Value Chain: Definition, Model, Analysis, and Example

Carla Tardi is a technical editor and digital content producer with 25+ years of experience at top-tier investment banks and money-management firms.

What Is a Value Chain?

A value chain is a series of consecutive steps that go into the creation of a finished product, from its initial design to its arrival at a customer’s door. The chain identifies each step in the process at which value is added, including the sourcing, manufacturing, and marketing stages of production.

A company conducts a value-chain analysis by evaluating the detailed procedures involved in each step of its business. The purpose of a value-chain analysis is to increase production efficiency so that a company can deliver maximum value for the least cost.

Key Takeaways

• 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 so it can deliver the most value for the least cost.
• The end goal of a value chain is to create a competitive advantage by increasing productivity while keeping costs reasonable.
• The value-chain theory analyzes a firm’s five primary activities and four support activities.

Understanding Value Chains

Due to increasing competition for unbeatable prices, exceptional products, and customer loyalty, companies must constantly examine the value they create to retain their competitive advantage. A value chain can help a company discern inefficient areas of its business and implement strategies for maximum efficiency and profitability.

In addition to ensuring seamless and efficient production mechanics, it’s critical for businesses to keep customers confident and secure enough to remain loyal. Value-chain analyses can also assist with this.

The overarching goal of a value chain is to deliver the most value for the least cost in order to create a competitive advantage.

Background

In other words, it’s important to maximize value at each specific point in a firm’s processes.

Components of a Value Chain

In his concept of a value chain, Porter splits a business’s activities into two categories: "primary" and "support," with sample activities listed below. Specific activities in each category will vary by industry.

Primary Activities

Primary activities consist of five components, all essential for adding value and creating a competitive advantage:

1. Inbound logistics: receiving, warehousing, and managing inventory.
2. Operations: converting raw materials into a finished product.
3. Outbound logistics: distributing a final product to consumers.
4. Marketing and sales: enhancing visibility and targeting appropriate customers through advertising, promotion, and pricing.
5. Service: maintaining products and enhancing the consumer experience through customer service, maintenance, repair, refund, and exchange.

Support Activities

The role of support activities is to assist in making the primary activities more efficient. Increasing the efficiency of any of the four support activities benefits at least one of the five primary activities. These support activities are generally denoted as overhead costs on a company’s income statement:

1. Procurement: obtaining raw materials.
2. Technological development: researching and developing manufacturing techniques and automating processes.
3. Human resources (HR) management: hiring and retaining employees who fulfill the firm’s business strategy and contribute to designing, marketing, and selling the product.
4. Infrastructure: including company systems and the composition of its management team, such as planning, accounting, finance, and quality control.

Examples of Value Chains

Starbucks Corporation

Starbucks (SBUX) offers a popular example of a company that understands and successfully implements the value-chain concept. There are numerous articles about how Starbucks incorporates the value chain into its business model.

Trader Joe’s

Another example is privately held grocery store Trader Joe’s, which also has received much press about its tremendous value and competitive edge. Because the company is private, there are many aspects of its strategy that we don’t know. However, when you enter a Trader Joe’s store, you can readily observe instances of Trader Joe’s business that reflect the five primary activities of the value chain.

1. Inbound logistics. Unlike traditional supermarkets, Trader Joe’s does all of its receiving, shelving, and inventory-taking during regular store hours. This system creates significant cost savings in terms of employee wages alone. Moreover, having this work take place while customers are still shopping sends the strategic message that "we’re all in this together."

2. Operations. Trader Joe’s product development is critical. The company selects unique products that are generally unavailable elsewhere. Its private-label products account for more than 80% of its offerings, which often have high profit margins. Another vital aspect of product development for Trader Joe’s is its taste-testing and chef-partnership programs, ensuring high quality and continuous product refinement.

3. Outbound logistics. Although Trader Joe’s does not offer home delivery, it carefully crafted an in-store experience for shoppers. This includes in-store tastings, lively atmosphere, and seasonal and holiday-themed tasting stations where staff prepares and serves new and familiar items.

4. Marketing and sales. Trader Joe’s relies less on traditional marketing. Instead, its entire in-store experience serves as a form of marketing. The company crafts product labels to appeal specifically to its customer base, differentiating itself in the marketplace and sharpening its competitive edge.

5. Service. Customer service is paramount for Trader Joe’s. Highly visible, friendly, knowledgeable, and articulate staff are available to assist shoppers. The company also has a no-questions-asked refund program.

This list could go on before reaching the four support activities cited above, as Trader Joe’s is a wildly successful example of applying value-chain theory to its business.

This list could go on before reaching the four support activities cited above, as Trader Joe’s is a wildly successful example of applying value-chain theory to its business.