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What is a Value Chain and Why is it Important for Businesses?

What is a Value Chain and Why is it Important for Businesses?

Your business's value chain will help identify inefficient processes in your operations. Read more to find out how to make the most of it.

18th September 2019
Reading Time: 3 minutes

What is it?

A value chain is very important for your business. It gives you a clear image of the process of your business and where the inefficiencies lie. Therefore, an effective value chain analysis will give you a competitive advantage.

A value chain is a set of linked processes or activities that a business does to bring forth a valuable product to the customer. To summarise, it is the movement of goods from its creation into the hands of your customers.

Subsequently, you can use the information from a value chain analysis to enhance your production efficiency. This will allow you to deliver a product to your customer at the lowest possible cost.

Components

There are 2 categories; primary and support. The primary category includes processes that are involved in creating a product from its conception to its after-sales service to customers. Similarly, the support category includes processes that are incidental to the primary category. These are processes that run in the background of the business but contribute to the delivery of valuable products as well. Both categories work together for a common goal which is to deliver a valuable product to a customer.

Primary

  • Inbound Logistics – logistic processes involved in receiving, warehousing, and also management of inventory.
  • Operations – the actual production phase whereby materials are converted into finished products.
  • Outbound Logistics – logistic processes involved in distributing the finished products to customers.
  • Marketing & Sales – processes involved in attracting the customers to purchase the finished products such as advertising, promotion, and pricing.
  • Service – after-sales customer service to satisfy customers needs and queries.

Support

  • Procurement – how a company gets its materials needed to operate.
  • Technological Development – R&D processes of a company that contributes in developing manufacturing techniques to improve the overall efficiency and productivity of the business.
  • Human Resource (HR) Development – processes involved in selecting and hiring new employees.
  • Infrastructure – a business’s management such as its legal, accounting, finance, public relations, etc. departments and its internal systems.

Why is it important?

Competitive Advantage

A value chain analysis essentially analyses a company’s production process. A successful analysis will identify which parts of the business process is inefficient. As a result, this will let you implement appropriate strategies to optimize business processes.

A business must continually examine and evaluate the value they create. In doing so, they will maintain a competitive advantage.

Flow of processes

An effective value chain analysis identifies where all costs are incurred in every process. As a result, management will be able to have a clear view of the business’s process. Transparency in every stage of the business process is very important as management will be able to communicate it effectively to every stakeholder.

Conclusion

To conclude, knowledge of your own business’s value chain is very important. This is so that you can understand at which stage or process of your business is working inefficiently. This allows you to implement cost-effective strategies that will improve the business’s efficiency and productivity. Subsequently, to avoid encountering such challenges and to minimise your own risk, you should contact a business lawyer.

Don’t know where to start? Contact us on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest lawyer marketplace.

Author
Ryan Tjahjono

Ryan currently works in the content team as a Legal Intern for Lawpath. He is in his third year of a Bachelor of Law and Business degree at UTS.