In this post, we will take a closer look at what a value chain – and why such an analysis can be a great idea to optimize a company’s finances.
The value chain is an essential analytical tool for many businesses, providing an overview of a company’s activities and the connections between them.
Each activity should be analyzed individually, but together they form a chain that ultimately adds value to the product the company aims to sell.
An essential analytical tool
The value chain is used as a tool to help businesses gain an overview of the most important activities, with the goal of creating as much value as possible for customers and achieving greater competitiveness.
The better the individual elements work together, the stronger the chain will be in creating value for the finished product.
Product is the key term here, as the classic value chain primarily applies to manufacturing companies that benefit from insights into activities like logistics, production, and technological resources.
Later in this post, you can read more about which activities might be relevant for other types of businesses, such as trading companies or those involved in providing services.
Below is more information on activities relevant to manufacturing companies.
Division of activities
The value chain provides an overview of nine different activities within a business. These activities are divided into primary activities and support activities.
Let’s take a closer look at these below.
Primary activities
Primary activities refer to those that have a direct impact on the product your company offers.
- Inbound logistics: Purchasing, receiving, and distributing raw materials or components used to create your product.
- Operations: Using raw materials to design and develop the final product.
- Outbound logistics: Distribution and delivery of the finished products.
- Marketing and sales: Marketing efforts, such as campaigns and ads, aimed at promoting and selling your products.
- Service: Post-sale services such as customer support, returns, and warranty claims.
Support activities
As the name suggests, support activities assist the primary activities but do not have a direct effect on the finished product itself.
Their role, like the primary activities, is to create value for the customer by enhancing the company’s efficiency in production and distribution.
- Firm infrastructure: This refers to the overall organizational structure of the company, ensuring that daily operations run smoothly.
- Human resources: No business can function without the right employees. HR plays a crucial role in adding value to customers by ensuring employee motivation and development, which are key elements in a well-functioning company.
- Technological resources: Resources used in the production and distribution of products. Keeping up with technological advancements ensures efficient, high-quality production.
- Procurement: Activities related to purchasing goods, technology, supplier agreements, etc.
Margin
Lastly, the margin refers to the difference between the total cost for the company and the total value the product has for consumers, including revenue from sales.
In this way, the margin represents the profit percentage that the company ultimately gains as a result of the activities listed above.
Value chain for other types of businesses
As mentioned, the description of the classic value chain above may not include all relevant elements for businesses that are not involved in manufacturing.
For service companies, the primary activities will look different. For example, inbound and outbound logistics are not included, and there will instead be a focus on elements such as:
- Product and concept development.
- Marketing and the four P’s.
- Sales, including the use of CRM systems.
- Implementation of service strategies.
For trading companies, the focus will not be on production activities, but instead on activities like purchasing products, inventory management, and distribution, along with marketing, sales, and service.
Although the value chain was originally developed with manufacturing companies in mind, it can easily be adapted for other types of businesses looking to analyze how their activities align with the goal of creating maximum value and profit.
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