Value Chain

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Analyse activities through which firms can create value. Explanation of the Value Chain Framework of Michael Porter. ('85)

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The Value Chain (VC) framework of Michael Porter is a model that helps to analyze specific activities through which firms can create value and competitive advantage.


The activities of the VC

  • Value Chain framework modelPrimary activities (line functions)
    • Inbound Logistics. Includes receiving, storing, inventory control, transportation planning.
    • Operations. Includes machining, packaging, assembly, equipment maintenance, testing and all other value-creating activities that transform the inputs into the final product.
    • Outbound Logistics. The activities required to get the finished product at the customers: warehousing, order fulfillment, transportation, distribution management.
    • Marketing and Sales. The activities associated with getting buyers to purchase the product, including: channel selection, advertising, promotion, selling, pricing, retail management, etc.
    • Service. The activities that maintain and enhance the product's value, including: customer support, repair services, installation, training, spare parts management, upgrading, etc.
  • Support activities (Staff functions, overhead)
    • Procurement. Procurement of raw materials, servicing, spare parts, buildings, machines, etc.
    • Technology Development. Includes technology development to support the VC activities. Such as: Research and Development, Process automation, design, redesign.
    • Human Resource Management. The activities associated with recruiting, development (education), retention and compensation of employees and managers.
    • Firm Infrastructure. Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc.

Creating a cost advantage based on the VC

A firm may create a cost advantage:

  • by reducing the cost of individual VC activities, or
  • by reconfiguring the VC.

Note that a cost advantage can be created by reducing the costs of the primary activities, but also by reducing the costs of the support activities. Recently there have been many companies that achieved a cost advantage by the clever use of Information Technology.


Once the VC has been defined, a cost analysis can be performed by assigning costs to the VC activities. Porter identified 10 cost drivers related to value chain activities:

  1. Economies of scale.
  2. Learning.
  3. Capacity utilization.
  4. Linkages among activities.
  5. Interrelationships among business units.
  6. Degree of vertical integration.
  7. Timing of market entry.
  8. Firm's policy of cost or differentiation.
  9. Geographic location.
  10. Institutional factors (regulation, union activity, taxes, etc.).

A firm develops a cost advantage by controlling these drivers better than its competitors do. A cost advantage also can be pursued by "Reconfiguring" the VC. "Reconfiguration" means structural changes such as: a new production process, new distribution channels, or a different sales approach.


Normally, the VC of a company is connected to other Value Chains and is part of a larger VC. Developing a competitive advantage also depends on how efficiently you can analyze and manage the entire VC. This idea is called: Supply Chain Management. Some people argue that network is actually a better word to describe the physical form of Value Chains: Value Networks.


Book: Michael E. Porter - Competitive Advantage -




Value Chain (Porter) Forum (25 topics) Help
  Combining Value Chain Analysis with Benchmarking to Analyze Competitive Advantage
How can value chain analysis and benchmarking be jointly used as tools for assessing the competitiveness of a company?
Could you give an example?...
     
  10 Decision Areas of Operation Management (Heizer)
Heizer wrote there are 10 decision areas of operation Management:
1. Goods and Services Design, 2. Quality Management, 3. Process and Capacity Design, 4. Location, 5. Layout Design, 6. Human Resources and Job Design, 7. Supply Chain Management, ...
     
  Procurement in the Value Chain Approach
For long the value chain approach by Michael Porter and as advanced by Peter Hines has placed procurement on the periphery, bundling it with general administration among other things.
Today, with threats of resource depletion, increased interve...
     
  Developing Green Value Chains
Developing green business strategies in value chains is a new trend to maximize the competitive advantages in terms of minimizing cost within the organizational value chain....
     
  Value Chain in Legal Services
How can a value chain be incorporated in law firms? What are the primary and support activities in such legal services?...
     
  Value Chain versus Diamond Model
Hi, can anyone explain in a few words what is the main difference between Porter's Diamond and Value Chain models?...
     
  Value Chain Analysis in Textile Industry
I am interested in the value chain analysis in textile industry of Uzbekistan to penetrate the EU market. I know that textile has a good opportunities in Uzbekistan, because the availability of raw materials: cotton, yarn and fibers is really improve...
     
  Comparing Value Chain and 7S Model
Hi! I am writing an assignment on a manufacturing company and used both Porter's value chain analysis and McKinsey's 7S framework as internal analysis of the company.
Can someone kindly tell me who to compare these 2 modules to come up with the ...
     
  Value Chain for Services Industry
I have read somewhere, that this model is not applicable for services industry, is it true? And does anybody know, if possible, a good model for strategic management for services industry? Thank you!...
     
  Value Chain in Research and Technology
Is there anyone having practice or insight on value chain specifically for research and technology?...
     
  Order Management in Porters Value Chain?
How do I segregate and fit in order management (not order fulfillment ) in Porters list of primary processes? Does it belong in marketing and sales?...
     
  Value Chain and Competitive Advantage Report
I know that a report on value chain and competitive advantage of the Public Sector in Lebanon was performed in 1999 upon request of the Prime Minister Salim El Hoss. Where can i find this report? Thank you in advance....
     
  Is Value Chain Analyse Only A Tool??
We study the value chain framework in the marketing plan as a situation analyzing tool. Some say that this can be used as a strategic tool. If we use primary activities of this to enhance the competitive advantages it is very similar to using integra...
     
  Role of Information Systems in Value Chain
How does Porter's value chain model help a business to use information systems for competitive advantage?...
     
  Value Chain Narrow Minded
Porters value chain is very good at explaining how a product adds value throughout the whole process starting from procurement and ending with reaching the end user. Supporting activities also add value to the product, though indirectly. Value chain ...
     
  Value Chain vs. Credit Crunch
In spite of today’s credit crunch crisis, the Value Chain model in my experience proved to be one of the most valuable tool, if not THE most valuable, to remedy the economical downturn.
The major benefits of developing a realistic and sound Valu...
     
  Examples of Value Chain Activities?
I understand the concept as described. Who can provide an example, with reference to an industry?...
     
  Value Chain Analysis is practical
Even after all these years I find the Value Chain model of Porter still one of the better, practical tools to analyse a process, its costs and its added value(s). Obviously the standard model has to be adapted for a given industry, for a given compan...
     
  Value Chains and Industries
Interestingly, different industries often emphasize different activities in the value chain. For example, retailers traditionally focus on inbound and outbound logistics and procurement, while manufacturing companies might focus on oper...
     
  How to apply the value chain? Activities and Linkages
The value chain has two types of activities which are the primary activities and the support activities. I can remember all the elements in these two activities. However I have difficulty in applying them. Are there any linkages between...
     




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Expert Tips - Value Chain (Porter) Premium
  The Added-Value Chain Model - 3 more Primary and 1 more Supporting Activity Added to Porter's Model
 
  Good Value Chain Questions to Ask - Optimizing your Supply Chain
 
  Process Classification Framework - Alternative to Porter's Value Chain Analysis
 
  Reported Benefits of Value-chain Initiaves - Value Chain Advantages
 
  Implementing Added-Value Chain Model - Implementation
 
  How to Design a Value Chain? - Supply Chain Design
 
  Online Value Chain - Use of Internet / IT
 
  10 Decision Areas of Operation Management (Heizer) - Operations Management
 
  List of Major Value Chain Obstacles - Pitfalls in Implementing Value Chain Management
 
  Innovating by Reconsidering Value Delivery - Fundamental Innovation
 
  Remember to Focus your Improvement Efforts? - Achieve More With Less, Kaizen, BPR, JIT, Lean, Value Chain
 
  Value Networks - Value Chain versus Value Network
 

Resources - Value Chain (Porter) Premium
Electronic Markets - Search Costs and Boundaries
Connections and Competences in the Governance of the Value Chain - Value Chain Delocalisation
The Role of Value Chain Functions, Quality Management and Innovation in Competitive Advantage - Value Chain Management, Quality Management, Innovation, Operational Excellence
Introduction to (Sustainable) Value Chain Analysis - Initial Understanding Value Chain Analysis
Location choices across the value chain - How activity and capability influence agglomeration and competition effects
Value Chain Model Diagram - Value Chain Analysis
Internet-based Distribution of Digital Videos - Economic Impacts of Digitizatization
 

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Compare with: Porter Five Forces  |  Porter Competitive Advantage  |  Porter Diamond Model  |  Parenting Advantage  |  Core Competence  |  BCG Matrix  |  Growth Phases  |  Distinctive Capabilities  |  Organizational Configurations  |  3rd Party Logistics (3PL)  |  Outsourcing  |  Just-in-time  |  Bricks and Clicks  |  Value Stream Mapping  |  Delta Model  |  Vertical Integration  |  Horizontal Integration  |  Vendor Managed Inventory  |  Kraljic Model


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