Value chain
The value chain concept, introduced by business theorist Michael Porter in 1985, refers to the series of activities within and around an organization aimed at enhancing its market competitiveness. This framework analyzes how specific activities contribute to the value of a company’s products or services, categorizing them into primary activities—including logistics, operations, sales and marketing, and service—and support activities such as procurement, technology development, human resources, and infrastructure. The emphasis of value chain analysis is on creating unique value for customers rather than merely striving to be the best, which can lead to price competition and market saturation.
In today's interconnected global economy, organizations rarely perform all activities independently; instead, they often participate in broader supply chains. This evolution necessitates a thorough examination of how each component interacts to optimize effectiveness and efficiency, while addressing sustainability and globalization challenges. Contemporary issues, such as digital transformation and environmental concerns, have prompted companies to adapt their value chains for better performance and reduced emissions. Consequently, the value chain remains a vital tool for organizations aiming to maintain competitiveness through continuous innovation and a focus on delivering distinct value to customers.
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Value chain
The term value chain was first used by business theorist Michael Porter in his 1985 book Competitive Advantage: Creating and Sustaining Superior Performance. It generally refers to the activities performed within and around an organization to improve and increase the organization’s market competitiveness. Value chain analysis studies the specific activities that add value to an organization’s services or products. These are divided into primary and support activities. Primary activities are the creation and distribution of a product or service. The source of competitive advantage of an organization resides in its ability to perform these activities and manage effectively the relations between them.
Overview
In many industries in the twenty-first century, it has become unusual for a single firm to perform all activities, from research and development to product design, assembly, and distribution to the final user. Instead, modern organizations are often part of a supply chain or value system. A value chain analysis examines the whole value system in which the organization operates. According to value chain analysis, the primary activities of an organization can be grouped into five areas: logistics (both inbound and outbound), operations, sales and marketing, and service. Each of these areas is linked to support activities meant to improve effectiveness, efficiency, and, finally, competitiveness. The secondary activities of an organization are grouped into four areas: procurement, technology development, human resources, and infrastructure (which includes bookkeeping and quality assurance). Procurement may relate most to the value system, as suppliers and producers are often in different countries, making up a global value chain, in the increasingly globalized economy.
Contrary to many traditional marketing systems, value chain argues that to be successfully competitive, an organization should focus on being unique, rather than being the best. Organizational strategy should consist of understanding that some customers might be unhappy, rather than focusing on being all things to all customers. The key to achieving competitive success, then, resides in the ability of an organization to create unique value for its customers. An effective competitive strategy will, in turn, produce a sustainable first-rate performance.
When every firm’s strategy is to be the best, rather than unique, the end result is raw price competition. In many industries, overextension into too many market areas and price-cutting to win market share can lead to catastrophic results. Competing to be unique means that every company can select the area in which it can perform best. If an organization does not create significant value for its customers, however, its profits will barely cover its costs. On the other hand, firms can create much value for customers while still earning little to grow sustainably.
Finally, a firm’s profitability within an industry is created by its chain of activities or value chain. Improving an organization’s effectiveness is a constant challenge. It requires a distinctive or unique value proposition, analyzing and selecting customers and distribution channels, determining which customers’ needs to focus on, pricing strategies, and production methods. Striving to serve all customers, meet the same needs for all, and undercut pricing can lead to failure.
Critics have argued that the value chain system is not infallible. Contemporary market convergences, in the digital media and mobile markets, for example, have presented distinctive models to which traditional value chain methods might not always apply. At the same time, digitization of industry operations, design, and production methods has also increased. This leads to greater amounts of data gathering and sharing among various segments of the value chain system, which can pose the opportunity for lower costs but can be challenging, as existing software and equipment may need revamping to provide the efficiencies necessary for businesses to retain their competitive advantage. Sustainability and globalization have posed other challenges to the value chain system. Particularly as activists continued to call for reduced greenhouse gas emissions to combat climate change, many businesses have made efforts toward this goal that have included changes to various aspects of their value chains. In 2023, Unilever announced that its methods involved such actions as decarbonizing factories and reducing distribution network emissions. The value chain's focus on constant innovation and value implementation has continued to make it relevant.
Bibliography
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