How Do Companies Create Value Along the Value Chain?

Your company can create value along the value chain to gain a competitive advantage. And, then, scanning it regularly and making sure it’s relevant to customer requirements allows your company to continuously outperform your competitors, keeping the money flowing straight to you.

But to create value, your business must map out what activities are involved along the value chain. Which ones contribute significantly to value creation? Then, you can think about how to add value to each activity.

Adding value enables your company to create economic value. Your company offers the highest value (satisfaction) to your customers at the lowest possible cost.

What are the activities in the value chain?

Let’s take Michael Porter’s value chain concept. He divided the value-creating activities within the firm into two groups: primary activities and support activities.

Primary activities

Primary activities include five components. And as the name suggests, they are strategic in adding value and creating a competitive advantage, requiring companies to focus on them. They include:

1. Inbound logistics includes the delivery of inputs from suppliers to the company’s warehouses or production facilities. It involves receiving, warehousing, and managing inventory.
2. Operations involve processing raw materials and other inputs into outputs. Depending on the production method used, they may require handling activities along the production line.
3. Outbound logistics is the opposite of inbound logistics. It involves shipping goods from a company’s production facilities or warehouses to customers or intermediaries such as wholesalers and distributors, including handling information flow, warehousing, and inventory management.
4. Marketing and sales include scanning consumer needs and wants, competitive trends, and identifying targeted markets. Then, the team develops the appropriate product, runs the promotion, sets the price, selects the distribution channel, and sells the product. The team is also responsible for managing long-term relationships with customers.
5. Services are involved in activities to ensure customers get the greatest satisfaction and benefit from its products after buying them. They include after-sales service, maintenance, repair, refunds, and customer complaint handling.

Support activities

Support activities consist of four components. They play a role in helping key activities operate more efficiently and effectively. Therefore, their contribution and role will vary, depending on which core activity they support.

Here are four supporting activities in Porter’s value chain:

1. Procurement involves activities related to the purchase and acquisition of inputs. It concerns not only raw materials but also other inputs needed to run business operations, such as office equipment, production machines, and technology equipment.
2. Technology involves handling and maintaining technology for other business activities, such as production technology, information technology within the company and external parties, and customer relationship management.
3. Human resource management involves recruiting, training, developing, motivating, and compensating employees. Handling industrial relations and layoffs is another concern. Thus, human resources are adequate to support strategies and other business activities, both quantity and quality.
4. Infrastructure covers functional areas such as accounting, corporate finance, legal, quality control, and strategic management.

Examples of creating value along the value chain

The primary and supporting activities make up the value system in a company. Companies then use it to develop value-creation strategies, thereby enabling them to gain a competitive advantage. For example:

Logistics

Efficient logistics activities are the cornerstone of creating value along the value chain. Here’s how a well-oiled logistics network contributes:

Reduced costs: Streamlined logistics minimizes shipping costs, leading to higher profitability. This allows your company to invest in other value-adding areas like product development or marketing.

Additionally, efficient route planning and warehouse management can further optimize costs by reducing fuel consumption and storage space requirements.

Improved customer satisfaction: Faster delivery times ensure products reach customers when they need them, enhancing their experience and loyalty.

Logistics can also contribute to a positive customer experience through features like real-time order tracking and flexible delivery options. Efficient logistics processes also minimize stockouts, ensuring customers get what they need, when they need it.

Inventory optimization: Optimized logistics processes allow for better inventory management, reducing the risk of overstocking or understocking. This improves cash flow and frees up capital for other strategic initiatives.

Additionally, advanced inventory management techniques can help predict demand fluctuations, allowing companies to maintain optimal stock levels and avoid stockouts.

Operation

Selecting the right production system significantly impacts value creation and cost reduction. Here are two effective methods that exemplify different approaches:

Flow production: This method excels at the high-volume production of standardized goods. By focusing on efficiency and streamlined processes, flow production allows companies to achieve economies of scale, leading to significant cost savings.

This approach is ideal for products with high demand and consistent specifications. Additionally, flow production can be enhanced by implementing lean manufacturing principles, which further eliminate waste and improve overall efficiency.

Mass customization: This innovative approach allows companies to personalize products to meet customer needs at costs comparable to mass production. It essentially combines the benefits of customization with the efficiency of mass production, creating significant value.

This method is well-suited for companies that want to offer a wider variety of options to their customers without sacrificing cost-effectiveness. Mass customization can be facilitated by using modular product designs and flexible production systems that can adapt to variations in customer requirements.

Marketing

Marketing activities play a vital role in creating value across the value chain. Here’s how effective marketing strategies contribute:

Increased demand generation: Well-crafted promotional campaigns raise awareness of your company’s products and services, driving more people to consider and purchase them. This translates to increased sales and revenue generation. Effective marketing leverages various channels to reach target audiences and highlight product benefits, creating a compelling value proposition.

Building brand loyalty: Developing a strong brand creates an emotional connection with customers, fostering loyalty and encouraging them to continue choosing your company over competitors. This brand loyalty translates to repeat business and reduces customer churn.

Enhanced customer relationships: Marketing can foster strong customer relationships by fostering two-way communication. This can involve creating engaging content, building online communities, and offering personalized customer experiences.

Effective communication allows you to understand customer needs and preferences, leading to better product development and marketing strategies.

Service

Delivering exceptional customer service is a cornerstone of creating value. Superior service keeps customers satisfied, fosters loyalty, and encourages them to continue buying from your company. Here are some examples:

Value-added services: Providing value-added services like free product delivery, in-home product demonstrations, or efficient complaint resolution adds an extra layer of convenience and satisfaction for the customer.

These services differentiate your company from competitors and contribute to a positive customer experience, ultimately leading to increased customer retention and advocacy.

Building customer trust: Excellent customer service builds trust with your customers. By addressing their concerns promptly and resolving issues efficiently, you demonstrate your commitment to their satisfaction. This fosters trust and strengthens long-term customer relationships.

Procurement

Smart procurement practices that focus on building strong supplier relationships create significant value:

Cost reduction: Selecting the right suppliers and negotiating favorable terms can lead to cost savings through discounts, bulk purchase agreements, and optimized delivery schedules. By working collaboratively with reliable suppliers, you can ensure timely delivery of quality materials or products at competitive prices, contributing to overall cost efficiency.

Improved quality and innovation: Developing strong relationships with suppliers allows for open communication and collaboration. This can lead to improved product quality through joint efforts to develop and implement stringent quality control measures. Additionally, collaboration with key suppliers can spark innovation by leveraging their expertise and access to emerging technologies or materials.

Information Technology

Information Technology (IT) plays a critical role in creating value across the entire value chain. It acts as an enabler, optimizing and enhancing activities in other areas:

Supporting operations: Technology underpins advanced production methods like mass customization. Computer-aided design (CAD) and manufacturing (CAM) tools facilitate automation and precise control over production processes. Additionally, IT systems manage inventory levels and optimize production scheduling, ensuring efficient resource allocation and timely product delivery.

Empowering marketing: Marketing teams leverage technology to build comprehensive customer databases and analyze market trends. Customer Relationship Management (CRM) software allows for targeted marketing campaigns, personalized communication, and efficient handling of customer inquiries and complaints. Furthermore, digital marketing platforms allow companies to reach a wider audience and track campaign effectiveness.

Facilitating information flow: Effective communication and information sharing are critical for value creation. IT infrastructure enables seamless information flow within the company (e.g., between production and marketing) and with external parties like suppliers and customers. This real-time data exchange allows management to make informed decisions based on accurate and timely information. 

For example, marketing teams can leverage sales data to adjust production forecasts, ensuring optimal stock levels and preventing shortages. Similarly, collaboration tools facilitate communication with suppliers, enabling efficient procurement and product development.

Human Resource Management

Effective Human Resource (HR) management practices directly contribute to creating value along the value chain:

Developing a skilled workforce: HR focuses on attracting, hiring, training, and developing talented employees. By investing in employee development programs, companies ensure their workforce possesses the necessary skills and knowledge to perform their jobs effectively. This translates to increased productivity, improved service quality, and ultimately, greater customer satisfaction.

Enhancing customer experience: The right people interacting with customers significantly impact value creation. HR strategies that emphasize customer service skills and conflict resolution training empower employees to handle customer inquiries and complaints effectively. This results in increased customer satisfaction, reduced churn, and stronger customer loyalty.

Infrastructure

A company’s infrastructure, including its financial and accounting systems, also plays a part in creating value:

Streamlining financial processes: Efficient financial systems facilitate smooth customer payment collection, fostering a positive customer experience. Additionally, streamlined invoicing and billing processes ensure timely payments from customers, improving cash flow and financial health.

Optimizing financial decisions: The accounting and finance department utilizes IT systems to analyze financial data and make strategic recommendations. 

For example, analyzing profitability data allows management to assess the viability of offering customer discounts as a way to show customer appreciation while maintaining financial sustainability. Furthermore, financial modeling tools help companies evaluate different capital structures (borrowing, issuing bonds, or issuing stock) and make informed decisions that minimize financial costs.