What Are the Components of a Value Chain?
Organizations creating products of all sorts are always trying to be resource-efficient, and with value chains, they're able to do just this. These chains are a set of running stages that are followed to allow for the making of products. The idea behind it all revolves around organizations trying to compete with each other and having to optimize each step to maintain the highest quality, at a lower cost.
So, how does the chain in question operate and what components does it possess that define it? The information below shows basic financial literacy and a fundamental understanding of the topic, so go ahead and read on!
Contents:
- Introduction to the concept
- What it consists of
- Primary Actions
- Support Actions
- What comes with proper examination
- Final thoughts
Introduction to the concept
The concept in question pretty much came to the forefront, in 1985 by way of Michael Porter, who properly laid it out for us. The basic idea is that every stage has to be better for a more profitable outcome.
To achieve this, every activity has to be identified via value chain analysis and then addressed about other competitors in the industry. More than anything, the goal is to be better than them, while still maintaining the strategies of the organization. Note that addressing each aspect as a cost doesn't cover everything, as the value element has to be there.
What it consists of
As we have described what value chains are, we might as well look at how they work and specifically at their components. In regards to the stages in question, two general types of actions exist, which include both the primary and supporting variety.
Primary Actions
These mainly have to do with a product's creation and the actions following that. The major components looked at in this category include the following:
- Operations: this refers to every action taken from the product’s start as an amalgamation of unprocessed materials to its completion and readiness for consumption
- Inbound logistics: this refers to all actions taken regarding how all materials are brought into an organization and speaks to reception, transportation, storage, and incoming supply management
- Outbound logistics: this refers to all the actions related to the product's distribution to the customer
- Marketing and sales: this refers to all actions and tactics like advertising, that cause a buzz for any product, allowing customers to readily want to buy it
- Service: this refers to all actions that allow for products to be maintained while in the hands of those who've paid for them and it includes repairs, as well as refunds
Support Actions
Accompanying the primary actions are the supporting ones, whose function is to ensure the efficiency of all operations. While existing to better all primary components, the accompanying ones can also be enhanced, which in turn positively affects the five components listed above. These actions, which are typically seen on income statements as overhead costs include the following:
- Procurement: this speaks to how unprocessed materials are obtained
- Tech development: this deals with all the initial planning, designing, and development, of processes, as well as methods during the research stage
- Human resources: this deals with the hiring and retention of professionals that will give the organization the best chance of achieving its goals through all stages, and letting go of those who don't
- Infrastructure: this deals with how all areas of an organization are structured as it pertains to systems and management
It should be noted that the actions taken in any of these components are likely to differ among industries. An example of this would be a comparison between a supermarket and a farm. With the former, the raw materials conversion isn't as literal as it is with the latter and instead, could refer to any store activity.
What comes with proper examination
Value chain analysis is what allows organizations to put each stage under a microscope, to help optimize it. The goal is to make the company do more for less, which makes it more competitive and profitable.
That said, analyzing things in this way can be to the detriment of the organization partaking in it. The segmented nature of this analysis is such that it can fog up the general business strategy, by focusing on smaller details too much. It is also crucial to make an analysis of key metrics and economic indicators.
Final thoughts
Business is always going to be a bit of a war zone, which means all participants trying to create and sell products need an edge, something that value chains help with. With good analysis done on each stage, one can easily address the issues and help create a far more efficient mode of operation, which should help with keeping costs down, as well as maintaining profitability. That said, this type of micromanagement can make general models get lost in the shuffle altogether, which isn’t ideal.
In any case, it's always good to try and optimize each stage with quality tools and solutions to create something more streamlined. Having said that, better operation warrants it.
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