What it is:
The value chain is the process through which a company turns raw materials and other inputs into a finished product.
How it works (Example):
For example, Company XYZ might take sugar, flour, eggs, baking powder, vanilla and chocolate chips as inputs and add value to these items by mixing them together, applying heat and putting the result in packages. Company XYZ adds more value by delivering the finished product to local grocery stores.
Why it Matters:
The value chain should add value to inputs at every step -- this is how companies build competitive advantage, create profits and ensure that they are creating something that people want to buy. The company's job is to do this for as little cost as possible.