This action might not be possible to undo. Are you sure you want to continue?
it is useful to separate the business system into a series of value generating activities referred to as the value chain.VALUE CHAIN ANALYSIS To better understand the activities through which a firm develops a competitive advantage and creates shareholder value. In his 1985 book Competitive Advantage. Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. .
ACTIVITIES IN VALUE CHAIN Porter identified two type of activities 1. . Support activities The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities. thereby resulting in a profit margin. Primary activities 2.
OVERVIEW OF VALUE CHAIN .
marketing and sales.PRIMARY ACTIVITIES Primary activities are directly concerned with the creation or delivery of a product or service. Each of these primary activities is linked to support activities which help to improve their effectiveness or efficiency. and service. . operations. inbound logistics. outbound logistics.
SET OF PRIMARY ACTIVITIES PRIMARY ACTIVITIES .
Individual operations could include room service in an hotel. .PRIMARY ACTIVITIES Inbound Logistics Here goods are received from a company's suppliers. They are stored until they are needed on the production/assembly line. Goods are moved around the organization. Operations This is where goods are manufactured or assembled. or the final tune for a new car's engine. packing of books/videos/games by an online retailer.
Marketing and Sales In true customer orientated fashion. Service This includes all areas of service such as installation. training and so on. at this stage the organization prepares the offering to meet the needs of targeted customers. after-sales service. This area focuses strongly upon marketing communications and the promotions mix.PRIMARY ACTIVITIES Outbound Logistics The goods are now finished. and they need to be sent along the supply chain to wholesalers. . retailers or the final consumer. complaints handling.
). . and infrastructure (systems for planning. information management etc. finance. human resource management.SUPPORT ACTIVITIES There are four main areas of support activities: procurement technology development (including R&D). quality.
SET OF SECONDARY ACTIVITIES SECONDARY ACTIVITIES .
SECONDARY ACTIVITIES Procurement This function is responsible for all purchasing of goods. services and materials. lean manufacturing. This could include production technology. Technology Development Technology is an important source of competitive advantage. Internet marketing activities. Companies need to innovate to reduce costs and to protect and sustain competitive advantage. and many other technological developments. Customer Relationship Management (CRM). The aim is to secure the lowest possible price for purchases of the highest possible quality. .
SECONDARY ACTIVITIES Human Resource Management (HRM) Employees are an expensive and vital resource. training and development. and other mechanisms for planning and control such as the accounting department. . It includes the Management Information System (MIS). and rewards and remuneration. An organization would manage recruitment and selection. Firm Infrastructure This activity includes and is driven by corporate or strategic planning.
Organization is able to deliver a product/service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain.MARGIN Margin implies that organizations realize a profit margin that depends on their ability to manage the linkages between all activities in the value chain. .
Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors. .SIGNIFICANCE The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive advantage as follows: Cost advantage: by better understanding costs and squeezing them out of the value-adding activities.
Cost Advantage and the Value Chain A firm may create a cost advantage either by reducing the cost of individual value chain activities or by reconfiguring the value chain. new distribution channels. or a different sales approach. Reconfiguration means structural changes such a new production process. Porter identified some cost drivers related to value chain activities: ± ± ± ± ± ± ± ± Learning Capacity utilization Linkages among activities Interrelationships among business units Timing of market entry Firm's policy of cost or differentiation Geographic location Institutional factors (regulation. taxes. FedEx structurally redefined express freight service by acquiring its own planes and implementing a hub and spoke system. .) A firm develops a cost advantage by controlling these drivers better than do the competitors. etc. A cost advantage also can be pursued by reconfiguring the value chain. For example. union activity.
A differentiation advantage may be achieved either by changing individual value chain activities to increase uniqueness in the final product or by reconfiguring the value chain. Differentiation stems from uniqueness.g. Differentiation often results in greater costs. . resulting in tradeoffs between cost and differentiation.Differentiation and the Value Chain A differentiation advantage can arise from any part of the value chain. better service as a result of large scale) Institutional factors Many of these also serve as cost drivers. Porter identified several drivers of uniqueness: ± ± ± ± ± ± ± ± Policies and decisions Linkages among activities Timing Location Interrelationships Learning Scale (e.