Value Chain

Value Chain

The set of activities whereby a company take raw materials and turns them into finished products by adding value at each step. For example, take a conglomerate that controls every step of a supply chain. It may have a timber division that cuts down trees, which adds value to the wood because it can then be used. It then sends the timber to the milling division, which adds value by refining the timber into planks of wood. The carpentry department refining the planks adds value by making them into a table, which can then be sold to a customer.

The value chain analyzes how much value each activity adds to the final product against how much each step costs. The two may not be equivalent; making a table may add a great deal to the wood's value without costing very much. Analyzing the value chain is one strategy a company can use to identify and cut costs in a way that maximizes profit.