Guide to Value Chain Models: Definition and How To Use Them
By Indeed Editorial Team
Updated June 15, 2022
Published June 8, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Implementing a value chain model can increase a company's value while decreasing costs. Value chain models are a common tool that business analysts, project managers and administrators use to generate a competitive advantage. Learning how to create and implement a value chain model may help you lower costs and increase a company’s value.
In this article, we discuss what a value chain model is, what the model includes and how to implement it.
Value chain models can help businesses become more profitable by highlighting weak points in core functions and processes
The model includes two categories that represent functions within a business: primary activities and support activities
Value chain models carry many additional benefits, such as lower production costs, less waste and competitive market advantages
What is the value chain model?
The value chain model, also known as Porter’s value chain, is a process used to analyze the core functions of a business in order to lower costs and maximize value in every area. Michael Porter, an economist, coined the term value chain in 1985, and it has since become a common phrase and practice in the business world. It's a method of scrutinizing all operational processes from start to finish. For example, if your business produces car parts, you’d analyze everything from the sourcing of materials to the sale of the completed car part.
The more value that a business generates, the more profitable it's likely to be. This gives it a relative advantage against competitors. Closely examining the internal and external processes of the organization can help increase the added value by highlighting areas of weakness or places to cut costs.
Related: 10 Tips To Create Value in Business
What's in the value chain model?
The value chain model emphasizes two major categories of an organization: primary activities and support activities. These two categories highlight where to add value by allowing companies to understand and improve each aspect of the overall production system. It defines primary and support activities as follows:
Primary activities are essential to understanding and implementing a value chain model. These activities include:
Inbound logistics: These processes relate to the inbound logistics of receiving and storing products or materials. Often, suppliers are the main stakeholders you communicate with at this stage.
Operations: Operational processes refer to the manufacturing, assembly or creation of products. Operations are internal and include activities that prepare products for the market.
Outbound logistics: These processes relate to the outbound logistics of getting the product to the customers. Outbound processes can be external or internal.
Marketing and sales: Marketing and sales are the processes used to persuade the customer to buy the product. These processes include a wide variety of strategies and are often internal.
Services: These processes include anything done by the company after a customer purchases a product or service. Services can improve customer satisfaction and maximize the long-term value of the product.
Related: 21 Business Models and Examples
Support activities are supplemental to the value chain model, as all four support activities can influence each primary activity. The support activities include:
Firm infrastructure: These activities support the overall creation of products. This includes management, accounting, quality control and other similar departments.
Human resources management: These activities include hiring, training, paying and retaining employees to support the execution of the value chain.
Technology development: These activities encompass any technological procedures, processes or equipment used by your company within the value chain.
Procurement: These activities involve purchasing and obtaining raw materials and supplies needed to make your product.
Benefits of using the value chain model
Using the value chain model can have many internal and external benefits for your business. These benefits may include:
Lowered cost of production
Efficient procedures of production
Reduced amount of waste
Heightened value for both company and customer
Competitive market advantage
How to use a value chain model
Building and implementing a value chain model takes time, but its benefits can be worth the effort in value for your company. The following is a list of steps you can take to use a value chain model effectively:
1. Establish procedures for each primary activity
Decide which procedures and sub-activities are necessary to carry out each of the five primary activities. Each activity should add to the value being created. These sub-activities may help you organize the necessary components of each activity:
Direct activities: Direct activities generate value by themselves. For example, a contractor's inbound logistics include signing contracts with suppliers or setting delivery dates.
Indirect activities: Indirect activities bolster the success of the direct activities. Keeping records of past supplier contracts or conducting research on acquiring the highest quality materials are indirect activities that support inbound logistics.
Quality assurance: Quality assurance activities maintain the quality of the product. This might include a routine inspection of materials after the contractor has received a shipment from their supplier.
2. Create procedures for each support activity
Next, establish what's important for each of your four support activities. These procedures should create value as a support activity and contribute to the overall value created by the completed product. For example, the contractor determines how technology development adds value to inbound logistics via direct, indirect and quality assurance activities. Evaluate this for each combination of support and primary activities.
Related: How To Add Value to Your Business
3. Identify links between activities
Assessing your activities and determining any links between them can increase the value of both the procedures and the product. While you may not be able to immediately identify areas of weakness, making those connections can continue to provide value. For example, you may notice a low product output connecting to outdated employee training by the human resources department.
4. Analyze each procedure for improvements
Examining each procedure for improvements can contribute to an increase in value. For example, after evaluation, you recognize a need for improved employee training, a need to increase the number of products being completed and a possible connection between the two challenges. This provides an opportunity to brainstorm innovative solutions.
5. Find productive solutions
Once you have identified areas for improvement, you can work toward a productive solution that can maximize the value of the procedure in question. For example, you could hold a meeting with all human resources and operations managers to create a new employee training that teaches the employees a new operations procedure.
6. Apply findings
Apply the solution to the appropriate procedure and begin tracking the progress of the solution. Compare metrics from before and after implementing this solution so you can analyze them for success. For example, after a set amount of time, evaluate the new training procedures and compare the new product output numbers to the old numbers to see if the new training has increased production.
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