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
Primary activities (line functions)
Inbound Logistics. Includes receiving, storing, inventory control,
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,
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,
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:
Economies of scale.
Linkages among activities.
Interrelationships among business units.
Degree of vertical integration.
Timing of market entry.
Firm's policy of cost or differentiation.
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 Chains ⇨ Value Networks
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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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