a larger company that operates within a single country.
Duke University describes a global value chain as the activities and critical players spread across different firms and countries. As described above, Starbucks is an example of a global value chain, since it sources coffee beans from various countries and ships supplies to Starbucks locations around the world.
- A value chain documents the activities and business players involved in taking a product or service from concept to distribution.
- Value chains include primary activities involved in creating products and secondary activities that support that creation.
- Understanding your value chain allows you to consider your profit margins and figure out how to create more value with lower expenditures.