The value chain depicts the firm as a collection of value-

creating activities – five primary functions, and four support

functions. The value chain provides a different perspective on

the production activities that go on inside firms.

Firm infrastructure

Human Resource Management

Technology development

Procurement

Inbound logistics

Operations Outbound logistics

Marketing& sales

Service

Margin

Mar

gin

Primary activities

Supp

ort

activit

ies

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The value chain provides a framework for analysing cost drivers (factors which affect the average cost of production in a firm) inside a firm, such as:

1. drivers related to the organisation of the firm, internal efficiency and the level of transactions costs

2. drivers related to scale, scope and learning

Firms can ‘map’ their process flows (i.e the stages that are necessary to produce, market and distribute a product, and identify the key value-adding stages (the value of the output at that stage is much greater than the value of the input). The firm may decide to ‘make’ the products or services in the key stages and ‘buy-in’ other less crucial inputs, thus improving competitive advantage. The firm can also use value chain analysis to drive down costs by coordinating linked activities.

Firm infrastructure

Human Resource Management

Technology development

Procurement

Inbound logistics

Operations Outbound logistics

Marketing& sales

Service

Margin

Mar

gin

Primary activities

Supp

ort

activit

ies

2Tuesday, 13 August 13

Farmers WarehousesBulk

transport

Supermarket

Growersmarket

Supermarket

Generalstore

Supermarket

The value chain could also be thought of as a string of companies who together satisfy demand for goods and

services - demand for the final product generates demand for intermediate goods and services

Supplier

Supplier Supplier Supplier

Supplier Supplier

3Tuesday, 13 August 13

Farmers WarehousesBulk

transport

Supermarket

Growersmarket

Supermarket

Generalstore

Supermarket

This view suggest that much of the value created by firms results filling gaps in the chain!

Supplier

Supplier Supplier Supplier

Supplier Supplier

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