Developed by Michael Porter and used throughout the world for nearly 30 years, the value chain is a powerful tool for disaggregating a company into its strategically relevant activities in order to focus on the sources of competitive advantage, that is, the specific activities that result in higher prices or lower costs. Show
A company’s value chain is typically part of a larger value system that includes companies either upstream (suppliers) or downstream (distribution channels), or both. This perspective about how value is created forces managers to consider and see each activity not just as a cost, but as a step that has to add some increment of value to the finished product or service. In order to give you a top-notch experience on our website, Lucidity and our partners may use cookies and similar technologies to analyse usage, personalise content and ads, and optimise our site. Our Privacy Policy has lots more info on the cookies we use and how to amend your settings, if you fancy taking a look. The idea of the value chain is based on the process view of organisations, the idea of seeing a manufacturing (or service) organisation as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources - money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits. Most organisations engage in hundreds, even thousands, of activities in the process of converting inputs to outputs. These activities can be classified generally as either primary or support activities that all businesses must undertake in some form. According to Porter (1985), the primary activities are:
Secondary activities are:
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Porter’s Value Chain Analysis: this article explains the Porter’s Value Chain Analysis, developed by Michael Porter in a practical way. After reading you will understand the basics of this powerful management tool. This article also contains a downloadable and editable Value Chain Analysis template. What is a Value Chain Analysis?The value chain also known as Porter’s Value Chain Analysis is a business management concept that was developed by Michael Porter. In his book Competitive Advantage (1985), Michael Porter explains that a value chain is a collection of activities that are performed by a company to create value for its customers.
Do you want unlimited and ad-free access? Value Creation creates added value which leads to competitive advantage by research and development. Conducting a value chain analysis and implementing improvements and reduce costs can lead to added value also creates a higher profitability for an organization. What is the Porter’s Value Chain Analysis Model?The strength of this analysis is its approach. It focuses on the systems and business activities with customers as the central principle rather than on departments and accounting expense categories. It links systems and activities to each other and demonstrates what effect this has on costs and profit margins. Consequently, the Value Chain Analysis makes clear where the sources of value and the losses can be found in the organization.
The Value Chain activitiesIt consists of a number of activities, namely primary activities and support activities. Primary activities have an immediate effect (cost advantage) on the production, maintenance, sales and support of the products or services to be supplied. These activities consist of the following elements: Inbound LogisticsThese are all processes that are involved in the receiving, storing, and internal distribution of the raw materials or basic ingredients of a product or service. The relationship with the suppliers is essential to the creation of value in this matter. ProductionThese are all the activities (for example production floor or production line) that convert inputs of products or services into semi-finished or finished products. Operational systems are the guiding principle for the creation of value. Outbound logisticsThese are all activities that are related to delivering the products and services to the customer. These include, for instance, storage, distribution (systems) and transport. Marketing and SalesThese are all processes related to putting the products and services in the markets including managing and generating customer relationships. The guiding principles are setting oneself apart from the competition and creating advantages for the customer. ServiceThis includes all activities that maintain the value of the products or service to customers as soon as a relationship has developed based on the procurement of services and products. The Service Profit Chain Model is an alternative model, specific designed for service management and organizational growth. Support activities of the Value Chain AnalysisSupport activities within the Porter’s Value Chain Analysis assist the primary activities and they form the basis of any organization. In the figure dotted lines represent linkages between a support activity and a primary activity. A support activity such as human resource management for example is of importance within the primary activity production but also supports other activities such as service and outbound logistics. Firm infrastructureThis concerns the support activities within the organization that enable the organization to maintain its daily operations. Line management, administrative handling, financial management are examples of activities that create value for the organization. Human resource managementThis includes the support activities in which the development of the workforce within an organization is the key element. Examples of activities are recruiting staff, training and coaching of staff and compensating and retaining staff. Technology developmentThese activities relate to the development of the products and services of the organization, both internally and externally. Examples are IT, technological innovations and improvements and the development of new products based on new technologies. These activities create value using innovation and optimization. ProcurementThese are all the support activities related to procurement to service the customer from the organization. Examples of activities are entering into and managing relationships with suppliers, negotiating to arrive at the best prices, making product purchase agreements with suppliers and outsourcing agreements. Organizations use primary and support activities as building blocks to create valuable products, services and distinctiveness. Using the Porter’s Value Chain AnalysisPorter’s Value Chain Analysis: There are four basic steps that have to be followed if you wish to use the Value Chain as an analysis model. By following these basic steps the organization can be analyzed using the Value Chain. Step 1: identify sub activities for each primary activityFor each primary activity, sub-activities can be determined that create a specific value for an organization. There are three categories of sub activities, namely:
Step 2: identify sub activities for each support activityHere it concerns the idea how support activities such as firm infrastructure, human resource management, technology development and procurement can create value within the primary activities. Use the same distinction as in step 1 for direct and indirect activities and quality assurance. For example, consider how human resource management can create value to inbound logistics, marketing & sales and service. This will also have to be done for the other support activities. Step 3: identify linksThis is a crucial and time-consuming step because this is about finding the links between all the different kinds of added value you have identified. This part is of importance for an organization when it concerns increasing competitive advantage from the value chain. For example, a development within a CRM solution can have a link with increasing production and sales volumes through certain investments. Another example is the link between the complaints that have been recorded within the primary activity service and the increase of unfilled vacancies (human resource management) within the primary activity outbound logistics. Step 4: look for opportunities/ solutions to optimize and create valueAfter you have completed the value chain analysis it is important to determine what activities are to be optimized in order to create added value and the final product. This is about quantitative and qualitative investments that can eventually contribute to increasing your customer base, competitive advantage and profitability. Creating business cases will help you give priority and return on investment (ROI) to the possibly required added value creation of a primary or support activity. Value Chain Analysis templateStart listing the activities which add value to the organization with this ready to use Value Chain Analysis template.
Get Toolshero updates on new methods, models and theories! It’s Your TurnWhat do you think? How do you apply the Porter’s Value Chain Analysis in your work? Do you recognize the practical explanation or do you have more additions? What are your success factors for the good Value Chain Analysis set up? Share your experience and knowledge in the comments box below. More informationHow to cite this article: Add a link to this page on your website: |