Value chain refers to the entire set of activities company’s engages in to create its products and services and make them available to end consumers. This includes all sets of activities that fall in between these processes such as procurement of raw materials, production of goods, and storage and distribution. Value chains are not just limited to individual companies. It can be extended to include a company’s suppliers and their suppliers as well.

The concept of Value chain was first developed by Harvard Prof. Michael E. Porter in his book Competitive Advantage: Creating and Sustaining Superior Performance. According to Porters model of Value Chain, all the activities of a firm can be categorized into following categories:

Primary activities – concerned with the physical production, distribution, sale, delivery, maintenance and support of products and services. It is composed of following sets of activities:

1) Inbound logistics – refers to flow of inputs into the organization from external suppliers. This could be raw materials and parts and components. It is composed of activities such s receiving, warehousing, inventory management etc.
2) Operations – refers to the production process that transforms raw materials into finished goods and services.
3) Outbound logistics – refers to activities concerned with distribution of products to the market. It consists of activities such as storage, inventory management and distribution.
4) Marketing and sales – refers to set of activities associated with making the product and the company brand visible to the customers. It includes activities such as, marketing, brand building, advertising and promotions.
5) Service – refers to activities aimed at building long term relationship with target customers by offering them customer and product support services. These include activities such as customer service, maintenance, repair, refund, and exchange.

Secondary activities – concerned with enabling and making the primary activities more efficient and effective. These activities are not directly associated with production and distribution of goods and services but nonetheless provide a vital support service to the primary activities. These activities are in turn divided into following categories:

6) Procurement – concerned with purchase of raw materials and parts and components to make the finished products and services. It consists of activities such as suppliers selection, negotiating and contracting, receipt and inspection of goods, supplier relationship management etc.
7) Technological development – concerned with activities such as research and development, technology management and security. It consists of activities such as design and development, process automation, innovation management etc.
8) Human resources (HR) management – concerned with activities related to human resource management such as recruitment and selection, advancement and performance appraisal, employee relationship management etc.
9) Infrastructure – refers to a firm’s infrastructure comprised of various departments i.e. accounting, finance, quality control, legal department etc. Also includes systems.

Why analyze the value chain?

Value Chain analysis helps firms identify activities within their value chain that are inefficient i.e. adding more costs than adding value. These activities can than be optimized to create more value. A careful analysis of a firm’s value chain may highlight areas of competitive advantage for the firm. It enables a clear understanding of linkages and dependencies between activities. This can offer immense insight into the workings of the firm and can be a source of major innovations and efficiency. In context of this exercise, value chain analysis will reveal the social and environmental impact of the various organizational activities.