How an Understanding of The Value Chain Help Explain The Emergence of The Business Models

The term value chain describes the way of looking at a chain of activities that transform inputs into outputs that customers value. It is called value chain because at each stage of the value chain, value is added to the products or service that enhances the quality, nature, taste, style, cost or some other characteristics of the product.

The purpose of the business model is to help firms realize its potential to earn profits.

The value chain consists of two activities:

1. Primary activities
2. Support activities

The primary activities consists of a group of interrelated activities such as the acquisition of inventory or raw materials from suppliers, transformation of the raw materials into finished goods, distribution or transfer of the finished goods to end users, advertising or promoting the goods to attract customers, and lastly providing extra services to customers (e.g. installation, warrantee, repairs, etc.) as a means of gauging customer interest towards the goods.

The support activities as the name implies consists of those activities that render support to the firm’s primary activities.

The ability of a firm to spot those areas of the value chain which will add value to its product will influence the firm’s capacity in gaining competitive advantage and maximizing profit.

In summary, the profit maximization and competitive advantage directly leads to the importance and relevance of a business model.