The value chain is a way of organizing the activities of a business so that each activity adds value or productivity to the total operation of the business.
In 1985, Porter introduced the term value chain in his book. In this book, he introduced value chain as a strategic tool to identify how the critical components of business tie together to deliver value for the business across the value chain process.
In business, the raw material is received as input and value are added to them through various processes. The finished product is sold as output to customers. This means that the organizations consist of a chain of value-creating activities that assure competitive advantages as they deliver value to the customers.
The Value Chain in E-commerce
The competitive advantage is achieved when an organization links the activities in its value chain at a cheaper cost and more effectively than its competitors. For example, the purchasing function helps the production activity to ensure the on-time availability of the raw material and the other supplies to meet the requirements for manufacturing.
Further, the manufacturing function becomes responsible to produce quality products that the sales staff can depend on. The human resource function must hire or retain the right personnel to ensure continuity in manufacturing, sales and other areas of the business.
General components of the value chain:-
Value chain divides activities into two components |types:
- Primary activities
- Support activities
Primary activities are associated with the mission of the firm. They are the processes that create products and services i.e. it is that aspect where operations and processes are involved to produce the kind of products or services the organization wants to sell or market. According to Porter, the primary activities of a business are:
Inbound logistics refer to obtaining materials required for successful operations. It includes activities like vendor selection, comparative shopping, negotiating supply contracts and just-in-time arrival of goods.
Operations involve manufacturing or creating a service. This is the actual conversion of raw materials received into finished products. It includes machining, packaging, assembly, equipment maintenance, testing, and facility operations. This production activity provides added value for the marketing function.
Outbound logistics deliver the product or service to customers. This activity represents the actual storing, distributing and shipping of the final product. It involves warehousing, materials handling, shipping and timely delivery to the ultimate retailer or customer. The output of this activity ties in directly with marketing and sales.
Marketing and sales:–
Marketing and sales are included as primary activities because they are central to customer demand. It includes advertising, product promotion, sales management, identifying the product’s customer base and distribution channels.
Service is responsible for after-sales support of a product. It includes testing, maintenance, repairs, warranty work, and replacement parts. The output of this activity means satisfied customers, improved image of the product and the business and potential for increased production, sales and so on.
Support activities are represented by the firm’s infrastructure. These activities support primary activities and each other. These activities include tasks or activities indirectly associated with the actual production of goods and services without which, however, the primary activities will be hampered and value creation activities or creation of a product may not be realized. The key support activities in the value chain are:
This activity is the backbone of the business unit. It includes general management, accounting, finance, planning, legal services, and quality management.
Human resource management is concerned with recruiting, training and advancing the careers of people who work for the firm. The output of this activity affects virtually every other activity in the company.
Technology also applies to the support of the value chain through all of its steps. This activity adds value in the way it improves the product and the business processes in the primary activities.
Procurement deals with obtaining the raw materials needed to produce a product or service. Thus this activity focuses on the purchasing Function and how well it ensures the availability of quality raw material for production.