Value Chain

A value chain is the sequence of activities a company performs to design, produce, market, deliver, and support a product or service. Each step adds value for the customer and can be optimized to increase efficiency, reduce cost, and create competitive advantage.

Key takeaways

• A value chain maps how value is created from idea to customer and beyond (post-sale service).
• Analyzing the value chain helps identify inefficiencies and opportunities to lower costs or enhance differentiation.
• Michael E. Porter popularized the framework by splitting activities into five primary and four support categories.
• The goal is to maximize value delivered while minimizing cost.

Primary activities

Primary activities directly relate to creating and delivering the product:
* Inbound logistics — receiving, warehousing, and inventory management.
* Operations — converting inputs into finished products or, for service/retail businesses, product selection and merchandising.
* Outbound logistics — distribution and delivery to customers (or in-store presentation and experience).
* Marketing and sales — pricing, promotion, and channels that attract and close customers.
* Service — after-sales support such as customer service, maintenance, returns, and refunds.

Support activities

Support activities enable and improve primary activities:
* Procurement — sourcing and purchasing inputs and services.
* Technology development — R&D, process automation, and product design improvements.
* Human resources — recruiting, training, and retaining employees who execute the strategy.
* Firm infrastructure — finance, planning, quality control, and general management systems.

Example: Trader Joe’s (illustrative)

Trader Joe’s demonstrates how value-chain choices create a distinct competitive position:
* Inbound logistics: staff perform receiving and stocking during store hours, reducing back-room labor and signaling a participatory culture.
* Operations (product development): heavy focus on private-label items and close vendor relationships to secure unique, high-margin products.
* Outbound logistics: emphasis on in-store experience (tastings, curated displays) rather than home delivery.
* Marketing and sales: minimal traditional advertising; branding and in-store design serve as the main marketing vehicle.
* Service: high staff-to-customer ratio and a generous return policy enhance customer satisfaction and loyalty.

Explain like I’m five

Think of a value chain as all the steps needed to make a toy—from designing it, finding materials, building it, selling it in a shop, to fixing it if it breaks. Each step should add something useful so the toy is worth buying.

Value chain vs. supply chain

• Supply chain: focuses on the flow of goods and resources from suppliers to the company and then to customers.
• Value chain: includes the supply chain but also emphasizes how value is added at each step (product design, branding, after-sales service).

How to perform a value chain analysis

1. Identify the company’s primary and support activities.
2. Calculate the costs and value associated with each activity.
3. Look for opportunities to lower costs or increase differentiation to gain competitive advantage.

Global value chains

A global value chain splits production and related tasks across countries (design in one country, manufacturing in another, assembly in a third). Multinational firms coordinate these dispersed activities to capture efficiencies and market advantages.

Bottom line

A value chain is a practical tool for understanding how a business creates value and where it can improve. By analyzing each activity—primary and support—companies can cut waste, enhance differentiation, and strengthen their competitive position.