Value Chain

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Summary

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


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Value Chain (Porter) Special Interest Group.



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Forum about the Value Chain (Porter).


 

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Value Chain for Services Industry
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Value Chains and Industries
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How can a value chain be incorporated in law firms? What are the primary and support activities in such legal services?...
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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, wit...
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🔥 NEW Customer Value Chain (CVC)
The Customer Value Chain (CVC) is a bit similar or analogous to Michael Porter's Value Chain (the series of activities such as operations, logistics, and marketing that companies execute in order to c...
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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?...
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Best Practices

The top-rated topics about the Value Chain (Porter). Here you will find the most valuable ideas and practical suggestions.


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 ...
118
 
7 comments

Inventory Replenishement in Value Chain
In the context of the value chain, would inventory replenishement be a support value process or a primary value process?...
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Expert Tips

Advanced insights about the Value Chain (Porter). Here you will find professional advices by experts.


The Added-Value Chain Model

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Information Sources

Various sources of information regarding the Value Chain (Porter). Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops.


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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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