Value Chain

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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 -


Special Interest Group - Value Chain (Porter)


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Forum - Value Chain (Porter)  

Discussions about Value Chain (Porter).


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  Role of Information Systems in Value Chain
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  Comparing Value Chain and 7S Model
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  Value Chain for Services Industry
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  Inventory Replenishement in Value Chain
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  Value Chain versus Diamond Model
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  Value Chain in Research and Technology
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  Procurement in the Value Chain Approach
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  Value Chain Analysis is practical
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  Combining Value Chain Analysis with Benchmarking to Analyze Competitive Advantage
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  Order Management in Porters Value Chain?
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  10 Decision Areas of Operation Management (Heizer)
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Best Practices - Value Chain (Porter)

Here you find the most valuable discussions from the past.


  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 (...)
 
 
 
 
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  Value Chains and Industries
Interestingly, different industries often emphasize different activities in the value chain. For example, retailers trad (...)
 
 
 
 

Expert Tips - Value Chain (Porter)

Here you will find advices by experts.


 

The Added-Value Chain Model

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Good Value Chain Questions to Ask

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Reported Benefits of Value-chain Initiaves

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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 (...)
 
 
 

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Fundamental Innovation (...)
 
 
 

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Value Networks

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Three Reasons for Dysfunctional Buyer - Supplier Relationships

Supply Chain Management, Purchasing, Alliances, Partnerships, Supply Chain Relations (...)
 
 

Resources - Value Chain (Porter)

Here you find powerpoint presentations, micro-learning videos and further information sources.


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Introduction to Supply Chain Management

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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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