What is a value chain and how to create yours

The value chain is the set of all actions that aim to add value to your products/services, from conception to final delivery to the customer. It is a fundamental piece for companies to constantly reassess what their competitive advantages are and what value they are delivering to their consumers.

Find out more about what the value chain is, what its benefits are, and how to implement it in your company.

Learn more: How to create an action plan template

What is value chain?

A value chain is nothing more than a diagram where a company’s activities are represented. This strategic tool was created by Michael Porter in 1985 and allows you to better understand the business.

The value chain helps create a competitive advantage by delivering greater value to customers at the lowest possible cost. With it, a company can identify areas for improvement in efficiency, cost reduction, or strengthening differentials that make it stand out from the competition.

Thus, the company has a better alignment of internal activities, ensuring that they all exist intending to create value for the customer. That way, you have a sustainable competitive advantage that is constantly reviewed/strengthened.

In practice, the value chain is divided into two main categories: primary activities and support activities. Each of them has its elements and characteristics. Learn more about them below.

Primary activities

The primary activities are those directly linked to the manufacture, sale and transportation of the product to the customer. They are divided into five categories:

1. Inbound logistics: It consists of activities related to the receipt and movement of raw material stock used in manufacturing the product.
2. Operations: This stage includes everything related to equipment, assembly, product packaging, maintenance of the industrial park and other activities to add value to it. In other words, Operations encompass everything that transforms the raw material into the finished product.
3. Outbound logistics: This category includes the activities related to the delivery of the product/service to the customer. As examples, we can mention the systems for collecting, storing, or distributing the product.
4. Marketing and sales: In this category are activities that allow customers to learn about the product or service and make a purchase from it. This involves activities of dissemination, advertising, and points of sale, among others.
5. Service: Finally, the Service category brings the activities that increase the perception of the value of the products/services after the purchase. These include installation services, customer support, customer training, product/service updates and improvements, among others.

Support activities

As the name implies, support activities are those that support primary activities. In this way, they help to create an advantage over competitors, as well as ensure that primary tasks occur correctly. They are divided into four categories:

1. Company infrastructure: these are the support systems necessary for the company to keep its operations running. Some of the main examples are the legal, financial, accounting, and quality management sectors.
2. Human Resources Management: in this category are all items that deal with activities related to the recruitment, training, retention, and remuneration of the company’s employees.
3. Technology development: these are the activities to support the value chain, improvement and innovation within the company’s area of operation. In this group are tasks such as research and development, process automation, and design.
4. Purchasing: It involves the acquisition of the necessary resources for the company to be able to work: acquisition of raw materials, services, machinery, and office supplies, among others. This also includes finding suppliers and negotiating the best prices.

Below is an explanatory diagram that helps you visualize how these groups in the value chain are linked. According to Michael Porter, it shows the relationship between primary and support activities.

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How to create a value chain: Examples and tips

Now that you understand what a value chain is and what the main elements of one are, it’s time to understand the main steps that must be followed when setting one up in your company. See below for a step-by-step guide to creating your value chain!

1. Identify the breakdown of primary and support activities

The first step is to identify those activities that are necessary for the creation of the product/service offered by the company. To help, divide them into three subcategories:

• Direct activities: are those that generate value by themselves, without depending on another activity in the chain. Examples of this category are sales and advertising activities.

• Indirect activities: these help in delivering value so that direct activities occur smoothly. Among them are the management of the sales team and the maintenance of customer records, for example.

• Quality assurance: these are those actions that ensure that direct and indirect activities meet the necessary standards under regulations and legislation.

Then, determine the sub-activities that create value within each primary activity. For example, how to indicate how the human resources department can add value to logistics, operations, etc.

2. Analyze the value and costs of the identified activities

Then, gather the other employees and do a reflection exercise on how each activity adds value to customers and the business in general. 

Then, compare each activity to the competitive advantage you’re trying to achieve (lead or cost differentiation, for example). Next, evaluate whether this activity supports the objective. To complete this step, you can ask questions such as:

• Does this activity require a lot of time, energy and budget?

• How much does a certain raw material used in the manufacture of the product cost?

This will help identify which activities are profitable and which are not.

3. Identify the connections

At this stage, all connections between the previously identified activities should be highlighted. This process usually takes a considerable amount of time, so be careful to list all the links between the activities (whether primary or supportive).

4. Look for opportunities to increase value

Once the above steps have been completed, it is important to determine which activities should be optimized or improved to maximize the value you provide to customers.

In this task, keep in mind that your organization’s value chain must reflect business strategies. In other words, it is necessary to make it clear what are the characteristics that differentiate your company from the competition, such as having a lower cost structure, for example.

Then, after completing the previous steps, you will have a huge list of change proposals and should prioritize them. Use as a criterion the focus on what most impacts your customer, ensuring that you start with what adds the most value.

Learn more: 5 tips to optimize your processes

Conclusion 

Now you know what the value chain is, how to bring this strategy to your reality, and the main characteristics of it that need to be in your planning.

And if you want more efficiency and compliance in your operations, our experts can help you identify the best strategies for your company with SoftExpert solutions. Talk to us today!