Value Chain Model

What is it?

A value chain refers to a series of interconnected activities that a company engages in to create and deliver a valuable product or service to its customers. It encompasses all the processes and activities involved in the production, marketing, distribution, and support of a product, from its initial conception to its final delivery to the customer.

The value chain concept helps organizations analyze and understand the various stages of their operations, allowing them to identify opportunities for cost reduction, quality improvement, and overall efficiency. It is divided into two main categories:

1. Primary Activities: These are directly involved in the creation and delivery of the product or service. They include activities like inbound logistics (sourcing materials), operations (production), outbound logistics (distribution), marketing and sales, and customer service.
2. Support Activities: These activities provide the necessary support and infrastructure for the primary activities to function effectively. Examples include procurement, technology development, human resources management, and infrastructure.

By analyzing each step in the value chain, companies can identify areas where they can gain a competitive advantage, reduce costs, or enhance their product or service offerings. Value chain analysis is a valuable strategic management tool for businesses to improve their overall performance and competitiveness in the market.

Who developed it?

The “value chain” model was developed by Michael E. Porter, a renowned American economist, researcher, and professor at Harvard Business School. Michael Porter introduced this concept in his book titled “Competitive Advantage: Creating and Sustaining Superior Performance,” which was first published in 1985. In this book, Porter outlined the concept of the value chain as a framework for understanding how businesses create value through a series of interconnected activities.

Porter’s value chain model has become a fundamental tool in strategic management and is widely used by businesses to analyze their operations, identify areas for improvement, and gain a competitive advantage in the market. It has had a significant impact on the field of business strategy and remains a cornerstone of modern business management.

Example

Let’s explain the “value chain” model using a chocolate shop as an example. The value chain for a chocolate shop consists of a series of interconnected activities that contribute to the creation and delivery of a chocolate to the customer:

1. Inbound Logistics:
   • Supplier Relationships: The shop establishes relationships with suppliers to source ingredients such as flour, tomatoes, cheese, and toppings.
   • Ordering and Inventory Management: Efficient ordering and inventory management ensure a constant supply of fresh ingredients.
2. Operations:
   • Food Preparation: Skilled chefs and kitchen staff prepare the dough, sauce, and toppings according to the shop’s recipes.
   • Cooking: Chocolates are cooked in ovens to perfection, ensuring taste and quality.
3. Outbound Logistics:
   • Packaging: Chocolates are carefully placed in boxes to maintain their quality during delivery or takeout.
   • Delivery: For shops offering delivery, drivers ensure prompt and safe delivery to customers.
4. Marketing and Sales:
   • Menu and Pricing: The shop designs a menu with various chocolate options and sets competitive prices.
   • Advertising: Marketing efforts, which may include social media, ads, and promotions, attract customers.
   • Ordering Channels: Customers place orders through various channels, such as phone, website, or mobile app.
5. Customer Service:
   • Order Taking: Friendly staff take orders, answer questions, and provide a positive customer experience.
   • Issue Resolution: Addressing customer concerns or issues promptly is essential for customer satisfaction.
6. Procurement:
   • Vendor Selection: Choosing reliable suppliers who provide quality ingredients at competitive prices.
   • Negotiation: Negotiating favorable terms and prices with suppliers.
7. Technology Development:
   • Ordering System: Developing and maintaining an efficient online ordering system.
   • Kitchen Equipment: Investing in technology like high-quality ovens and kitchen appliances.
8. Human Resources:
   • Staff Training: Training employees in food preparation, safety, and customer service.
   • Scheduling: Efficient staff scheduling to meet demand while controlling labor costs.
9. Infrastructure:
   • shop Facilities: Maintaining a clean and welcoming dining area for customers.
   • Delivery Vehicles: Ensuring the shop has reliable vehicles for deliveries.

By analyzing each of these value chain activities, a chocolate shop can identify areas for improvement, cost reduction, or differentiation from competitors. For example, optimizing ingredient sourcing (inbound logistics) or improving online ordering (technology development) can enhance the overall value provided to customers while increasing operational efficiency. Ultimately, understanding and managing the value chain is crucial for delivering a high-quality product and maintaining competitiveness in the shop industry.