What is Value Chain?
The value chain is a concept developed by Michael Porter to describe the set of activities that a company performs in order to deliver a product or service to the market. It consists of a series of interrelated activities that add value to the final product or service, starting from the initial design and development, through the production process, to the marketing, sales, and after-sales service.
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By analyzing the core business processes in organizations, Michael Porter of Harvard Business School proposed a tool called Value Chain for the identification and creation of more customer value.
A business operates in a cyclical manner in which assets, inputs, and raw materials are used to design offerings, which are delivered through channels of intermediaries to reach customers. This is the simplest explanation that one can offer for a modern business process delivering customer value.
Michael Porter opined that every business firm is a synthesis of activities that are performed to design, produce, market, deliver and support its products and services. The value chain identifies nine strategically relevant activities that create value and cost in a specific business.
This consists of five primary activities that include inbound logistics, operations, outbound logistics, marketing, sales, and services, and four support activities that include procurement, technology development, human resource management, and firm infrastructure.
Operating a business involves a system of activities and relationships with other members of the chain. Each part of the system – each link in the chain – adds value to the product. The figure shows the relationships between the organization with other members in the value creation process and end customers.
All the activities can be grouped as primary, upstream, and downstream activities. Before the company is engaged in primary activities such as production and pricing, it engages in upstream activities such as purchasing equipment and materials from suppliers.
Downstream activities, performed after the product has been produced, require dealing with other collaborators such as transportation companies and intermediaries. These upstream and downstream activities are called supportive activities. They provide the support necessary for carrying out primary activities or for conducting the sale of goods or services to the final buyer.
The value chain can be summarised as a chain of activities by which a firm can bring in materials, create a good or service, market it, and provide service after a sale is made. Each step has the potential for creating more value for the customer.
A firm needs to evaluate the costs and performance associated with each activity and try to improve the processes for the benefit of the customer. The best way to handle the situation is to benchmark processes and costs associated with each activity and then take steps to build efficiency into the company system.
The success of the marketing department does not guarantee overall success, because every department needs to be integrated with the ‘customer value goal’ in mind. In a traditional company, there is contact only between the marketing department and the buyer; the rest of the departments only feed the marketing department for business success.
In this case, the marketing department provides all the information to the customer and also brings back all the information into the organization.
Modern marketing demands that every department should be aware of the expectations of customers. A real marketing-oriented company should develop systems and procedures so that customer template is always at the forefront of every department. Senior management should try to increase intimacy between the departments and customers so that organizational activities will evolve with the life cycle of customers.
Core Business Processes
- Market Sensing Process
- New Product Launch Process
- Customer Acquisition Process
- Customer Relationship Management Process
- Fulfilment Management Process
Market Sensing Process
This process involves the collection of market knowledge, customer intelligence, dissemination of this information within the organization, and taking suitable responses for the benefit of both the company and customers.
New Product Launch Process
This process involves all the activities that a firm takes in researching, designing, developing, and launching new, high-quality offers within the company’s marketing budget.
Customer Acquisition Process
This process involves all the activities in defining the target market and prospecting new customers.
Customer Relationship Management Process
This process involves all the activities in building a deeper understanding of customer interactions, building relationships, and designing offerings to suit individual customers.
Fulfilment Management Process
This process involves all the activities in receiving and approving orders, shipping the goods on time, and realizing payments.