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What is Value Chain

The Benefits Businesses Derive from Value -Adding Activities

Feb 12, 2009 Gwendolyn Cuizon

Value chain pertains to activities that are perceived as value-adding, which could be either primary activities or support activities of the business.

The term value chain was coined by Michael Porter in his 1985 bestselling book Competitive Advantage: Creating and Sustaining Superior Performance (New York, NY The Free Press). The idea around value chain as expounded in Porter’s book involves “primary activities” that are deemed as value-adding activities of an organization which include the following: inbound logistics, production, outbound logistics, sales and marketing, maintenance.

Support Activities

Behind the “primary activities” are “support activities” that also add value to the organization. These functions are: administrative, infrastructure management, human resources management, R&D, and procurement. The ultimate aim of value chain is to create maximum value at minimal costs.

Value chain became a recognized powerful analysis tool for strategic planning. Kotelnikov (2001) defined value chain as a high-level model of how businesses receive raw materials as input, add value to the raw materials through various processes, and sell finished products to customers.

Benefits of Value Chain

Value chain is critical tool to business development because it espoused the idea that, according to Kotelnikov (2001) “success in digital economy is the implementation of an integrated value chain that extends across - and beyond - the enterprise.”

Hence, multiple value chain participants -- from employees to managers to suppliers and to customers -- must deliver value and strive for a common goal. Value chain then helps in promoting understanding end-to-end process, spotting anomalies, eliminating redundancy and inefficiencies, and allowing process design, transformation and experience to take place freely and continuously.

Knowing what value chain can do, it is imperative, then, that companies implement value chain as an important tool in their corporate strategy. Patterns and trends in a constantly evolving product are very important to some companies. Take for instance knowing the latest gadgets for mobile phones would be beneficial to Nokia.

Being ahead of their competitors and abreast with the changing needs of their customers is what keeps big businesses at the forefront of their respective industries. Changes in the international business scene could potentially affect the value chain. This is because adapting to change and making necessary allocations for it is critical for any company's survival.

Also, value chain is not contained within the individual’s business alone. It also pertains to the supply chains and distribution networks. Delivering a combination of products and services to the end customer will create different economic actors along the way that have their own value chain. The synchronized interactions of those local value chains lead to an extended value chain that could sometimes be global in extent.

The copyright of the article What is Value Chain in Business Management is owned by Gwendolyn Cuizon. Permission to republish What is Value Chain in print or online must be granted by the author in writing.

Value Chain