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Definition: A value chain is the whole series of activities that create and build value at every step. The total value delivered by the company is the sum total of the value built up all throughout the company. Michael Porter developed this concept in his 1980 book 'Competitive Advantage'.
Description: The significance of the value chain: The value chain concept separates useful activities (which allow the company as a whole to gain competitive advantage) from the wasteful activities (which hinder the company from getting a lead in the market). Focusing on the value-creating activities could give the company many advantages. For example, the ability to charge higher prices; lower cost of manufacture; better brand image, faster response to threats or opportunities.
What is the value chain made of?
Porter defines the value chain as made of primary activities and support activities. Primary involves inbound logistics (getting the material in for adding value by processing it), operations (which are all the processes within the manufacturing), outbound (which involves distribution to the points of sale), marketing and sales (which go sell it, brand it and promote it) and service (which maintains the functionality of the product, post sales).
The support functions which feed into all the primary functions are the firm infrastructure, like MIS which allows managers to monitor the environment well; Human Resource, which develops the skills needed to steer the company well; procurement to buy/ source goods at the right price, which increasingly takes importance because of difficult economic conditions and technology, which could give the firm speed, accuracy and quality. Both these allow the firm to charge a margin, which partly comes from the value addition of the primary and support functions and partly from the advantage that the company gains due to communication of the value addition to the consumer (brand image, faith, trust and so on).
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