Value chain

{{Short description|Set of activities that a firm performs to deliver a valuable product}} {{More citations needed|date=June 2023}} {{Strategy}} A '''value chain''' is a sequence of activities that an organization performs to design, produce, market, deliver, and support goods or services for customers. The concept was introduced by '''Michael Porter''' in ''Competitive Advantage: Creating and Sustaining Superior Performance'' (1985) as a framework for analyzing how firms create value and achieve competitive advantage through coordinated business processes.

Value chain analysis examines how each activity—ranging from inbound logistics and operations to marketing, sales, and after-sales service—contributes to overall cost structure and customer value. The framework also includes supporting functions such as infrastructure, human resource management, technological development, and procurement, which enable primary activities to operate effectively.

Beyond individual firms, the value-chain concept has been extended to '''industry, national, and global levels''', where interconnected production networks—often referred to as '''global value chains (GVCs)'''—shape international trade, investment patterns, and economic development. As a result, value-chain analysis is widely used in '''strategic management, supply-chain management, and development economics''' to understand competitiveness, efficiency, and value creation across organizations and regions.

==Role of the business unit== According to Porter, the appropriate level for constructing a value chain is the business unit within a business,<ref name="Michael E. Porter 1985">{{cite book | last=Porter | first=Michael E. | title=Competitive advantage: Creating and sustaining superior performance | publisher=Free Press | date=1985 | isbn=978-0-02-925090-7}}</ref> not a business division or the company as a whole. Porter is concerned that analysis at the higher company levels may hide certain sources of competitive advantage only visible at the business unit level.<ref>{{cite book | last=Porter | first=Michael E. | chapter=The value chain and competitive advantage | editor-last=Barnes | editor-first=David | title=Understanding business: Processes | publisher=Psychology Press | date=2001 | isbn=978-0-415-23861-8 | chapter-url=https://books.google.com/books?id=vNldIVx6BQ4C&pg=PA52 | page=52}}</ref>

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.<ref name="Michael E. Porter 1985"/>thumb|500px|Michael Porter's value chain|center

===Primary activities=== All five primary activities are essential in adding value and creating a competitive advantage and they are:<ref>{{Cite journal | last=Zamora | first=Elvira A. | date=2016-08-31 | title=Value chain analysis: A brief review | url=http://koreascience.or.kr/journal/view.jsp?kj=GSHSS5&py=2016&vnc=v5n2&sp=116 | journal=Asian Journal of Innovation and Policy | language=en | volume=5 | issue=2 | pages=116–128 | doi=10.7545/ajip.2016.5.2.116 | issn=2287-1608 | url-access=subscription}}</ref><ref name="Michael E. Porter 1985" />

*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.<ref>{{Cite web | url=https://www.investopedia.com/terms/v/valuechain.asp | title=Value chain | last=Kenton | first=Will | website=Investopedia | access-date=2019-02-20}}</ref>

===Support activities=== {{Unreferenced section|date=June 2023}} 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, 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: consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel. *Procurement: the acquisition of goods, services or works from an external source.

===Virtual value chain=== The virtual value chain, created by John Sviokla and Jeffrey Rayport,<ref>{{cite magazine | last1=Rayport | first1=Jeffrey F. | last2=Sviokla | first2=John J. | date=1 November 1995 | title=Exploiting the virtual value chain | magazine=Harvard Business Review | pages=75–85 | url=https://hbr.org/1995/11/exploiting-the-virtual-value-chain}}</ref> 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, manufacturing, distribution and sales of traditional companies.

==Industry-level== {{Unreferenced section|date=June 2023}} 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. Wassily 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 == {{Main|Global value chain}}

=== 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 and Mexico, for example, where the cost of labor is the lowest {{harv|Gurría|2012}}.<ref name="OECD5nov2012">{{cite conference | url=http://www.oecd.org/about/secretary-general/theemergenceofglobalvaluechainswhatdotheymeanforbusiness.htm | title=The emergence of global value chains: What do they mean for business | first=Angel | last=Gurría | conference=G20 Trade and Investment Promotion Summit | location=Mexico City | date=5 November 2012 | publisher=OECD | access-date=7 September 2013}}</ref> 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.{{harv|Gurría|2012}}<ref name="OECD5nov2012" />

=== Global value chains in development=== Through global value chains, there has been a growth in interconnectedness as MNEs play an increasingly larger role in the internationalisation of business. In response, governments have cut corporate income tax rates or introduced new incentives for research and development to compete in this changing geopolitical landscape {{harv|LeBlanc|Matthews|Mellbye|2013|p=6}}.<ref name="OECD4sept2013">{{cite report | publisher=OECD | url=http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/the-tax-policy-landscape-five-years-after-the-crisis_5k40l4dxk0hk-en#page7 | series=OECD Taxation Working Papers | title=The tax policy landscape five years after the crisis | first1=Pierre | last1=LeBlanc | first2=Stephen | last2=Matthews | first3=Kirsti | last3=Mellbye | location=France | date=4 September 2013 | access-date=7 September 2013 | url-status=live | archive-url=https://web.archive.org/web/20140318165753/http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/the-tax-policy-landscape-five-years-after-the-crisis_5k40l4dxk0hk-en#page7 | archive-date=18 March 2014}}</ref>

In an (industrial) development context, the concepts of global value chain analysis were first introduced in the 1990s (Gereffi et al.)<ref>{{cite book | last=Gereffi | first=Gary | date=19 November 1993 | chapter=The organization of buyer-driven global commodity chains: How U.S. retailers shape overseas production networks | pages=95–122 | hdl=10161/11457 | hdl-access=free | chapter-url=https://dukespace.lib.duke.edu/bitstreams/1e1347ab-4ad4-483d-957b-ecd79e455236/download | editor-last1=Gereffi | editor-first1=Gary | editor-last2=Korzeniewicz | editor-first2=Miguel | title=Commodity chains and global capitalism | publication-place=Westport, Connecticutt | publisher=Praeger | isbn=978-0-313-28914-9}} Republished as {{cite book | last=Gereffi | first=Gary | date=30 November 2018 | chapter=The organization of buyer-driven global commodity chains: How US retailers shape overseas production networks | pages=43–71 | editor-last=Gereffi | editor-first=Gary | title=Global value chains and development: Redefining the contours of 21st century capitalism | publisher=Cambridge University Press | isbn=978-1-108-47194-7 | doi=10.1017/9781108559423.003 | hdl=10161/11457 }}</ref> and have gradually been integrated into development policy by the World Bank, Unctad,<ref>{{cite web | date=13 March 2013 | url=http://unctad.org/en/PublicationsLibrary/diae2013d1_en.pdf | title=Global value chains and development: Investment and value added trade in the global economy | edition=Advance unedited | publisher=Unctad | id=UNCTAD/DIAE/2013/1 | archive-url=https://web.archive.org/web/20180824034221/https://unctad.org/en/publicationslibrary/diae2013d1_en.pdf | archive-date=2018-08-24}}</ref> 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.<ref>{{cite report | first1=Jonathan | last1=Mitchell | first2=Christopher | last2=Coles | first3=Jodie | last3=Keane | name-list-style=amp | title=Upgrading along value chains: Strategies for poverty reduction in Latin America | publisher=Comercio y Pobreza en Latino América | date=December 2009 | type=Briefing paper | url=http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/5654.pdf | archive-url=https://web.archive.org/web/20141111205640/http://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/5654.pdf | archive-date=11 November 2014}}</ref> 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.<ref>{{cite web | title=Value Chain Development Wiki | url=https://www.marketlinks.org/using-value-chain-development-wiki | archive-url=https://web.archive.org/web/20201030104432/https://www.marketlinks.org/using-value-chain-development-wiki | archive-date=2020-10-30 | url-status=dead | publication-place=Washington, D.C. | publisher=USAID}}</ref>{{failed verification|date=August 2025}}

For example, the International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) has investigated strengthening the value chain for sweet sorghum as a biofuel crop in India. 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.<ref>{{cite book | last1=Reddy | first1=Belum V. S. | last2=Reddy, Ashok Kumar | first2=A. | last3=Ravinder Reddy | first3=Ch. | last4=Parthasarathy Rao | first4=P | last5=Patil | first5=J. V. | date=2013 | title=Developing a sweet sorghum ethanol value chain | publisher=International Crops Research Institute for the Semi-Arid Tropics | publication-place=Patancheru | isbn=978-92-9066-555-7 | url=http://exploreit.icrisat.org/sites/default/files/uploads/1378281395_DevelopingASweetSorghum_2013.pdf | url-status=dead | archive-url=https://web.archive.org/web/20140223044045/http://exploreit.icrisat.org/sites/default/files/uploads/1378281395_DevelopingASweetSorghum_2013.pdf | archive-date=2014-02-23}}</ref>

==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,<ref>{{cite book | last=Martin | first=James | title=The great transition: Using the seven disciplines of enterprise engineering | place=New York | publisher=AMACOM | year=1995 | isbn=978-0-8144-0315-0 | url-access=registration | url=https://archive.org/details/greattransitionu00mart}}, particularly the Con Edison example.</ref> had some success in the early 1990s.<ref>{{cite news | last=Byrne | first=John A. | date=20 December 1993 | title=The horizontal corporation | work=Business Week | issue=3351 | pages=76–81 | url=https://www.bloomberg.com/news/articles/1993-12-19/the-horizontal-corporation | access-date=11 August 2025}} </ref>

The value-chain concept has been extended beyond individual firms. It can apply to whole supply chains and distribution 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).<ref>{{Cite report | ssrn=4818195 | title=Dynamic value networks theory (DVN): Harnessing interconnected relationships for value creation | date=8 May 2024 | last=Pirro | first=Nicholas}}</ref>

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.

==SCOR== {{Unreferenced section|date=June 2023}} {{main|Supply chain operations reference}}

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.

==References== {{Reflist|30em}}

==Further reading== * {{cite book | last1=Kaplinsky | first1=Raphael | last2=Morris | first2=Mike | author-link1=Raphael Kaplinsky | title=A handbook for value chain research | publisher=Institute of Development Studies, University of Sussex | location=Brighton, England | date=29 November 2001 | oclc=156818293 | url=http://www.ids.ac.uk/ids/global/pdfs/ValuechainHBRKMMNov2001.pdf | url-status=dead | archive-url=https://web.archive.org/web/20170810033300/http://www.ids.ac.uk/ids/global/pdfs/ValuechainHBRKMMNov2001.pdf | archive-date=10 August 2017}} (Prepared for the International Development Research Centre.)

==External links== * {{commons category-inline|Value chain diagrams}} * [https://web.archive.org/web/20100111184831/http://www.brighthub.com/office/project-management/articles/51759.aspx Using a Value Chain Analysis in Project Management] {{subject bar|auto=y|d=y}}

{{DEFAULTSORT:Value Chain}} Category:Supply chain management Category:Michael Porter Category:Value proposition