What Is a Value Chain Model? (With Steps to Use One)
By Indeed Editorial Team
Published June 4, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
The value chain model aims to lower costs while increasing value. It's commonly used by managers to optimize the operations of a company. When considering whether to adopt this approach to business, it's important to understand how it applies to each aspect of a company's operation. In this article, we discuss what the value chain model is, detail what it includes, consider the benefits, and disclose how to use it.
What is the value chain model?
Economist Michael Porter first used the term value chain model in 1985 to describe a process companies use to analyze the core functions of their business to lower costs and maximize value in every aspect of their operation. The concept has become a common practice in companies across the world in the intervening years. The value chain business model incorporates all the activities that are necessary in the process of creating a product or service. This includes everything from ordering the resources for production to the final delivery of the product or service to the consumer.
The company gathers and analyzes the data in relation to each of these steps, with the goal being to increase production efficiency. By closely examining each step in the value chain, a company can highlight the areas where it's performing poorly and those where they aren't optimizing costs.
What's included in the value chain model
The model categorizes activities as either primary or support activities. Companies define these two categories as follows:
Primary activities incorporate five aspects of a company's operation:
Inbound logistics: These activities relate to the transportation, storage, and receiving of inbound goods to a company. In a manufacturing company, this includes the raw materials the organization plans to use when manufacturing products.
Outbound logistics: These are the activities that relate to the internal or external processes that are associated with getting the product to the consumer.
Operations: This is the creation, production, or manufacture of the product and the associated processes. These activities are internal to the company and incorporate activities relating to preparing the product for the market.
Marketing and sales: These are the internal processes and strategies the company adopts that aim to persuade the customer to purchase the product or service.
Services: These activities relate to customer care and satisfaction post-purchase. They aim to add long-term value to the product or service.
Support activities can influence each of the primary activities. There are four support activities:
Human resources: Activities of this nature relate to the hiring, training, rewarding, and retaining of employees who work in different areas supporting the value chain.
Firm infrastructure: These activities offer fundamental support to the creation of the product and include accounting, management, and quality control.
Procurement: This relates to activities sourcing, purchasing, and obtaining the raw materials and products that are necessary to manufacture the final product.
Technological development: This includes all the activities relating to the technology used in the product's manufacture. It incorporates the procedures, processes, and equipment that the company uses in the chain.
Benefits of using value chain
The following benefits come with the adoption and use of a value-driven approach:
Reduced costs: By analyzing each aspect of the value chain, an organization aims to minimize the costs associated with each step. This means that the company improves efficiency and productivity at each step in the value chain, and the company can reduce the total cost of production.
Competitive advantage: An advantage over the competition can result from offering the consumer better value. This value might come from a lower price, or it may result from a greater benefit that attaches to the product and adds value.
Cost advantage: A cost advantage arises when a company can reduce the costs associated with a specific aspect of the value chain or reconfigure the value chain, so it's more efficient. This can result in the company gaining a cost advantage over its competitors.
Improved bids and proposals: When a company manages its value chain effectively, it can capture, track, and manage the customer requirements at each step in the value chain. This means that the company can more accurately estimate the costs associated with design, planning, procurement, production, and service.
Better product planning, research, and development: Operating under this model means that companies have a comprehensive understanding of what's happening at each step in the production process and that different teams are able to work together to improve the different aspects. This makes planning easier, improves resource allocation, and assists when researching and developing new products.
Standardized processes: The model relies on repeatable and measurable business processes, which assists the company to deliver a consistent product and to better meet customer expectations and commitments. It also assists in resource allocation and reducing waste.
Increased efficiency: A proper analysis of each of the steps in the value chain allows organizations to identify pressure points and areas that aren't operating efficiently. They can then focus their attention on making improvements in these areas.
Increased revenue and profitability: The attention to detail relating to each step of the process and the emphasis on productivity and improving efficiency has the effect of increasing revenue and profitability.
Increases value for company and customer: The company analyzes each step in the value chain to optimize it. As a result, it minimizes inefficiencies and waste, which leads to lower costs, improvements in quality, and value increases for both the company and the customer.
How to use a value chain model
Building and implementing a value chain takes both time and effort. The benefits of investing in the process mean it's a process worth considering. The following steps illustrate how to implement the model:
1. Establish procedures for each primary activity
The first step requires the organization to consider each of the five primary activities and the procedures and sub-activities for each. Divide each of the primary activities into a series of procedures or sub-activities that are necessary and evaluate whether they add value to the end product. If they don't add value, then consider if they're necessary or if there's a way to refine them so that they do add value. When completing this process, it may be helpful to break the elements of each activity down into the following sub-activities:
Direct activities: These activities generate value by themselves. For example, when considering outbound logistics, direct activities may include signing contracts with a transport company to pick products up on a certain date and deliver them to defined locations.
Indirect activities: These activities are those that contribute to the success of the direct activities. For example, performing research to ensure the raw materials are of the highest quality is an indirect activity that contributes to the success of inbound logistics.
Quality assurance: These are the activities that ensure the quality of the product or service. For example, a customer satisfaction survey post-purchase helps identify any quality concerns that may need attention.
2. Establish procedures for each indirect activity
Next, complete the same process for the four indirect activities. Divide each of the indirect activities into a series of procedures or sub-activities, and evaluate whether they add value to the end product. Divide each into direct, indirect, and quality assurance sub-activities.
For indirect activities, it's important to consider the value each indirect activity has not only on the direct activities but on the other indirect activities as well. For example, to evaluate human resources, you might consider the value that the hiring of staff adds to operations. This entails considering each activity that human resources completes and evaluating whether it adds value to the individual procedures that make up operations.
3. Identify links between activities
By determining if there are links between activities, you can look for ways to better add value to the organization, with the aim of adding value to both the procedures and the product. For example, you notice few people are using a new software program to order the raw supplies for production. You can use this observation to find ways to add more value, such as by introducing a new software program or offering additional training.
4. Analyze each procedure for improvements
After identifying the areas where improvements may be necessary to add value, the next step is to look for solutions. In the previous example, too few people are using the available technology to order supplies. Further investigation might reveal the reason for this is that only one member of the team responsible for ordering has had proper training in how to use the software. Given this, you might look to human resources to formalize training when introducing new technology.
5. Implement the solutions
Once the company identifies the solution, it's important to implement it properly. This considers the practical aspects of the solution. For example, when implementing training for new technology, it's important to ensure that staff members are responsible for the training, including how and when it occurs.
6. Evaluate the improvements
Evaluation of improvements is a key aspect of the model. This entails obtaining clear metrics that enable the company to evaluate the success of the improvement. From the technology example, metrics relating to the number of employees using the software after training are relevant.
Explore more articles
- 20 Common Types of Video Content for Marketing Purposes
- A Step-by-Step Guide on How to Schedule an Email in Gmail
- Stages and Benefits of Developing a Product Strategy
- Top 10 Online SEO Courses (With Descriptions and Benefits)
- 8 Popular Customer Services Courses and Certifications
- 7 Methods for Taking Organized Notes (With Tips to Improve)
- How to Apply the Five Whys Analysis to a Business Problem
- Understanding the Importance of Marketing in Business
- When to Use a Pareto Chart (Plus How to Create One)
- What Is a Corporate Resolution and How Does It Work?
- What Is Cybersecurity Risk Management? (With Steps)
- A Step-by-Step Guide to Selecting the Right Business Fonts