Management - 12manage

Value Chain Framework
(Porter)

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

The Value Chain 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 Value Chain

  • 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 value chain 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 value chain

A firm may create a cost advantage:

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

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 value chain has been defined, a cost analysis can be performed by assigning costs to the value chain 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 value chain. "Reconfiguration" means structural changes such as: a new production process, new distribution channels, or a different sales approach.

 

Normally, the Value Chain of a company is connected to other Value Chains and is part of a larger Value Chain. Developing a competitive advantage also depends on how efficiently you can analyze and manage the entire Value Chain. 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 Framework Forum

Recent User Comments
Elias - Israel 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 operations and technology development. Many software companies focus on marketing and sales, and typically banks are good at services and firm infrastructure."    1
Al - Malaysia How to apply the value chain? "The value chain has two types of activities which are the primary activities and the secondary activities. I can remember all the elements in these two activities. However I have difficulty in applying them. Are there any linkages between these two activities?"    76
Ashveen - Mauritius Value Chain and SCM? "What is the relationship between Supply Chain Management and Value Chain Management? How are they interdependent??"    25
landrine - S-Africa Michael Porter's value chain "In the context of the value chain, would inventory replenishement be a support value process or a primary value process?"    18
Bonard Mwape - Tanzania Value Chain model in tourism "How does the model handel a services industry like tourism? It looks to me much of the tourism industry operates on networks allianed globally.. It seems countries doing well in this industry are those who have created linkages to global partners."    17
Best User Comments
Thornton - USA Value Networks "In an article 'Value Creation, Coordination and Positioning in Supply Relationships' in Long Range Planning (Volume 39, Issue 2, April 2006, Pages 133-153), Lars Huemer has reservations as to the usefulness of the value chain model and the notion of value systems as general representations of value creation, coordination and positioning in supply relationships. He suggests that value configuration analysis including the value network logic provides a fruitful alternative, and can reveal a number of complexities in supply relationships, including differences in value creating logic, sets of interdependencies and more compound supply structures. I agree with him that it's time to say goodbye to Porter's process-oriented, sequential Value Chain model and proceed with the more flexible and interdependent non-sequential collaboration-oriented Value Network models."    21
Theresa - S-Africa Value Chain in 2007? "What is the role uncertainty, agility and collaboration are playing in Porters value chain model?"    -12

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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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  § Gian Z. (Netherlands) Value chains and Industries "That would be a combination of focus, core competencies and specific vertical markets (within banking you can further segment, uncovering even more broad trends...)
In my opinion it all boils down to the strategy and positioning of that particular company. The framework is particularly interesting (to me...) when setting up new organizations... It can then be used as a blueprint."
  § Warren Miller (USA) Value Chains and Industries "Porter's value chain is much overrated. Unlike his five-forces framework, for which he recently wrote an update in HBR, he never published anything in HBR about his value chain framework. Colleagues of mine have had great difficulty using it as an analytical tool to appraise a company. And it doesn't resonate with clients at all. All in all, it's a better tool conceptually than it is in practice."
  § Wendy (UK) Value Chains & Industries "Elias, I agree. Organisations tend to focus on those parts of the value chain in which they perceive there is the greatest opportunity to differentiate themselves from the competitors, and thus save costs or add more value in order to win more market share/ retain existing share."
  § Gustav (Denmark) Value Chain "I think that the work by Stabell and Fjelstad is a valuable supplement to Porter value Chain model. They divide organisations into 3 groups: Value Chains, Value Shops and Value Networks.
Industries like banking, insurance, telephone companies and airlines work as value networks. Software companies, entrepreneurs, etc work as value shops. And physical product focused companies work as value chains."
  § Enzo Zamboni (Argentine) Value Chain and Industries "I agree ,elias..but depend of the point of view from the organization to Michael Porter´s Value Chain,example: in the Biotech and Nanotech companies the critical path is teh Human resources Management and the technology development..is our case.."

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  § Marc (USA) How to apply the value chain "The linkage is the key. Wal-Mart is a great example. Their distribution network is "inbound logistics." However, they gain great leverage by linking it to their IT capability. The linkage is the key to the model."
  § deji (united kingdom) good "this is very good and striaght forward."
  § Amna (Pakistan) Management Studies "V good question"
  § dilip singh (india) value chain "that is really helpfull to me........"
  § shane Julien (New York) outbound logistic "how to apply the outbound logistic"

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  § Elias (Israel) Value Chain and Supply Chain "The value chain of an individual company is normally part of the total supply chain of value-creating activities.
While Porter's value chain concept decomposes all activities of one firm into its parts and analyses each individual activity and their interdepencies, the supply chain concept tries to optimize the supply system as a whole by taking into account the interdependencies between the activities in multiple firms."

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  § Jeff (USA) Primary and Support Activities "Primary. Watch the picture in this article closely. The bottom half are making up all Primary activities. The activities in the top half are making up the Support activities in the Value Chain."
  § blshaw (USA) Inventory Replenishment "Regarding landrine's question: Inventory Replenishment is part of a primary value process. You must also identify your POV. Either you are replenishing your customer's inventory (e.g. You are Procter & Gamble and your customer is Walmart); or you are having your inventory replenished (e.g. You are Walmart and Procter & Gamble is your supplier). Also, see SCOR model from Supply Chain Council."

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  § Rob (SA) Value Networks "The notion is sound, but it depends on the nature of the business as to which approach fits best. Please refer to Kotler (2004) for the specific marketing use of the value network."

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