Last edited 18 Apr 2019

Value chain

[edit] Introduction

The term value chain was coined in 1998 by Harvard Business School professor Michael Eugene Porter in his book ‘Competitive Advantage: Creating and Sustaining Superior Performance’ (Free Press, 1985).

It comprises all the activities that must be performed by a firm in order to allow it to bring to market a product or service. These activities may include designing, manufacturing, marketing, sales, delivering and supporting the product (after sales) and so on.

The type of firm in question could be one that produces an end product by processing raw materials or it may be a firm that buys from other manufacturers semi-processed goods and converts them into finished products. The efficiency with which the company carries out these tasks will determine its costs and profits.

[edit] The chain of activities

To get to market, a product or service will typically go through an ordered chain of activities and at each stage it will increase in value. For example, in the processing of raw materials, the value chain comprises all the steps involved in bringing the product from conception to distribution, which includes obtaining the raw material, processing and manufacturing, marketing and promotion. For instance, sawn timber in itself may not have a high value, but it will increase in value as it goes through the various stages of cutting, treating, planing, shaping and assembly to then be marketed, sold and delivered.

Companies gain competitive advantage by continually examining and improving their value chain and delivering maximum value while incurring minimum cost. They may examine their value chains (value chain analysis) to see where in their operations there are inefficiencies, then instigate measures to correct those inefficiencies and add further value (at the lowest possible cost) in order to maximise their operations and profitability.