A value chain is a chain of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. The concept comes from business management and was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.
The appropriate level for constructing a value chain is the business unit, (not division or corporate level). Products pass through activities of a chain in order, and at each activity the product gains some value. Chain of activities gives the product more added value than sum of the independent activities' values.[vague]
The activity of a diamond cutter can illustrate the difference between cost and the value chain. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. Typically, the described value chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of the business, e.g. ISO 9001.
The value chain categorizes the generic value-adding activities of an organization. The activities considered under this product/service enhancement process can be broadly categorized under two major activity-sets.
- Physical/traditional value chain: a physical-world activity performed in order to enhance a product or a service. Such activities evolved over time by the experience people gained from their business conduct. As the will to earn higher profit drives any business, professionals (trained/untrained) practice these to achieve their goal.
- Virtual value chain: The advent of computer-based business-aided systems in the modern world has led to a completely new horizon of market space in modern business-jargon - the cyber-market space. Like any other field of computer application, here also we have tried to implement our physical world's practices to improve this digital world. All activities of persistent physical world's physical value-chain enhancement process, which we implement in the cyber-market, are in general terms referred to[by whom?] as a virtual value chain.
In practice as of 2013[update], no progressive organisation can afford to remain stuck to any one of these value chains. In order to cover both market spaces (physical world and cyber world), organisations need to deploy their very best practices in both of these spaces to churn out the most informative data, which can further be used to improve the ongoing products/services or to develop some new product/service. Hence organisations today try to employ the combined value chain.
Combined Value Chain = Physical Value shown in sample below.
|Inbound Logistics||Production Process||Out-Bound Logistics||Marketing||Sales||Activities|
A good look at this value-chain matrix indicates that there are a number of locations in any business process to add value or to improve the process, which in turn will help in saving money and time while improving the performance. The basic idea is same age-old concept of utilizing the input of information, whatever the source.
A firm's value chain forms part of a larger stream of activities, which Porter calls a value system. A value system, or an industry value chain, includes the suppliers that provide the inputs necessary to the firm along with their value chains. After the firm creates products, these products pass through the value chains of distributors (which also have their own value chains), all the way to the customers. All parts of these chains are included in the value system. To achieve and sustain a competitive advantage, and to support that advantage with information technologies, a firm must understand every component of this value system.
An industry value-chain is a physical representation of the various processes involved in producing goods (and services), starting with raw materials and ending with the delivered product (also known as the supply chain). It is based on the notion of value-added at the link (read: stage of production) level. The sum total of link-level value-added yields total value. The French Physiocrats' Tableau économique is one of the earliest examples of a value chain. Wasilly Leontief's Input-Output tables, published in the 1950s, provide estimates of the relative importance of each individual link in industry-level value-chains for the U.S. economy.
The value chain framework quickly made its way to the forefront of management thought as a powerful analysis tool for strategic planning. The simpler concept of value streams, a cross-functional process which was developed over the next decade, had some success in the early 1990s.
The value-chain concept has been extended beyond individual firms. It can apply to whole supply chains and distribution networks. The delivery of a mix of products and services to the end customer will mobilize different economic factors, each managing its own value chain. The industry wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chains the "value system." A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers (and presumably extended to the buyers of their products, and so on).
Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a manufacturer might require its parts suppliers to be located nearby its assembly plant to minimize the cost of transportation. By exploiting the upstream and downstream information flowing along the value chain, the firms may try to bypass the intermediaries creating new business models, or in other ways create improvements in its value system.
Value chain analysis has also been successfully used in large petrochemical plant maintenance organizations to show how work selection, work planning, work scheduling and finally work execution can (when considered as elements of chains) help drive lean approaches to maintenance. The Maintenance Value Chain approach is particularly successful when used as a tool for helping change management as it is seen as more user friendly than other business process tools.
Value chain approach could also offer a meaningful alternative to evaluate private or public companies when there is a lack of publically known data from direct competition, where the subject company is compared with, for example, a known downstream industry to have a good feel of its value by building useful correlations with its downstream companies.
Value chain analysis has also been employed in the development sector as a means of identifying poverty reduction strategies by upgrading along the value chain. Although commonly associated with export-oriented trade, development practitioners have begun to highlight the importance of developing national and intra-regional chains in addition to international ones.
The Supply-Chain Council, a global trade consortium in operation with over 700 member companies, governmental, academic, and consulting groups participating in the last 10 years, manages the Supply-Chain Operations Reference (SCOR), the de facto universal reference model for Supply Chain including Planning, Procurement, Manufacturing, Order Management, Logistics, Returns, and Retail; Product and Service Design including Design Planning, Research, Prototyping, Integration, Launch and Revision, and Sales including CRM, Service Support, Sales, and Contract Management which are congruent to the Porter framework. The SCOR framework has been adopted by hundreds of companies as well as national entities as a standard for business excellence, and the US DOD has adopted the newly-launched Design-Chain Operations Reference (DCOR) framework for product design as a standard to use for managing their development processes. In addition to process elements, these reference frameworks also maintain a vast database of standard process metrics aligned to the Porter model, as well as a large and constantly researched database of prescriptive universal best practices for process execution.
Value Reference Model 
A Value Reference Model (VRM) developed by the trade consortium Value Chain Group offers an open source semantic dictionary for value chain management encompassing one unified reference framework representing the process domains of product development, customer relations and supply networks.
The integrated process framework guides the modeling, design, and measurement of business performance by uniquely encompassing the plan, govern and execute requirements for the design, product, and customer aspects of business.
The Value Chain Group claims VRM to be next generation Business Process Management that enables value reference modeling of all business processes and provides product excellence, operations excellence, and customer excellence.
Six business functions of the Value Chain:
- Research and Development
- Design of Products, Services, or Processes
- Marketing & Sales
- Customer Service
This guide to the right provides the levels 1-3 basic building blocks for value chain configurations. All Level 3 processes in VRM have input/output dependencies, metrics and practices. The VRM can be extended to levels 4-6 via the Extensible Reference Model schema.
See also 
- Porter, M. E. (1996). What is strategy? Harvard Business Review, November–December, 61-78.The value chain
- Martin, James (1995). The Great Transition: Using the Seven Disciplines of Enterprise Engineering. New York: AMACOM. ISBN 978-0-8144-0315-0., particularly the Con Edison example.
- "The Horizontal Corporation". Business Week. 1993-12-20.
- Mitchell, J., Coles, C., and Keane, J. (2009) Upgrading along value chains: Strategies for poverty reduction in Latin America London, UK: COPLA Global - Overseas Development Institute.
- Microlinks (2009) [Value Chain Development Wiki http://microlinks.kdid.org/vcwiki] Washington, D.C.: USAID.
Media related to Value chain diagrams at Wikimedia Commons