# Value Chain: Definition, Model, Analysis, and Example

> **Definition**
>
> A value chain is the full range of activities needed to create a product or service and make it available to consumers.

## What Is a Value Chain?

A value chain is a series of consecutive steps that go into the creation of a finished product, from its initial design to its arrival at a customer’s door. The chain identifies each step in the process at which value is added, including the sourcing, manufacturing, and marketing stages of its production.

### Key Takeaways

*   A value chain is a step-by-step business model for transforming a product or service from idea to reality.
*   Value chains help increase a business’s efficiency so the business can deliver the most value for the least possible cost.
*   The end goal of a value chain is to create a competitive advantage for a company by increasing productivity while keeping costs reasonable.
*   Value chain theory analyzes a firm’s five primary activities and four support activities.

![Value Chain](https://www.investopedia.com/thmb/LlEK_3shDR17MKw2WuvAfZxwDt8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/valuechain-458d7c8977264aaf979a8c6d31d5547f.jpg)

*These activities add value to the article created. — Dennis Madamba / Investopedia*

## Understanding Value Chains

Because of ever-increasing competition for lower prices, better products, and customer loyalty, companies must continually examine the value they create to retain their [competitive advantage](https://www.investopedia.com/terms/c/competitive_advantage.asp). A [value chain](https://www.investopedia.com/ask/answers/050115/what-are-primary-activities-michael-porters-value-chain.asp) can help a company to discern areas of its business that are inefficient and implement strategies that will [optimize its procedures](https://www.investopedia.com/terms/p/process-value-analysis-pva.asp) for maximum efficiency and profitability.

In addition to ensuring that production mechanics are seamless and efficient, businesses also need to keep customers confident and secure enough to remain loyal. [Value chain analyses can help](https://www.investopedia.com/ask/answers/061115/what-are-some-advantages-and-disadvantages-value-chain-analysis.asp) with this, too.

Michael E. Porter, of Harvard Business School, introduced the concept of a value chain in his book, “Competitive Advantage: Creating and Sustaining Superior Performance.” He wrote: “Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product.”

In other words, it’s important to maximize value at each specific point in a firm’s processes.

> **Important**
>
> The overarching goal of a value chain is to deliver the most value for the least cost in order to create a competitive advantage.

## Components of a Value Chain

In his concept of a value chain, Porter splits a business’s activities into two categories, primary and support, of which sample activities for each are listed below. Specific activities in each category will vary according to the industry.

### Primary Activities

Primary activities consist of five components, all essential for adding value and creating competitive advantage:

1.  **Inbound logistics** include functions like receiving, warehousing, and managing inventory.
2.  **Operations** include procedures for converting raw materials into a finished product.
3.  **Outbound logistics** include activities to distribute a final product to a consumer.
4.  **Marketing and sales** include strategies to enhance visibility and target appropriate customers—such as advertising, promotion, and pricing.
5.  **Service** includes programs to maintain products and enhance the consumer experience, like customer service, maintenance, repairs, refunds, and exchange.

### Support Activities

The role of support activities is to help make the primary activities more efficient. When you increase the efficiency of any of the four support activities, it benefits at least one of the five primary activities. These support activities are generally denoted as overhead costs on a company’s income statement:

1.  **Procurement** concerns how a company obtains raw materials.
2.  **Technological development** is used at a firm’s research and development (R&D) stage, like designing manufacturing techniques and automating processes.
3.  **Human resources (HR) management** involves hiring and retaining employees who will fulfill the firm’s business strategy and help design, market, and sell the product.
4.  **Infrastructure** includes company systems and the composition of its management team, such as planning, accounting, finance, and quality control.

## Example of a Value Chain

A value chain example is the privately held grocery store [Trader Joe’s](https://www.investopedia.com/articles/markets/082715/trader-joes-stock-doesnt-exist-heres-why.asp), which received much press about its tremendous value and competitive edge. Because the company is private, there are many aspects of its strategy that we don’t know. However, when you enter a Trader Joe’s store, you can readily observe instances of Trader Joe’s business that reflect the five primary activities of the value chain.

1. **Inbound logistics:** Unlike traditional supermarkets, Trader Joe’s does all of its receiving, shelving, and inventory during regular store hours. Although potentially maddening for shoppers, this system creates cost savings in terms of employee wages. Moreover, the logistics of having this work take place while customers are still shopping sends the strategic message that “we’re all in this together.”

2. **Operations:** Here’s an example of how a company could apply the value chain creatively. In primary activity number two above, “converting raw materials into finished product” is cited as an “operations” activity. However, because converting raw materials is not an aspect of the supermarket industry, we can use operations to mean any other regular grocery store function. So, let’s substitute “product development,” as that operation is critical for Trader Joe’s.

The company selects its products carefully, featuring items that you generally can’t find elsewhere. Its [private-label](https://www.investopedia.com/terms/p/private-brand.asp) products account for more than 80% of its offerings, which often have the highest [profit margins](https://www.investopedia.com/terms/p/profitmargin.asp), since Trader Joe’s can source them efficiently in volume. Another vital piece of product development for Trader Joe’s is its taste-testing and chef-partnership programs, which ensure high quality and continuous product refinement.

3\. **Outbound logistics:** Many supermarkets offer home delivery, but Trader Joe’s does not. But we can also apply the activity of outbound logistics to apply to the range of amenities that shoppers encounter once they are inside a Trader Joe’s store. The company has thought carefully about the kind of experience it wants customers to have when visiting its stores.

Among Trader Joe’s many tactical logistics are its in-store tastings. Usually, there are a few product tastings happening simultaneously, which create a lively atmosphere and often coincide with the seasons and holidays. The tasting stations feature new and familiar items prepared and served by staff.

4\. **Marketing and sales:** Compared to its competitors, Trader Joe’s barely does any traditional marketing. However, its entire in-store experience is a form of marketing. The company’s copywriters craft product labels to appeal specifically to its customer base. The unique branding and innovative culture of Trader Joe’s indicate that the company knows its customers well. Which it should, as the firm has actually chosen the type of customers it prefers and has not deviated from that model.

With this indirect marketing of style and image, Trader Joe’s has differentiated itself in the marketplace, thus sharpening its competitive edge.

5\. **Service:** Customer service is paramount for Trader Joe’s. Generally, you see twice as many employees as shoppers in their stores. Whatever work they are doing at the moment, the staff are there primarily to help the customer. In addition, the company has a no-questions-asked refund program.

## Explain Like I'm Five

A value chain is the sequence of steps involved in adding value to a product and making it desirable to consumers. Some of the steps are obvious, like manufacturing, packaging, and delivering the product. But it also includes steps after the sale, like marketing, providing customer service, repairing defective products, and offering refunds. All of these steps are important in creating a product that consumers want to buy.

The phrase "value chain" evokes a similarity with the term "supply chain," referring to the sequence of manufacturing steps that go into a finished product. Much like supply chains, businesses need to study their value chains to find out where they can improve efficiency and make their products more attractive.

## What Is a Value Chain vs. a Supply Chain?

A [supply chain](https://www.investopedia.com/terms/s/supplychain.asp) is the system and resources needed to move a product or service from supplier to customer. A value chain expands on this, also taking into consideration how value is added along the chain, including after the sale is finalized.

## What Are the Steps to Value Chain Analysis?

According to Harvard Business School, the steps in value chain analysis are:

*   Identify primary and secondary value chain activities.
*   Determine the values and costs of those activities.
*   Identify competitive advantage opportunities.

## Can the Value Chain Span the Globe?

Yes. The term “global value chain” refers to production broken into activities and tasks carried out in different countries. A global value chain is carried out by a transnational corporation, an enterprise composed of linked entities in two or more countries.

## The Bottom Line

A value chain is the consecutive steps that go into making a finished product, from the initial design to the customer’s doorstep. The chain identifies each step in the process at which value is added.

Value chain analysis is a company’s evaluation of the detailed procedures involved in each step of its business. The analysis aims to increase production efficiency so that a company can deliver maximum value for the least possible cost.  

> **Article Sources**
>
> 1.  Michael E. Porter, via Google Books. “[Competitive Advantage: Creating and Sustaining Superior Performance](https://books.google.com/books?id=7UqQXsQ_dj4C&newbks=1&newbks_redir=0&printsec=frontcover#v=onepage&q&f=false).” Simon and Schuster, 2008.
>     
> 2.  Trader Joe's. "[InsideTJ's-Episode 4-Transcript](https://www.traderjoes.com/content/dam/trjo/pdfs/transcripts/InsideTJs-Episode4-Transcript.pdf)," Download. Page 2.
>     
> 3.  Trader Joe’s. “[Homepage](https://www.traderjoes.com/home).”
>     
> 4.  Harvard Business School Online. “[What Is a Value Chain Analysis? 3 Steps](https://online.hbs.edu/blog/post/what-is-value-chain-analysis).”