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What Value Chain Really Means

        posted by , May 02, 2013

Every product and service you buy is the result of a value chain.

A value chain is a process of adding value one step at a time. For example, a cup of coffee at a your local café has gone through several value added steps.

coffee value chain

The farmer, processing facility and café all add value to your morning cup of coffee. That's a value chain.

Definition: Value Chain

A value chain is a series of steps that add value to a good or service. A value chain may take place within one firm or may span across an extended supply chain that involves a number of firms.

Example: Automotive Value Chain

In many cases a value chain spans an extended supply chain.

If you manufacture cars, you probably depend on an extended network of suppliers. The value chain of the automotive industry has 4 levels: resources, components, assembly and sales & service.

automotive value chain

Example: Investment Bank's Value Chain

The concept of a value chain can be used to model the value that's added by departments in an organization. For example, investment banks tend to divide their firms into front office, middle office and back office. Each level adds value to the firm:

banking value chain

Back office handles a firm's day-to-day operations such as the processing of data, settlement of trades, reporting and call centers.

Middle office handles strategic control functions such as risk management, financial control, compliance and treasury services.

Front office makes the money. They are the client and market facing functions of an investment bank.

Each industry defines its value chain according to its own model.

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