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Why Value Chains Are Important For Your Business

A value chain outlines all of your business activities. Check out our guide to the different parts of the chain and why each is important for your business.

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.

Value chain primary activities are: inbound logistics, operations, outbound logistics, marketing and sales, and service.

What is a value chain?

A 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, 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.

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.

Value chain support activities are: firm infrastructure, HR management, technology development, and procurement.

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.

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.

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