If companies are to deliver value to their customers, it is important for companies to understand where value is created, and where value is potentially lost. The Value Chain put forward by Michael E. Porter is helpful in determining where value is created or lost in terms of the activities performed by the company.
The value chain describes the activities within and around the company that create the final product or service. The cost and value of these activities, will determine whether or not best value products or services are being made that will satisfy the customer.
By evaluating a company with the Value Chain framework, business managers have the opportunity of evaluating their entire business in different activities. This gives managers an opportunity to analyze which activities creates the greatest value, and which activities help to secure competitive advantages. Likewise, this framework also gives managers the opportunity of analyzing which processes or activities do potentially not add much value.
The Value Chain thus helps managers to identify the activities that are especially important for competitiveness and for the attainment of the company's overall strategy.
The value chain is grouped into two main groups of activities: primary activities and support activities. Primary activities are directly concerned with the production or delivery of certain products or services. Support activities help to support the efficiency and effectiveness of primary activities.
Below, each activity in the two main activities are listed
- Inbound logistics
- Outbound logistics
- Marketing and sales
- Technology development
- Human resource management
- Firm infrastructure
The overall strategic goals of the company, like e.g. cost efficiency, should therefore be matched by the company's value chain. Managers must therefore focus on the activities generating e.g. cost efficiency, and secure that these activities perform as well as possible.
The Value Chain is a very useful tool in investigating the design of the organization, and to assess whether or not the different activities performed in the company ads the needed amount of value, and if some activities should be outsourced or terminated, because they do not contribute much to the competitive advantage of the company.