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 a company conducts a value chain analysis by evaluating the detailed procedures involved in each step of its business the purpose of a value chain analysis is to increase production efficiency so that a company can deliver maximum value for the least possible cost dennis madamba investopediaunderstanding value chainsbecause of ever increasing competition for unbeatable prices exceptional products and customer loyalty companies must continually examine the value they create in order to retain their competitive advantage a value chain can help a company to discern areas of its business that are inefficient and then implement strategies that will optimize its procedures for maximum efficiency and profitability in addition to ensuring that production mechanics are seamless and efficient it s critical that businesses keep customers feeling confident and secure enough to remain loyal value chain analyses can help 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 1in other words it s important to maximize value at each specific point in a firm s processes 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 chainin 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 1primary activities consist of five components all essential for adding value and creating competitive advantage 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 example of a value chaina value chain example is the privately held grocery store trader joe s which also has 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 taking during regular store hours although potentially maddening for shoppers this system creates a ton of cost savings in terms of employee wages alone 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 products account for more than 80 of its offerings which often have the highest profit margins too as 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 233 outbound logistics many supermarkets offer home delivery but trader joe s does not yet here we can apply the activity of outbound logistics to mean 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 us to have when we visit 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 both new and familiar items that are 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 via this indirect marketing of style and image trader joe s has succeeded in differentiating 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 friendly knowledgeable and articulate staff are there primarily for you employees welcome shoppers interruptions and will instantly rush to find your item or answer your question in addition the company has always employed a no questions asked refund program you don t like it you get your money back period this list could go on and on before ever reaching the four support activities cited above as trader joe s is a wildly successful example of applying value chain theory to its business 