The market is competitive, and because of this, companies are trying their best to research and innovate their products. Businesses today need to provide value to their customers to enjoy good profits, but how can a business evaluate that it is providing value to its customers? Here, the concept of the Value chain comes into play. The value chain helps analyse and answer every single question of a business about how it can provide value to its customers. It is a valuable and strategic technique employed by a business to identify if there is any chance of innovation in a product. Let’s get ahead and learn more about value chain meaning.
Did you know? The value chain term was first coined in the 18th century in the Tableau Economique by the French economist Francois Quesney.
Meaning of Value Chain
Value chain refers to a concept that describes the full process of business activity in creating a product or service. It includes activities that are required to transform a product from its infancy to becoming a reality, which refers to the process of the procurement of raw materials for the creation of the finished goods to the stage when the product is complete with the relevant packaging and is suitable enough for consumers to purchase.
The value chain framework comprises five basic activities: inbound operations, outbound logistics, marketing, sales, and service.
Benefits of Value Chain
Value chains have their own set of various benefits, which include:
- Helps in supporting various business decisions for business activities.
- Checkpoints of ineffectiveness in the internal process and suggest corrective measures for change.
- Understand the linking and dependence of various activities involved in the business activity.
- Maximize the firm's output by reengineering activities involved in the business and minimizing the day-to-day expenses incurred by the organization.
- Understand the areas that need improvement and a business's core competencies.
Value Chain vs Supply Chain
Value chain and Supply chain are two distinctive processes involved in bringing the product from its pre-planned design and infancy to the hands of the final customers. Both of these have different perspectives, which are discussed below:
The distinction between a value chain and a supply chain is that the supply chain doesn’t have any added value. Everything in the supply chain is a conveyance, which refers to a commodity transferred from one business to the other, while the main function of the value chain is to add value to the commodity.
The concept of the supply chain originated from operational management textbooks, whereas the value chain concept comes from practical business management concepts.
All the primary activities of the Supply chain ecosystem are carefully planned and controlled by the Supply chain management process. The functional system of a supply chain’s primary goal is to ensure customer satisfaction, while the primary goal of a value chain is to give the business an advantage.
Value Chain Types
A company, while doing an analysis, implements it as a strategy to increase the value of the business. Value chain analysis can be broadly divided into two parts, which are as follows:
It refers to all those activities that benefit the consumers and helps portray a company's creative side. The components of primary activities are:
- Inbound logistics is when the company involved in the production process receives, stores, and distributes its inputs.
- Outbound logistics is when a company sends its various products and services to its end customers.
- Operations involve changing inputs into finished goods.
- Marketing is sales when goods are advertised and promoted in the entire market to generate or increase sales.
- Service, which involves repair and smooth Maintainance of products.
Activities that control the overall success of a business are termed Support activities. The constituents of support activities are:
- Procurement refers to a process of buying resources and is an example of a value chain analysis.
- Development of technology to reduce product costs and improve the equipment used and design related to the product
- Human resource management refers to the recruitment, training and development process of workers to enhance their skills and expertise level.
Porter’s Value Chain Model
Porter’s value chain model tests the process of transforming inputs into outputs. It interprets a company as an institution of value-creating activities. Porter coined the concept to highlight how businesses can help add value to the raw materials and help in creating perfect finished products for the end consumers. Thus, it is considered important to maximize the value earned through each significant stage in a company's operations.
Porter helped represent a chain of activities common to every kind of business, segregated into primary and support activities. These activities were called building blocks for a business to produce a product that adds value to its end customers.
Value chains help increase a business's efficiency so the business can deliver the most value for the least possible cost. The article was focused on the distinctive study of the value chain. Reading would help one to be able to interpret much more easily what the value chain is all about and all its various components and distinctive types.
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