The value chain concept was developed by Michael E. Porter in 1985. It is a management concept which describes a company as a conglomerate of tasks.
The tasks are divided into primary tasks and supportive tasks. Primary tasks are directly linked to creating value by production or services. Supportive tasks, on the other hand, build the necessary basis for primary tasks. The third part of a value chain is the margin which is the difference between production costs and sales price.
Depending on the type of company, the tasks will be divided into different groups. Each of these groups of either primary or supportive tasks consists of direct, indirect and quality management tasks. Indirect and quality management tasks are often referred to as general expenses by more traditional cost accounting which results in losing valuable information.
Value Chain Example
To make this topic more easily understandable, the following value chain example will explain the above mentioned basics on a publishing company.
The most striking primary task within a publishing company is the book printing. However, there are more tasks which come before or after printing – editing, for example, or distribution.
To be able to execute the primary tasks, a publishing company needs qualified personnel and freelancers. Thus, one of the most important supportive tasks is personnel management. Another supportive task is purchasing of materials (office materials, printing paper, …).
Direct, Indirect and Quality Management Tasks
Let’s have a closer look at editing. We have already categorized this as a primary task. It is directly connected to producing a book. A direct task would, therefore, be the actual editing process.
Sending the files to and from the editor and publishing company, keeping records of accomplished work and changes in the files would be indirect tasks. They are not immediately connected to creating value but they are necessary to guarantee a smooth process.
Quality management tasks could involve sending the edited files to another editor to check them for mistakes. Evaluation of the editor surely belongs here too. If the editor has delivered poor work, it will be noted down and s/he will not be approached again for another project.
Use of the Value Chain Method
This value chain example can be adapted to every other company type. When making a value chain for your company, you will get a better overview of the different tasks involved in creating your value than when using traditional cost accounting methods.
The advantages are clear. When you can split every task involved into three parts depending on their function, you can evaluate at a glance if and where you could cut costs if you have too many expenses. On the other hand, you can find out much more easily where the fault may lie if your product or service proves not good enough. You begin with quality management tasks and then move back until you find the fault.