The concept of Value Chain on marketing refers to the various business activities and processes in creating a product or performing a service.
A value chain can consist of multiple stages of a product or service’s lifecycle, including research and development, sales, and everything in between.
Harvard Business School Professor Michael Porter conceived the concept in his book: The Competitive Advantage: Creating and Sustaining Superior Performance.
The value Chain consists of two types of Activities
Primary Activities
Those that go directly into the creation of a product or the execution of a service
- Inbound logistics: Activities related to receiving, warehousing, and inventory management of source materials and components
- Operations: Activities related to turning raw materials and components into a finished product
- Outbound logistics: Activities related to distribution, including packaging, sorting, and shipping
- Marketing and sales: Activities related to the marketing and sale of a product or service, including promotion, advertising, and pricing strategy
- After-sales services: Activities that take place after a sale has been finalized, including installation, training, quality assurance, repair, and customer service
Secondary Activities
Help primary activities become more efficient – effectively creating a competitive advantage.
- Procurement: Activities related to the sourcing of raw materials, components, equipment, and services
- Technological Development: Activities related to research and development, including product design, market research, and process development
- Human Resources Management: Activities related to the recruitment, hiring, training, development, retention, and compensation of employees
- Infrastructure: Activities related to the company’s overhead and management, including financing and planning
Value Chain Analysis
Evaluating each of the activities in a company’s value chain to understand where opportunities for improvement lie
Conducting a value chain analysis prompts you to consider how each step adds or subtracts value from your final product or service.
Value Chain Analysis helps you answer:
- How to differentiate yourself from your competitors
- How to provide the most value to your customers
- How to increase revenue and profits
- How to improve operations efficiency
How to Conduct a Value Chain Analysis
Conducting a value chain analysis involves a systematic process to identify, assess, and optimize the activities contributing to creating value within your business. Here’s a step-by-step guide:
- Identify Activities: Identify all the activities involved in creating and delivering your product or service. These activities can be categorized into primary and support activities.
- Map the Value Chain: Create a visual representation of the value chain, outlining the sequence of activities from raw materials to the final product/service delivery.
- Assess Value: Evaluate each activity’s impact on the final product’s value and customer satisfaction. Consider factors such as quality, efficiency, and uniqueness.
- Analyze Costs: Determine the costs associated with each activity. This includes direct costs (e.g., raw materials) and indirect costs (e.g., overhead).
- Competitive Advantage: Identify areas where your business excels compared to competitors. These areas could be due to cost advantages or unique value-added features.
- Opportunities and Weaknesses: Identify activities where you can improve efficiency, reduce costs, or enhance value. Also, pinpoint areas where your business might be lagging or facing challenges.
- Benchmarking: Compare your value chain to competitors or industry best practices to understand where you stand and what improvements are possible.
- Technological Advancements: Evaluate how technology can improve various activities within the value chain, leading to increased efficiency and innovation.
- Collaboration: Consider partnerships or collaborations to optimize certain activities. Outsourcing non-core activities might be beneficial.
- Cost-Value Trade-offs: Make strategic decisions about where to allocate resources. Sometimes, investing more in certain activities can lead to significant value creation downstream.
- Continuous Improvement: Value chain analysis is an ongoing process. Regularly review and update your analysis to adapt to changes in the market, technology, and customer preferences.
- Implementation: Execute the identified improvements and changes systematically. Monitor the results and make further adjustments as needed.
Remember that a value chain analysis aims to enhance efficiency and create a competitive advantage. It requires thorough understanding of your industry, market dynamics, and company strengths and weaknesses.
Key Takeaways from the concept of value chain in marketing
- A value chain is a step-by-step business model for transforming a product or service from idea to reality.
- Value chains help increase a business’s efficiency to deliver the most value for the least possible cost.
- The end goal of a value chain is to create a competitive advantage for a company by increasing productivity while keeping costs reasonable.
- The value-chain theory analyzes a firm’s five primary and four support activities.
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