A value chain isn't a group of restaurants that offer inexpensive food options, though you technically could use that term to reference these eateries. It's actually a concept that encompasses all of your business activities, no matter the size of your business.
The concept originated in the 1980s and is still going strong for one reason—it works. The value chain framework is effective for small businesses, medium-sized corporations, and large enterprises.
The first time anyone heard of the value chain concept was in Michael Porter's book, Competitive Advantage: Creating and Sustaining Super Performance. The entire focus of the book was on cost advantage and how a company can distinguish itself from the competition effectively. By using the value chain concept, a company can have a competitive advantage, notes the Harvard Business School professor.
As noted, this concept is still used today, and it's been perfected along the way. However, it's not an easy concept to grasp. It's rather complex and requires someone to have a decent understanding of the concept and what the value chain entails. Then, you, as a business owner, can decide if it's a concept you want to incorporate.
Subscribe to get more marketing tips straight to your inbox.
What is a value chain?
A value chain maps all the interconnected activities a business does to deliver products or services to its customers while creating value at each step. In simple terms, it's how your company turns raw materials and inputs into something customers will pay for.
Value chain is a broad term, but an important one nevertheless. It consists of both primary and secondary aspects that a company needs to identify and categorize. When you assess these activities and subactivities, you gain an understanding of how they interrelate with one another and your business' functions.
Then, you take it one step further and analyze each activity. You think about how it's affecting your company's function, output, and profit. You can then decide how, or if, each activity or subactivity could be improved. Particularly, it relates to the time, cost, and effort required for each activity.
You may perform your own value chain analysis—the entire process of assessing primary and secondary activities, but you can also hire a professional to help. Fortunately, if you choose to do this on your own, there are programs available that can help you improve your processes.
Primary activities
Primary activities are any functions that directly affect your product or service creation, maintenance, or sale.
These value chain activities include operations, outbound logistics and supply chain activities, marketing, sales, and inbound marketing. Though, other aspects of your company also fit into the value chain concept.
Support activities
Every aspect of the value chain revolves around the creation, support, maintenance, or sale of your service or products to sustain superior performance.
But, besides the main chain of events, secondary activities, such as your company's infrastructure and human resources department, also play a role. These activities support the primary activities.
Why are value chains important?
Value chains can enhance your business in a number of ways by allowing you to critically think about each aspect and how they work together in the grander scheme of your business' function. They allow you to pinpoint downfalls and think of solutions that optimize different parts of your business.
While this is just a general overview of the influence a value chain may have on your business, a value chain assessment or analysis allows you to look at each aspect of your company through a microscope. You see what attributes positively and negatively to your profit.
First and foremost, you can determine which aspects of your business are ineffective. You can then plan a way to correct them. You can make decisions about various aspects of your business that you may have never looked at in the past.
Besides the drawbacks of your business, you also gain an understanding of its strengths. Possibly, you could take those same concepts and find a way to incorporate them into other aspects of your business.
Essentially through a value chain, you develop an understanding of how different activities of your business relate to one another, even if they seem unconnected. For example, an issue with your human resources management can affect almost all other aspects of your company.
By taking a look at your business' inner workings and making the appropriate changes, you can have a cost advantage, especially when compared to your competition.
Example of a value chain
For the sake of this example, we're going to use the hypothetical company, Mary Lou's Homebaked. This company is a bakery that makes a variety of baked goods, including cookies, bagels, cakes, and more. All raw products, including flour, sugar, flavorings, etc., this company uses come from suppliers.
Through its manufacturing process, including the areas mentioned above with a value chain, the bakery creates baked goods that are tasty and provide value, one that's worth more than the raw ingredients she uses in the process. It's also worth more than her effort.
Mary Lou's then sets the goods on display for people to purchase each day while also offering the option of customers placing customized orders. She then sells them at a price that allows for profit, making room for a purchase value that's greater than her materials and effort but not high enough to turn away customers.
She has a staff to assist and a manager who takes care of human resources, which allows them to offer a larger amount of baked goods in a shorter time. Mary Lou has implemented advanced equipment for these reasons as well.
This bakery runs advertisements on TV and has fliers, a Facebook page, and a website where customers can place orders.
Value chain management
When you understand what is a value chain, it's clear to see that you need some system of mapping to keep every aspect of your company organized.
This requires a value chain framework.
Ultimately, this is a scalable process, and how you do it depends on the size of your business.
Ideally, you should have a physical map you create or a value chain framework where you can input information easily. If you don't have a large staff, you may conduct the process yourself.
However, if you have a large staff, get your managers and subject matter experts involved. More heads are better than one in this case.
Value chain mapping tips
As you complete the process, continuously ask yourself questions about the different aspects of your business. This allows you to take a moment to critically think about every part of your company, how it relates to other aspects, and what changes you can make to improve it.
Some examples of useful questions include:
- What's expendable and won't affect our business' production negatively if taken away?
- How can we make our business processes better and more efficient?
- Is there anything we can add that won't harm our profit much but give us a more competitive edge?
- What can we do to streamline our processes and make them more time-efficient without harming the product?
Be open-minded. Self-criticism isn't easy, even when it's related to your business and not necessarily yourself. However, this is a time to be open-minded. Listen to others. Pinpoint problems and make a commitment to do better.
Realize that there isn't a one-size-fits-all solution. What works for cleaning up problems in one aspect of your business may not work in another.
Value chain analysis
The goal of a value chain is to improve your business. It's to take a critical look at every aspect of its workings and give you an opportunity to make improvements.
You'll find that this process can enhance profit, efficiency, and even employee morale, as you optimize certain processes and target the problems within.
Generally, you should have a three-step process. And once again, your company's structure may be much more complex, which will require you to steer away from this framework a bit.
1. List business activities
Initially, you want to list all of your business' activities, including both your primary and secondary activities. Then, determine if each activity is a primary or secondary activity.
While both play a vital role in how your company functions, it's incredibly important to assess each primary activity well.
2. Connect subactivities
At this point, when you're mapping or charting, no matter your value chain framework, look for connections between your subactivities. While you may feel as though a department or two is weak, it may stem from your HR department. This sector will need more training or guidance on hiring measures.
Perhaps you have a division of your company that's not producing up to expectations. This may stem from issues with operations or a lack of technology.
3. Diagnose and fix problems
Finally, after you have your value chain framework completed, it's time to diagnose the problems. This is more than just saying one department isn't working right. It's also looking at how your company runs as a whole and how it may stem from an issue with another department or issue.
You then need to make changes that'll better your business overall to drive profit.
Benefits of optimizing your value chain
When you take the time to analyze and refine your value chain, you stand to gain numerous advantages that impact your bottom line and market position.
Optimizing each link in your value chain affects your entire operation, leading to improvements in everything from production speed to customer satisfaction. Here's how a well-tuned value chain benefits your business:
Increased efficiency
Mapping and analyzing the value chain can help you identify bottlenecks and redundancies that slow down your processes. Streamlining operations allows your team to accomplish more with the same resources, reducing production time while maintaining or improving quality standards.
When workflows become more efficient, employees experience less frustration and can focus on value-adding activities rather than administrative busywork or waiting for other processes to complete.
Cost reduction
A thorough value chain analysis frequently reveals unnecessary expenses and waste that can be eliminated without sacrificing quality. By identifying areas where resources are being underutilized or misallocated, companies can make targeted adjustments that significantly reduce operational costs.
Companies that optimize their value chains often find opportunities to consolidate suppliers, negotiate better terms, or substitute more cost-effective materials or processes — all of which contribute to a healthier bottom line.
Competitive advantage
Perhaps the most compelling benefit of an optimized value chain is the competitive edge it provides in the marketplace. When your business can deliver products or services faster, more affordably, and with better quality than competitors, you position yourself as the preferred option for customers.
Companies with highly optimized value chains can often provide customization options or faster delivery times that competitors cannot match, creating unique selling propositions that attract and retain customers in competitive markets.
Common value chain challenges and how to address them
Despite the clear benefits, implementing and maintaining an effective value chain isn't without obstacles. Many businesses encounter similar roadblocks when trying to optimize their operations and create seamless connections between different activities.
Understanding these common challenges is the first step toward developing strategies to overcome them and unlock your organization's full potential. Here are the key issues most companies face:
Identifying inefficiencies
Inefficiencies are activities that consume resources without adding proportional value — like redundant approvals, excessive inventory, or outdated processes that have never been questioned. They often remain invisible because they've become normalized or because no one has responsibility for monitoring the entire system.
To address them, implement clear performance metrics that measure both departmental and cross-functional performance, conduct regular process mapping sessions, and empower frontline employees to report problems without fear of blame. Technology tools that visualize workflow data can quickly highlight bottlenecks that might otherwise go unnoticed.
Aligning internal teams
Departmental silos occur when teams optimize for their own metrics at the expense of overall company performance — like when sales promises customizations that manufacturing can't efficiently produce. This misalignment creates friction points that slow processes and frustrate both employees and customers.
Overcome this challenge by establishing shared goals and metrics that reward cross-department collaboration, creating regular cross-functional meetings to discuss interconnections, and developing integrated planning processes. Digital collaboration tools can improve visibility across departments and help everyone understand how their work impacts downstream activities.
Managing external suppliers
External partners represent potential weak links in your value chain when their operations, quality standards, or timelines don't align with your needs. Supplier problems can cascade through your entire operation, causing delays and quality issues.
Build stronger supplier relationships by sharing forecasts and strategic plans, developing clear performance expectations, and creating communication channels for early problem identification.
Rather than focusing solely on price, evaluate suppliers on reliability, quality, innovation capacity, and cultural fit with your organization. For critical components, maintain backup supplier relationships to reduce vulnerability to disruptions.
How technology impacts value chains
Technology has become a primary driver of value chain analysis. The evolution of digital tools has influenced how businesses design, operate, and optimize their value chains across industries.
Here's how emerging technologies are reshaping value chains:
Automation and AI integration
Automation and AI technologies eliminate manual work and enhance decision-making throughout the value chain. Robotic process automation handles repetitive tasks with perfect consistency, while machine learning algorithms can predict equipment failures before they occur, optimize inventory levels, and personalize customer experiences.
Companies implementing these technologies typically experience reduced labor costs, fewer errors, and faster processing times. Start small by identifying high-volume, rule-based processes for automation, then gradually expand to more complex applications as your team builds expertise and confidence in the technology.
Real-time data tracking
Modern IoT sensors and tracking systems provide unprecedented visibility into operations, allowing managers to monitor materials, products, and equipment as they move through production and distribution networks. This real-time information enables immediate problem resolution rather than discovering issues days or weeks later through reports.
To implement effective tracking, identify critical control points in your value chain, deploy appropriate sensor technology, and create dashboards that translate data into actionable insights. Focus first on areas where visibility gaps are causing the most significant disruptions or quality issues.
Digital transformation and scalability
Cloud-based systems and digital platforms enable companies to quickly adapt their value chains to changing market conditions without massive infrastructure investments. This digital foundation makes it easier to test innovations, integrate new partners, and scale operations without proportional increases in overhead costs.
Begin your digital transformation by migrating core systems to cloud platforms, standardizing data formats across your organization, and training employees on digital collaboration tools. Prioritize technologies that improve customer experience and operational visibility for the greatest immediate impact.
Linking together your value chain
Now that you understand the value chain definition and the overall concept of this process, you can use it for your business.
Fortunately, Mailchimp offers services that can enhance different aspects of your business. As a result, you may want to look into some of the products available from Mailchimp as you target certain problems during a value chain analysis.
Key Takeaways
- Value chain analysis helps businesses identify and optimize every activity that contributes to delivering products or services, revealing both inefficiencies and competitive advantages.
- Optimizing your value chain leads to increased operational efficiency, significant cost reductions, and enhanced competitive positioning in the marketplace.
- Common challenges in value chain analysis include identifying hidden inefficiencies, aligning departmental goals, and managing external supplier relationships.
- Modern technologies like AI, IoT sensors, and cloud platforms are transforming value chains by automating processes, enabling real-time monitoring, and creating more adaptable business operations.