Value chain

A value chain is a set of activities that

a firm operating in a specific industry
performs in order to deliver a valuable
product or service for the market. The
concept comes through business
management and was first described
by Michael Porter in his 1985 best-
seller, Competitive Advantage: Creating
and Sustaining Superior Performance.[1]
The idea of the value chain is
based on the process view of
organizations, the idea of
seeing a manufacturing (or
service) organization as a
system, made up of
subsystems each with inputs,
transformation processes
and outputs. Inputs,
transformation processes,
and outputs involve the
acquisition and consumption
of resources – money, labour,
 materials, equipment,
buildings, land,
administration and
management. How value
chain activities are carried
out determines costs and
affects profits.

— IfM, Cambridge[2]

The concept of value chains as

decision support tools, was added onto
the competitive strategies paradigm
developed by Porter as early as 1979.[3]
In Porter's value chains, Inbound
Logistics, Operations, Outbound
Logistics, Marketing and Sales, and
Service are categorized as primary
activities. Secondary activities include
Procurement, Human Resource
management, Technological
Development and Infrastructure (Porter
1985, pp. 11–15).[1][2]

According to the OECD Secretary-

General (Gurría 2012)[4] the emergence
of global value chains (GVCs) in the
late 1990s provided a catalyst for
accelerated change in the landscape of
international investment and trade, with
major, far-reaching consequences on
governments as well as enterprises
(Gurría 2012).[4]

Firm-level

Michael Porter's value chain

The appropriate level for constructing a
value chain is the business unit,[5] not
division or corporate level. Products
pass through a chain of activities in
order, and at each activity the product
gains some value. The chain of
activities gives the products more
added value than the sum of added
values of all activities.[5]

The activity of a diamond cutter can

illustrate the difference between cost
and the value chain. The cutting activity
may have a low cost, but the activity
adds much of the value to the end
product, since a rough diamond is
significantly less valuable than a cut
diamond. Typically, the described value
chain and the documentation of
processes, assessment and auditing of
adherence to the process routines are
at the core of the quality certification of
the business, e.g. ISO 9001.

A firm's value chain forms a part of a

larger stream of activities, which Porter
calls a value system. A value system, or
an industry value chain, includes the
suppliers that provide the inputs
necessary to the firm along with their
value chains. After the firm creates
products, these products pass through
the value chains of distributors (which
also have their own value chains), all
the way to the customers. All parts of
these chains are included in the value
system. To achieve and sustain a
competitive advantage, and to support
that advantage with information
technologies, a firm must understand
every component of this value system.

Primary activities

Inbound logistics: arranging the

inbound movement of materials,
parts, and/or finished inventory from
suppliers to manufacturing or
assembly plants, warehouses, or
retail stores
Operations: concerned with
managing the process that converts
inputs (in the forms of raw materials,
labor, and energy) into outputs (in the
form of goods and/or services).
Outbound logistics: is the process
related to the storage and movement
of the final product and the related
information flows from the end of
 the production line to the end user
Marketing and sales: selling a
product or service and processes for
creating, communicating, delivering,
and exchanging offerings that have
value for customers, clients, partners,
and society at large.
Service: includes all the activities
required to keep the product/service
working effectively for the buyer after
it is sold and delivered.

Support activities

Infrastructure: consists of activities

such as accounting, legal, finance,
control, public relations, quality
assurance and general (strategic)
management.
Technological development: pertains
to the equipment, hardware,
software, procedures and technical
knowledge brought to bear in the
firm's transformation of inputs into
outputs.
Human resources management:
consists of all activities involved in
recruiting, hiring, training, developing,
compensating and (if necessary)
 dismissing or laying off personnel.
Procurement: the acquisition of
goods, services or works from an
outside external source

Physical, virtual and

combined value chain

The value chain Competitive

categorizes the advantage cannot
generic value- be understood by
adding activities looking at a firm as
of an a whole. It stems
from the many
organization. The
discrete activities a
activities
firm performs in
considered under
this designing,

product/service producing,
marketing,
enhancement
delivering and
process can be
supporting its
broadly
product. Each of
categorized under these activities can
two major contribute to a
activity-sets. firm's relative cost
position and create
1. a basis for
differentiation.

Michael Porter[6]

Physical/traditional value chain: a

physical-world activity performed in
order to enhance a product or a
service. Such activities evolved over
time by the experience people gained
from their business conduct. As the will
to earn higher profit drives any
business, professionals
(trained/untrained) practice these to
achieve their goal.
2. Virtual value chain: The advent of
computer-based business-aided
systems in the modern world has led to
a completely new horizon of market
space in modern business-jargon – the
cyber-market space. Like any other
field of computer application, here also
we have tried to implement our
physical world's practices to improve
this digital world. All activities of
persistent physical world's physical
value-chain enhancement process,
which we implement in the cyber-
market, are in general terms referred to
as a virtual value chain.

In practice as of 2013, no progressive

organisation can afford to remain stuck
to any one of these value chains. In
order to cover both market spaces
(physical world and cyber world),
organisations need to deploy their very
best practices in both of these spaces
to churn out the most informative data,
which can further be used to improve
the ongoing products/services or to
develop some new product/service.
Hence organisations today try to
employ the combined value chain.

Combined Value Chain = Physical

Value shown in sample below.

Inbound Production Out-Bound

Marketing Sales Activities
Logistics Process Logistics

GATHER

ORGANIZE

SELECT

SYNTHESIZE

DISTRIBUTE
This value-chain matrix suggests that
there are a number of opportunities for
improvement in any business process.

Industry-level
An industry value-chain is a physical
representation of the various
processes involved in producing goods
(and services), starting with raw
materials and ending with the delivered
product (also known as the supply
chain). It is based on the notion of
value-added at the link (read: stage of
production) level. The sum total of link-
level value-added yields total value. The
French Physiocrats' Tableau
économique is one of the earliest
examples of a value chain. Wasilly
Leontief's Input-Output tables,
published in the 1950s, provide
estimates of the relative importance of
each individual link in industry-level
value-chains for the U.S. economy.

Global value chains

Cross border / cross region
value chains

Often multinational enterprises (MNEs)

developed global value chains,
investing abroad and establishing
affiliates that provided critical support
to remaining activities at home. To
enhance efficiency and to optimize
profits, multinational enterprises locate
"research, development, design,
assembly, production of parts,
marketing and branding" activities in
different countries around the globe.
MNEs offshore labour-intensive
activities to China and Mexico, for
example, where the cost of labor is the
lowest.(Gurría 2012)[4] the emergence
of global value chains (GVCs) in the
late 1990s provided a catalyst for
accelerated change in the landscape of
international investment and trade, with
major, far-reaching consequences on
governments as well as enterprises.
(Gurría 2012)[4]

Global value chains in

development

Through global value chains, there has

been growth in interconnectedness as
MNEs play an increasingly larger role in
the internationalisation of business. In
response, governments have cut
Corporate income tax (CIT) rates or
introduced new incentives for research
and development to compete in this
changing geopolitical landscape.
(LeBlanc et al.)[7]

In an (industrial) development context,

the concepts of global value chain
analysis were first introduced in the
1990s (Gereffi et al.)[8] and have
gradually been integrated into
development policy by the World Bank,
Unctad,[9] the OECD and others.

Value chain analysis has also been

employed in the development sector as
a means of identifying poverty
reduction strategies by upgrading
along the value chain.[10] Although
commonly associated with export-
oriented trade, development
practitioners have begun to highlight
the importance of developing national
and intra-regional chains in addition to
international ones.[11]

For example, the International Crops

Research Institute for the Semi-Arid
Tropics (ICRISAT) has investigated
strengthening the value chain for sweet
sorghum as a biofuel crop in India. Its
aim in doing so was to provide a
sustainable means of making ethanol
that would increase the incomes of the
rural poor, without sacrificing food and
fodder security, while protecting the
environment.[12]

Significance
The value chain framework quickly
made its way to the forefront of
management thought as a powerful
analysis tool for strategic planning. The
simpler concept of value streams, a
cross-functional process which was
developed over the next decade,[13] had
some success in the early 1990s.[14]

The value-chain concept has been

extended beyond individual firms. It
can apply to whole supply chains and
distribution networks. The delivery of a
mix of products and services to the end
customer will mobilize different
economic factors, each managing its
own value chain. The industry wide
synchronized interactions of those
local value chains create an extended
value chain, sometimes global in
extent. Porter terms this larger
interconnected system of value chains
the "value system". A value system
includes the value chains of a firm's
supplier (and their suppliers all the way
back), the firm itself, the firm
distribution channels, and the firm's
buyers (and presumably extended to
the buyers of their products, and so
on).

Capturing the value generated along

the chain is the new approach taken by
many management strategists. For
example, a manufacturer might require
its parts suppliers to be located nearby
its assembly plant to minimize the cost
of transportation. By exploiting the
upstream and downstream information
flowing along the value chain, the firms
may try to bypass the intermediaries
creating new business models, or in
other ways create improvements in its
value system.

Value chain analysis has also been

successfully used in large
petrochemical plant maintenance
organizations to show how work
selection, work planning, work
scheduling and finally work execution
can (when considered as elements of
chains) help drive lean approaches to
maintenance. The Maintenance Value
Chain approach is particularly
successful when used as a tool for
helping change management as it is
seen as more user-friendly than other
business process tools.

A value chain approach could also offer

a meaningful alternative to evaluate
private or public companies when there
is a lack of publicly known data from
direct competition, where the subject
company is compared with, for
example, a known downstream industry
to have a good feel of its value by
building useful correlations with its
downstream companies.

Use with other analysis

tools
Once value has been analysed and the
contributing parts of the organisation
have been identified, other models can
be used in conjunction with the value
chain to assess how these areas can
either be improved or capitalised upon.
For example, a SWOT analysis can be
used within the "outbound logistics"
function to understand what its
strengths and weaknesses are, and
what opportunities there may be to
improve that area, or identify the
threats to what may be a critical part of
the value delivery system.

Equally, other models can be used to

assess performance, risk, market
potential, environmental waste, etc.

SCOR
The Supply-Chain Council, a global
trade consortium in operation with over
700 member companies, governmental,
academic, and consulting groups
participating in the last 10 years,
manages the Supply-Chain Operations
Reference (SCOR), the de facto
universal reference model for Supply
Chain including Planning, Procurement,
Manufacturing, Order Management,
Logistics, Returns, and Retail; Product
and Service Design including Design
Planning, Research, Prototyping,
Integration, Launch and Revision, and
Sales including CRM, Service Support,
Sales, and Contract Management
which are congruent to the Porter
framework. The SCOR framework has
been adopted by hundreds of
companies as well as national entities
as a standard for business excellence,
and the U.S. Department of Defense
has adopted the newly launched
Design-Chain Operations Reference
(DCOR) framework for product design
as a standard to use for managing their
development processes. In addition to
process elements, these reference
frameworks also maintain a vast
database of standard process metrics
aligned to the Porter model, as well as
a large and constantly researched
database of prescriptive universal best
practices for process execution.

Usefulness of value chain

analysis
Under the value chain analysis , a
typical a industry value chain
incorporates three things. Such as:-

Supplier-Related Value Chains -

Activities, costs and margins of
suppliers
Company Value Chains - Internally
 performed activities, costs and
margins
Forward Channel value Chains -
Buyer or end-user value chains

See also
Agricultural value chain
Beneficiation
Business unit
Calculating Demand Forecast
Accuracy
Delta model
Demand chain
Industry information
 Marketing strategy
Porter 5 forces analysis
Porter generic strategies
Strategic management
Value grid
Value
Value migration
Value network
Value shop

Human Resource value chain is to help

improve business performance by
applying the full capabilities of people.
References
1. Porter, Michael E. (1985). Competitive
Advantage: Creating and Sustaining
Superior Performance . New York.:
Simon and Schuster. Retrieved
9 September 2013.
2. "Decision Support Tools: Porter's
Value Chain" . Cambridge University:
Institute for Manufacturing (IfM).
Archived from the original on 29
October 2013. Retrieved 9 September
2013.
3. Porter, Michael E. (1979). "How
competitive forces shape strategy"
(PDF). Harvard Business Review.
Archived from the original (PDF) on 29
October 2013. Retrieved 9 September
2013.
4. Angel Gurría (5 November 2012). The
Emergence of Global Value Chains:
What Do They Mean for Business . G20
Trade and Investment Promotion
Summit. Mexico City: OECD. Retrieved
7 September 2013.
5. Michael E. Porter (1985) Competitive
advantage: creating and sustaining
superior performance. The Free Press
6. Ghemawat, Pankaj (Spring 2002).
"Competition and Business Strategy in
Historical Perspective". Business
History Review. Harvard Business
Review. SSRN 264528 .
7. Pierre LeBlanc; Stephen Matthews;
Kirsti Mellbye (4 September 2013). The
Tax Policy Landscape Five Years after
the Crisis (Report). OECD Taxation
Working Papers. France: OECD.
Archived from the original on 18 March
2014. Retrieved 7 September 2013.
8. Gereffi, G., (1994). The Organisation
of Buyer-Driven Global Commodity
Chains: How US Retailers Shape
Overseas Production Networks. In G.
Gereffi, and M. Korzeniewicz (Eds),
Commodity Chains and Global
Capitalism. Westport, CT: Praeger.
9.
http://unctad.org/en/PublicationsLibrar
y/diae2013d1_en.pdf
10. Jonathan Mitchell; Christopher
Coles & Jodie Keane (December 2009).
"Upgrading Along Value Chains:
Strategies for Poverty Reduction in Latin
America" (PDF). Comercio y Pobreza en
Latino América (COPLA). Briefing Paper.
London: Overseas Development
Institute.
11. Microlinks (2009) [Value Chain
Development Wiki
http://microlinks.kdid.org/vcwiki ]
Washington, D.C.: USAID.
12. Developing a sweet sorghum
ethanol value chain Archived 2014-02-
23 at the Wayback Machine. ICRISAT,
2013
13. Martin, James (1995). The Great
Transition: Using the Seven Disciplines
of Enterprise Engineering. New York:
AMACOM. ISBN 978-0-8144-0315-0.,
particularly the Con Edison example.
14. "The Horizontal Corporation".
Business Week. 1993-12-20.

Further reading
Kaplinsky, Raphael; Morris, Mike
(2001). A handbook for value chain
research . Brighton, England:
Institute of Development Studies,
University of Sussex.
OCLC 156818293 . Pdf. (Prepared
for the International Development
Research Centre.)

External links
Media related to Value chain
 diagrams at Wikimedia Commons
Using a Value Chain Analysis in
Project Management

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