What Is a Firm's Value Chain?
In value chain analysis, analysts examine the flow of raw materials to the point of sale to ensure that value exceeds costs. Firm-level value chains focus specifically on business units rather than entire divisions or industries. A value chain breaks down business unit activities into processes. Identifying the inputs, transformation and output of each department can help a company implement efficient processes that create a competitive advantage.
The five primary value chain activities provide direct value to the customer. Exact activities vary by company, but the primary groupings are inbound logistics, operations, outbound logistics, marketing and sales, and service. Inbound logistics represents the reception, storage and distribution of raw materials. Operations transforms the raw inputs into the finished goods for the customer. Outbound logistics delivers the final goods to customers. Marketing and sales represent activities that help customers buy the goods. Service includes the follow-up support, such as repair and maintenance services.
In contrast to primary activities, support functions never directly interface with the customer. Instead, support functions enable effective performance of the primary activities. The main categories of support activities are firm infrastructure, human resources, technology and purchasing. Technology development can focus on process automation that allows the operations activities to run more efficiently. Human resources can support marketing by recruiting sales representatives that fit with the organization's culture.
A company's value chain is part of a larger supply chain that includes interactions with suppliers and distributors. The supply chain includes the raw materials supplier, the manufacturer, the distributor, the retailer and the consumer. The supply chain helps analysts visualize what outside parties will be affected by decisions. For example, a company that implements a more efficient inventory management system will improve the efficiency of both the inbound logistics and purchasing departments, which have relationships with suppliers and manufacturers.
To analyze a company's value and supply chains, it's helpful to map out a flow chart of all company processes. A graphical representation helps analysts identify key relationships and causation. Analysts should pay special attention to activities that affect each other on a cost basis. This information is useful for performing incremental analysis on "make or buy" decisions regarding outsourcing.