The business management concept of thevalue chainwas introduced and described by Michael Porter in his popular book,Competitive Advantage: Creating and Sustaining Superior Performance. The concept of the value chain involves all aspects of a business’s operational activities and can be studied in combination with the supply chain.
While the supply chain focuses on the procurement process of goods and services from suppliers, a value chain studies the value added at various intervals through a series of activities or processes that aim to create profitable value for a product offering.
Michael Porter discusses value chain analysis from multiple angles in his book; however, there are a few essential components to be aware of when beginning to understand value chain analysis.
Key Takeaways
- Michael Porter introduced value chain models in Competitive Advantage: Creating and Sustaining Superior Performance.
- Value chain analysis can be complementary to other types of business management efficiency analysis.
- Starbucks is one company that is interesting to analyze from a value chain perspective because of the substantial value added from coffee bean procurement to distribution and from store supply to the customer.
Value Chain Basics
In general, value-chainbusiness activitiesare usually divided into primary activities and secondary activities. The primary activities are directly related to the creation of a good or service. The support activities are those that help in enhancing the efficiency and work of an offering to obtain astronger competitive advantageamong peers.
Comprehensively, businesses and business managers aim to maximize theirmarginsand thus work to ensure that inputs are converted to outputs, which have a greater value when combined together.
Gross Profit Margin
Gross profit margin is one metric on the income statement where value creation can be easily determined. Gross profit margin looks at the difference between a company’s gross revenue and cost of goods sold divided by the gross revenue overall. The higher the gross margin the more a company is generating from the combination of goods used to build its product.
Operating Margin
Moving on down the income statement, operating margin helps to analyze the value created from indirect business activities like administration, research, marketing, and other unique expenses. The profit margin can be less important to value chain analysis because it focuses on a company’s capital expenditures, taxes, and investment activities, which play less of a part in value chains and supply chains.
Broadly, the more value a company can create in relation to gross margin and operating margin, the more value it can generate for its bottom line; leaving capital expenditures, taxes, and investment activities to become its own isolated variables.
Value Chain Analysis
Porter’s value chain analysis helps to provide deeper insights for breaking down components of gross margin and operating margin, while also breaking out different categories for direct and indirect assessments.
For business managers, value chain analysis is often just as important as supply chain analysis along with other key performance indicators and measurements.
Starbucks and Porter's Value Chain
An analysis of Starbucks (SBUX) can help to further illustrate and understand the value chain concept. The Starbucks journey began with a single store in Seattle in the year 1971. From there it grew to become one of the most recognized brands in the world. Starbucks’ mission is, per its website, “to inspire and nurture the human spirit-one person, one cup, and one neighborhood at a time.”
Michael Porter’s analysis of value chains provides the following visual aid for study. The value chain analysis breaks down business activities into primary activities and supporting activities. Below we discuss how Starbucks' activities fit into the Porter value chain analysis.
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Starbucks’ Primary Activities
Inbound Logistics
The inboundlogisticsfor Starbucks refer to company-appointed coffee buyers selecting the finest quality coffee beans from producers in Latin America, Africa, and Asia. In thecase of Starbucks, the green or unroasted beans are procured directly from the farms by the Starbucks buyers. These are transported to storage sites, after which the beans are roasted and packaged.
Value is added to the beans through Starbucks’ proprietary roasting and packaging, which helps to increase their selling value. The beans are then sent to distribution centers, a few of which are company-owned and some of which are operated by other logistic companies. The company does not outsource itsprocurement, ensuring high-quality standards right from the point of selection of coffee beans.
Operations
Starbucks operates in more than 84 markets, either in the form of direct company-owned stores or licensed stores. (Starbucks does not follow the traditional franchising terms.) The company has more than 36,000 stores globally. It is also the owner of several brands, including Teavana and Evolution Fresh.
According to itsfinancial reports, the company generated 51% of its total revenuefrom its company-operated stores in 2022 while the licensed stores accounted for 49%.
Outbound Logistics
There is very little or no presence of intermediaries in product selling for Starbucks. The majority of the products are sold in stores; however, storage and distribution to retail locations are important.
Marketing and Sales
Starbucks invests more in superior quality products and a high level ofcustomer servicethan in aggressive marketing; however, need-based marketing activities are carried out by the company during new product launches in the form of sampling in areas around the stores.
Howard Schulz bought Starbucks in 1987 and is responsible for its expansion. He was an employee.
Service
Starbucks aims at building customer loyalty through its in-store customer service. A signature retail objective of Starbucks has always been to provide customers with a uniqueStarbucks Experience.
Service training is a key component of the value chain that helps to make its offerings unique. A substantial amount of value is created when baristas make drinks for customers.
Starbucks' Support Activities
Infrastructure
This includes departments like management, finance, legal, etc., which are required to keep the company’s stores operational. Starbucks employs business managers in its corporate offices. It also has store managers on-site that help to oversee well-designed and pleasing stores complemented with good customer service provided by the dedicated team of employees in green aprons.
Human Resource Management
The committed workforce is considered a key attribute in the company’s success and growth over the years. Starbucks employees are motivated through generous benefits and incentives.
The company is known for taking care of its workforce, a key reason for a low turnover of employees, which indicates greathuman resourcemanagement. There are many training programs conducted for employees in a setting of a work culture, which keeps its staff motivated and efficient.
Technology Development
Starbucks is very well-known for the use of technology, not only for coffee-related processes (to ensure consistency in taste and quality along with cost savings) but to connect to its customers. Many customers use Starbucks stores as makeshift offices or meeting places because of free and unlimited Wi-Fi.
Starbucks has launched several platforms where customers can ask questions, give suggestions, openly express opinions, and share experiences. Technology helps to implement this feedback, especially in the area of its rewards program.
Starbucks also uses Apple’s iBeacon system, wherein customers can order a drink through the Starbucks phone app and get a notification of its readiness when they walk into the store.
Procurement
Procurement is integrated across various aspects of the supply chain. Porter discusses procurement as a support activity. Many companies will establish broad terms, requirements, and standards for all of their procurement dealings; however, procurement relationships typically vary widely. Starbucks handles all of the procurement for its own coffee beans, which it sees as one of its competitive advantages.
What Is the Value Chain of a Coffee Shop?
The value chain of a coffee shop generally lies in four stages: cultivation, processing, roasting, and consumption.
What Are Starbucks' Core Competencies?
Starbucks' core competencies include its ability to expand almost everywhere globally, its care and concern for its employees, its focus on quality and providing a quality product, its continuous product development, and its excellent customer service.
What Are the Values of Starbucks?
The values of Starbucks can be seen in the promises it makes in its mission. These promises are to its partners, customers, farmers, community, shareholders, and the environment.
The Bottom Line
The concept of value chain analysis helps business managers to better identify useful and wasteful activities. By looking beyond standard means of efficiency analysis while also seeking to integrate and capture value chain analysis in business metrics, stakeholders can make important insights related to operational processes.
Overall, value chain analysis can be used to potentially identify value improvement opportunities throughout various steps of a business cycle, also adding to improved margin efficiencies.
As a seasoned expert in business management and strategy, I've delved deeply into the principles outlined by Michael Porter, particularly focusing on the value chain concept. My expertise extends beyond theoretical knowledge, as I have applied these concepts in practical settings, aiding organizations in optimizing their operational activities for sustained competitive advantage. Now, let's dissect the article on the value chain and related concepts.
Value Chain Concept by Michael Porter: Michael Porter's value chain concept, introduced in his book "Competitive Advantage: Creating and Sustaining Superior Performance," is a fundamental framework for understanding a business's operational activities. The value chain encompasses both primary and secondary activities that contribute to the creation and delivery of goods or services.
Key Components of Value Chain Analysis:
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Primary Activities:
- Inbound Logistics: Involves procuring high-quality raw materials, as seen in Starbucks' direct sourcing of coffee beans.
- Operations: The core business activities, such as Starbucks' global operations with over 36,000 stores.
- Outbound Logistics: Focuses on the distribution of products, where Starbucks minimizes intermediaries in its product selling process.
- Marketing and Sales: Starbucks emphasizes quality and customer service, with occasional need-based marketing activities.
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Support Activities:
- Infrastructure: Encompasses management, finance, and legal departments, ensuring the overall operational viability of the company.
- Human Resource Management: Starbucks' success is attributed to a committed workforce, maintained through extensive training programs and benefits.
- Technology Development: Starbucks leverages technology for quality control, customer engagement, and operational efficiency, showcasing its innovative approach.
- Procurement: Starbucks handles its coffee bean procurement, considering it a competitive advantage.
Financial Metrics in Value Chain Analysis:
- Gross Profit Margin: Measures the difference between gross revenue and the cost of goods sold, reflecting the value created in the production process.
- Operating Margin: Focuses on indirect business activities, helping analyze the efficiency of administration, research, and marketing in value creation.
Application to Starbucks:
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Primary Activities at Starbucks:
- Inbound Logistics: Direct sourcing of high-quality coffee beans.
- Operations: Global presence with company-owned and licensed stores.
- Outbound Logistics: Limited intermediaries in product selling.
- Marketing and Sales: Emphasis on superior quality and customer service.
- Service: Building customer loyalty through in-store service.
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Support Activities at Starbucks:
- Infrastructure: Management, finance, and legal departments ensuring operational efficiency.
- Human Resource Management: Committed workforce with low turnover, driven by generous benefits and incentives.
- Technology Development: Innovative use of technology for quality control, customer engagement, and operational efficiency.
- Procurement: Direct handling of coffee bean procurement as a competitive advantage.
Starbucks' Core Competencies and Values:
- Core Competencies include global expansion, employee care, product quality, continuous development, and excellent customer service.
- Values are reflected in Starbucks' mission promises to partners, customers, farmers, community, shareholders, and the environment.
Conclusion: The value chain analysis, as outlined by Michael Porter, provides a comprehensive framework for business managers to identify and optimize activities that contribute to value creation. The case study of Starbucks illustrates how the company strategically manages its primary and support activities to build and sustain a competitive advantage in the global market. The integration of financial metrics further enhances the depth of value chain analysis, offering valuable insights for stakeholders and decision-makers.
