Marketing Management

Professor Ashis Mishra

Value Chain

One of the prevalent method of understanding business model of any organization is value chain. Let
me tell you that there is no hard and fast way or hard and fast method by which you understand a
business model. So I told you the different components of business model and you have to look up to
them individually and then join it collectively to see how you make sense out of it.
So that leads to the point that are there any existing templates, are there any existing framework by
which we can understand business model? So one of the ways is value chain.

The concept of value chain was provided by Professor Michael Porter in 1985 in his classic book called
Competitive Advantage. So any marketing organization can provide value to the customer by
identifying their needs, and preparing a package, or preparing an offering what I told you about these
4 P's to satisfy their needs.

To achieve this above, the organization need to carry out many individual discrete activities like
identifying the need, designing the product, mass production of the same, delivering products to the
customer, and ensure the support service etc.

Now each of these activities would contribute to the firm's relative cost structure that is when you
design a product, you spend money. You design a distribution channel, you spend money. So low-cost
physical distribution system, logistics efficiency, high productivity of the salesforce, highly efficient
customer support. So each of these things contributes to the cost structure.

So sometimes you spend more. Sometimes you spend less. So if your salesforce is efficient, you spend
less. If they are not efficient, you spend more. Physical distribution system, if it is efficient, you spend
less. If it is not efficient, you spend more.

So this could create the basis for differentiation like a procurement of high quality raw material could
be a basis for differentiation. Tie-up with the best vendors or suppliers available could be a basis of
differentiation. Highly efficient accounting and order processing system could be a basis of
differentiation. So a systemic way of analyzing each and every activity a firm performs and ascertaining
its differentiation ability as well as the profitability is called value chain.

A value chain, according to Porter, a value chain disaggregates a firm into its strategically relevant
activities, many of them I told you just now in order to understand the behavior of the costs and the
potential source of differentiation. So where do you spend money and where do you get it back.

So if you look up to this value chain model of Michael Porter what he does essentially is divides the
firm's activities into two different segments. One is the primary activity that is he speaks about
inbound logistics, the store operations, or any other kind of operations, the outbound logistics,
marketing and sales, and service. So these are the essential activities or central activities for the
survival of the firm and then the activities that perverts each of these activities, that is, support
activities. They are firm infrastructure resources, human resource, technology and procurement.

So then this also could change if your organization is different and the type of business that you do
that would be different, then your primary activities and support activities could also change. The
essential framework over here talks about identify the primary activities, identify the support activities
and then find out the margin. So that is your profit. That is the money that you are going to make out
of the business.

© All Rights Reserved. This document has been authored by Professor Ashis Mishra and is permitted for use only within the course "Marketing
Management" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illus trations, pictures,
scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying,
recording or otherwise – without the prior permission of the author.
 Marketing Management
Professor Ashis Mishra
Value Chain

So as I told you, again, you can apply the operations of any business houses that you
are aware of to the value chain model given by Michael Porter and find out what other significant
activity is involved in the business. You can also determine the source of advantage for the firm and it
would actually help you to develop your marketing strategy.

© All Rights Reserved. This document has been authored by Professor Ashis Mishra and is permitted for use only within the course "Marketing
Management" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illus trations, pictures,
scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying,
recording or otherwise – without the prior permission of the author.