Value chain and Supply chain

Manufacturing companies create value by acquiring raw

materials and using them to produce something useful. Retailers
bring together a range of products and present them in a way
that's convenient to customers, sometimes supported by services
such as fitting rooms or personal shopper advice. And insurance
companies offer policies to customers that are underwritten by
larger re-insurance policies. Here, they're packaging these larger
policies in a customer-friendly way, and distributing them to a
.mass audience
The value that's created and captured by a company is the profit
:margin
Value Created and Captured – Cost of Creating that Value =
Margin
The more value an organization creates, the more profitable it is
likely to be. And when you provide more value to your
.customers, you build competitive advantage
Understanding how your company creates value, and looking
for ways to add more value, are critical elements in developing a
competitive strategy. Michael Porter discussed this in his
influential 1985 book "Competitive Advantage," in which he
.first introduced the concept of the value chain
A value chain is a set of activities that an organization carries
out to create value for its customers. Porter proposed a general-
purpose value chain that companies can use to examine all of
their activities, and see how they're connected. The way in
which value chain activities are performed determines costs and

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affects profits, so this tool can help you understand the sources
.of value for your organization
Elements in Porter's Value Chain
Rather than looking at departments or accounting cost types,
Porter's Value Chain focuses on systems, and how inputs are
changed into the outputs purchased by consumers. Using this
viewpoint, Porter described a chain of activities common to all
businesses, and he divided them into primary and support
.activities, as shown below

Primary Activities
Primary activities relate directly to the physical creation, sale,
maintenance and support of a product or service. They consist of
:the following
Inbound logistics – These are all the processes related to
receiving, storing, and distributing inputs internally. Your
.supplier relationships are a key factor in creating value here
Operations – These are the transformation activities that change
inputs into outputs that are sold to customers. Here, your
.operational systems create value
Outbound logistics – These activities deliver your product or
service to your customer. These are things like collection,
storage, and distribution systems, and they may be internal or
.external to your organization
Marketing and sales – These are the processes you use to
persuade clients to purchase from you instead of your
competitors. The benefits you offer, and how well you
.communicate them, are sources of value here

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Service – These are the activities related to maintaining the
value of your product or service to your customers, once it's
.been purchased
Support Activities
These activities support the primary functions above. In our
diagram, the dotted lines show that each support, or secondary,
activity can play a role in each primary activity. For example,
procurement supports operations with certain activities, but it
.also supports marketing and sales with other activities
Procurement (purchasing) – This is what the organization does
to get the resources it needs to operate. This includes finding
.vendors and negotiating best prices
Human resource management – This is how well a company
recruits, hires, trains, motivates, rewards, and retains its
workers. People are a significant source of value, so businesses
.can create a clear advantage with good HR practices
Technological development – These activities relate to
managing and processing information, as well as protecting a
company's knowledge base. Minimizing information technology
costs, staying current with technological advances, and
.maintaining technical excellence are sources of value creation
Infrastructure – These are a company's support systems, and the
functions that allow it to maintain daily operations. Accounting,
legal, administrative, and general management are examples of
necessary infrastructure that businesses can use to their
.advantage
Companies use these primary and support activities as "building
.blocks" to create a valuable product or service

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Using Porter's Value Chain

To identify and understand your company's value chain, follow

.these steps
Step 1 – Identify subactivities for each primary activity
For each primary activity, determine which specific subactivities
:create value. There are three different types of subactivities
Direct activities create value by themselves. For example, in a
book publisher's marketing and sales activity, direct
subactivities include making sales calls to bookstores,
.advertising, and selling online
Indirect activities allow direct activities to run smoothly. For the
book publisher's sales and marketing activity, indirect
subactivities include managing the sales force and keeping
.customer records
Quality assurance activities ensure that direct and indirect
activities meet the necessary standards. For the book publisher's
sales and marketing activity, this might include proofreading
.and editing advertisements
.Step 2 – Identify subactivities for each support activity
For each of the Human Resource Management, Technology
Development and Procurement support activities, determine the
subactivities that create value within each primary activity. For
example, consider how human resource management adds value
to inbound logistics, operations, outbound logistics, and so on.
As in Step 1, look for direct, indirect, and quality assurance
.subactivities

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Then identify the various value-creating subactivities in your
company's infrastructure. These will generally be cross-
functional in nature, rather than specific to each primary
activity. Again, look for direct, indirect, and quality assurance
.activities

Step 3 – Identify links

Find the connections between all of the value activities you've
identified. This will take time, but the links are key to increasing
competitive advantage from the value chain framework. For
example, there's a link between developing the sales force (an
HR investment) and sales volumes. There's another link between
order turnaround times, and service phone calls from frustrated
customers waiting for deliveries. The growing interest in value
chains began with Porter’s seminal work, “Competitive
.Advantage,” and has increased ever since
There are a number of significant trends that are now driving
the need for operations oriented analysis from a value chain
perspective. These include
Increasing competition and an increasing focus on innovation
as an element of strategy
Evolving governance models for the extended enterprise The
trend towards globalization of supply and production
Benefits already wrung out of manufacturing and the supply
chain
Trends in Management Discourse
Increasing Competition and the Primacy of Strategy – The
value chain is first and foremost a strategic concept, arising
from a strategic theory of firm competition . As companies

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struggle to compete in an environment of globalization and
intense competition, the focus shifts to alternative means to
remain competitive. This creates an increasing interest in Value
Chains as a tool to model the extended enterprise and formulate
. strategies for how to remain competitive
Evolving Governance Models for the Extended Enterprise –
The information era spurred on by the recent focus of capital
investment on internet technologies and “dot-com” business
models has increased general business and research interest in
alternative value chain and business models. This has been
promoted in the research literature by the focus on Core
Competencies and the Resource Based View (RBV) of the firm .
This growth in modular/virtual collaborative enterprise business
models has increased interest in the Value Chain as a primary
construction for analysis of new models for business governance
. Globalization of Supply and Production – The growth in
global sourcing and supply has begun a long-term process of
leveling the playing field for adding value world wide . This
leads to the need to model global value chains as the
.predominant mode of business in many industries
Many Benefits Already Wrung out of Manufacturing and the
Supply Chain – The Industrial Engineering and Operations
Management disciplines, combined with management and
operations improvement initiatives such as lean manufacturing,
TQM, and Six Sigma, have been improving the efficiency of
manufacturing and supply chain operations for many years.
While there is still considerable work to do in the field,
academic theoreticians and practitioners at many of the more
advanced firms are beginning to turn to a broader view of the
enterprise to continue making a contribution to improving
competitive stance . Improving the operational capability of
other value added activities in the enterprise, such as product
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development, requires shifting perspective from the supply
. chain to the value chain
Trends in Management Discourse – A final reason for the
growing interest in Value Chains may simply be the nature of
management fashion trends in academic and management
discourse. A lifecycle process revealing how management
knowledge entrepreneurs participate in the creation of trends in
discourse was described in a study of Quality Circles by
Abrahamson and Fairchild (1999) . This study derived two
:propositions that are relevant
Management fashions tend to have a lifecycle characterized )1
by a long latency phase followed by a wave-like, often
asymmetrical and ephemeral popularity curve
Three conditions occurring in conjunction trigger a management
fashion within a niche: (a) a fashion in that niche must collapse;
(b) there must be a widespread performance gap that a latency-
phase replacement fashion in that niche can believably address;
and (c) discourse must have brought this gap to the attention of
many management-fashion consumers. The collapsing wave of
interest in supply chain management associated with the dot-
com era bubble bursting may qualify for condition (a), while the
growing global competition in business certainly creates a
performance gap – condition (b). Value chains have had a long
latency period since the mid-1980s, are an accepted terminology
in academic discourse, and are believably positioned to address
many of the concerns that business practitioners have in industry
– condition (c). Value chain discourse has come on as a strong
contender in the past several years to fill the operations and
supply management niche in management fashion, and may be
ready for a continuing rise in popularity. Strategically, it is
being positioned as a dynamic differentiator

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In common parlance, a supply chain and a value chain are
complementary views of an extended enterprise with integrated
business processes enabling the flows of products and services
in one direction, and of value as represented by demand and
cash flow in the other . Both chains overlay the same network
of companies. Both are made up of companies that interact to
provide goods and services. When we talk about supply chains,
however, we usually talk about a downstream flow of goods and
supplies from the source to the customer. Value flows the other
way. The customer is the source of value, and value flows from
the customer, in the form of demand, to the supplier. That flow
of demand, sometimes referred to as a “demand chain”, is
manifested in the flows of orders and cash that parallel the flow
of value, and flow in the opposite direction to the flow of
supply. Thus, the primary difference between a supply chain
and a value chain is a fundamental shift in focus from the supply
base to the customer. Supply chains focus upstream on
integrating supplier and producer processes, improving
efficiency and reducing waste, while value chains focus
downstream, on creating value in the eyes of the customer. This
distinction is often lost in the language used in the business and
.research literature
Creating a profitable value chain therefore requires alignment
between what the customer wants, i.e., the demand chain, and
what is produced via the supply chain. And while supply chains
focus primarily on reducing costs and attaining operational
excellence, value chains focus more on innovation in product
.development and marketing