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A value chain is a progression of activities that a firm operating in a specific industry performs in order to deliver a valuable product (i.e., good and/or service) to the end customer. 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''. The concept of value chains as decision support tools, was added onto the competitive strategies paradigm developed by Porter as early as 1979. In Porter's value chains, Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales, and Service are categorized as primary activities. Secondary activities include
Procurement Procurement is the method of discovering and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agency buys goods or s ...
, Human Resource management, Technological Development and Infrastructure . According to the OECD Secretary-General 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 .


Firm-level

The appropriate level for constructing a value chain is the business unit,Michael E. Porter (1985) Competitive advantage: creating and sustaining superior performance. The Free Press 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. The activity of a
diamond cutter Diamond cutting is the practice of shaping a diamond from a rough stone into a faceted gem. Cutting diamonds requires specialized knowledge, tools, equipment, and techniques because of its extreme difficulty. The first guild of diamond cutters and ...
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

All five primary activities are essential in adding value and creating a competitive advantage and they are: *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 products 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 working effectively for the buyer after it is sold and delivered. Companies can harness a competitive advantage at any one of the five activities in the value chain. For example, by creating outbound logistics that are highly efficient or by reducing a company's shipping costs, it allows to either realize more profits or pass the savings to the consumer by way of lower prices.


Support activities

Using support activities helps make primary activities more effective. Increasing any of the four support activities helps at least one primary activity to work more efficiently. *Infrastructure: consists of activities such as accounting, legal, finance,
control Control may refer to: Basic meanings Economics and business * Control (management), an element of management * Control, an element of management accounting * Comptroller (or controller), a senior financial officer in an organization * Controlli ...
, 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(Raw materials) into outputs(Finished goods). *
Human resources management Humans (''Homo sapiens'') are the most abundant and widespread species of primate, characterized by bipedalism and exceptional cognitive skills due to a large and complex brain. This has enabled the development of advanced tools, culture, ...
: consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel. *
Procurement Procurement is the method of discovering and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agency buys goods or s ...
: the acquisition of goods, services or works from an outside external source. In this field company also makes decisions of purchases.


Virtual value chain

The virtual value chain, created by John Sviokla and
Jeffrey Rayport Jeffrey F. Rayport is an academic, author, consultant, and founder and chairman of Marketspace LLC, a strategic advisory practice that works with leading companies to reinvent how they interact with and relate to customers. Marketspace was a unit o ...
, is a business model describing the dissemination of value-generating information services throughout an Extended Enterprise . This value chain begins with the content supplied by the provider, which is then distributed and supported by the information infrastructure; thereupon the context provider supplies actual customer interaction. It supports the ''physical value chain'' of
procurement Procurement is the method of discovering and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agency buys goods or s ...
, manufacturing,
distribution Distribution may refer to: Mathematics * Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations *Probability distribution, the probability of a particular value or value range of a vari ...
and sales of traditional companies.


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 China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's List of countries and dependencies by population, most populous country, with a Population of China, population exceeding 1.4 billion, slig ...
and
Mexico Mexico (Spanish language, Spanish: México), officially the United Mexican States, is a List of sovereign states, country in the southern portion of North America. It is borders of Mexico, bordered to the north by the United States; to the so ...
, for example, where the cost of labor is the lowest. 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.


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. In an (industrial) development context, the concepts of global value chain analysis were first introduced in the 1990s (Gereffi et al.) and have gradually been integrated into development policy by the World Bank, Unctad, 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. 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. For example, the International Crops Research Institute for the Semi-Arid Tropics ( ICRISAT) has investigated strengthening the value chain for
sweet sorghum Sweetness is a basic taste most commonly perceived when eating foods rich in sugars. Sweet tastes are generally regarded as pleasurable. In addition to sugars like sucrose, many other chemical compounds are sweet, including aldehydes, ket ...
as a biofuel crop in
India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area, the List of countries and dependencies by population, second-most populous ...
. 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.


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 stream mapping, a cross-functional process which was developed over the next decade, had some success in the early 1990s. The value-chain concept has been extended beyond individual firms. It can apply to whole supply chains and
distribution Distribution may refer to: Mathematics * Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations *Probability distribution, the probability of a particular value or value range of a vari ...
networks. The delivery of a mix of products (goods 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. Moreover, it can offer an insight in how e-commerce and m-commerce (mobile commerce) add value in the flow of activities and processes involved in business-to-consumer markets. In 2019, ITIL 4 was released by AXELOS. Included in ITIL 4 is the Service Value Chain. The central element in the ITIL Service Value System is the Service Value Chain.


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.


See also

* Agricultural value chain *
Beneficiation In the mining industry or extractive metallurgy, beneficiation is any process that improves (benefits) the economic value of the ore by removing the gangue minerals, which results in a higher grade product (ore concentrate) and a waste stream ( ta ...
* Business unit * Calculating Demand Forecast Accuracy * Delta model * Demand chain *
Industry information Industry classification or industry taxonomy is a type of economic taxonomy that classifies companies, organizations and traders into industrial groupings based on similar production processes, similar products, or similar behavior in financial ...
* Marketing strategy *
Porter 5 forces analysis Porter's Five Forces Framework is a method of analysing the operating environment of a competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, ...
* Porter generic strategies *
Strategic management In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of resources and an assessme ...
*
Value Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value beyo ...
* Value migration * Value network *
Value shop A value shop is an organization designed to solve customer or client problems, rather than creating value by producing output from an input of raw materials. The principles of value shops were first conceptualized by Thompson in 1967, and properly ...
*
Wardley map A Wardley map is a map for business strategy. Components are positioned within a value chain and anchored by the user need, with movement described by an evolution axis. Wardley maps are named after Simon Wardley who created the technique at Fot ...
Human Resource value chain is to help improve business performance by applying the full capabilities of people.


References


Further reading

:*
Pdf.
(Prepared for the International Development Research Centre.)


External links

*
Using a Value Chain Analysis in Project Management
{{DEFAULTSORT:Value Chain Supply chain management Michael Porter Value proposition