Concept of Value chain approaches

Introduction:
The value chain approach was developed by Michael Porter in the
1980s in his book Competitive Advantage: Creating and
Sustaining Superior Performance (Porter, 1985). The concept of
value added, in the form of the value chain, can be utilized to
develop an organisations sustainable competitive advantage in
the business arena of the 21st C. All organisations consist of
activities that link together to develop the value of the business,
and together these activities form the organisations value chain.
Such activities may include purchasing activities, manufacturing
the products, distribution and marketing of the companys
products and activities (Lynch, 2003). The value chain framework
has been used as a powerful analysis tool for the strategic
planning of an organisation for nearly two decades. The aim of
the value chain framework is to maximise value creation while
minimising costs.
Main aspects of Value Chain Analysis
Value chain analysis is a powerful tool for managers to identify
the key activities within the firm which form the value chain for
that organisation, and have the potential of a sustainable
competitive advantage for a company. Therein, competitive
advantage of an organisation lies in its ability to perform crucial
activities along the value chain better than its competitors.
The value chain framework of Porter (1990) is an
interdependent system or network of activities, connected by
linkages (p. 41). When the system is managed carefully, the
linkages can be a vital source of competitive advantage
(Pathania-Jain, 2001). The value chain analysis essentially entails
the linkage of two areas. Firstly, the value chain links the value
of the organisations activities with its main functional parts.
Then the assessment of the contribution of each part in the
overall added value of the business is made (Lynch, 2003). In
order to conduct the value chain analysis, the company is split
into primary and support activities (Figure 1). Primary activities
are those that are related with production, while support
activities are those that provide the background necessary for
the effectiveness and efficiency of the firm, such as human
resource management. The primary and secondary activities of
the
firm
are
discussed
in
detail
below.

Primary activities
The primary activities (Porter, 1985) of the company include the
following:
Inbound logistics
These are the activities concerned with receiving the materials
from suppliers, storing these externally sourced materials, and
handling them within the firm.
Operations
These are the activities related to the production of products
and services. This area can be split into more departments in
certain companies. For example, the operations in case of a
hotel would include reception, room service etc.
Outbound logistics
These are all the activities concerned with distributing the final
product and/or service to the customers. For example, in case of
a hotel this activity would entail the ways of bringing customers
to
the
hotel.
Marketing and sales:
This functional area essentially analyses the needs and wants of
customers and is responsible for creating awareness among the
target audience of the company about the firms products and
services. Companies make use of marketing communications
tools like advertising, sales promotions etc. to attract customers
to
their
products.
Service
There is often a need to provide services like pre-installation or
after-sales service before or after the sale of the product or
service.
Support activities
The support activities of a company include the following:
Procurement
This function is responsible for purchasing the materials that are
necessary for the companys operations. An efficient
procurement department should be able to obtain the highest
quality goods at the lowest prices.

 Human Resource Management

This is a function concerned with recruiting, training, motivating
and rewarding the workforce of the company. Human resources
are increasingly becoming an important way of attaining
sustainable competitive advantage.
Technology Development
This is an area that is concerned with technological innovation,
training and knowledge that is crucial for most companies today
in order to survive.
Firm Infrastructure
This includes planning and control systems, such as finance,
accounting, and corporate strategy etc. (Lynch, 2003).
Figure 1
The Value Chain

Source: Porter (1985)

Porter used the word margin for the difference between the
total value and the cost of performing the value activities (Figure
1). Here, value is referred to as the price that the customer is
willing to pay for a certain offering (Macmillan et al, 2000).
Other scholars have used the word added value instead of
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margin in order to describe the same (Lynch, 2003). The analysis

entails a thorough examination of how each part might
contribute towards added value in the company and how this
may
differ
from
the
competition.
In a study of Saudi companies, Ghamdi (2005) found that 22% of
the companies in the study used value chain frequently, while
17% reported that they somewhat used it, and 42% did not use
the tool at all. An interesting finding of the study was that the
manufacturing firms were frequent users of the tool compared to
their service counterparts (Ghamdi, 2005).

The ability of a company to understand its own capabilities and

the needs of the customers is crucial for a competitive strategy
to be successful. The profitability of a firm depends to a large
extent on how effectively it manages the various activities in the
value chain, such that the price that the customer is willing to
pay for the companys products and services exceeds the relative
costs of the value chain activities. It is important to bear in mind
that while the value chain analysis may appear as simple in
theory, it is quite time-consuming in practice. The logic and
validity of the proven technique of value chain analysis has been
rigorously tested, therefore, it does not require the user to have
the same in-depth knowledge as the originator of the model
(Macmillan et al, 2000). The first step in conducting the value
chain analysis is to break down the key activities of the company
according to the activities entailed in the framework. The next
step is to assess the potential for adding value through the means
of cost advantage or differentiation. Finally, it is imperative for
the analyst to determine strategies that focus on those activities
that would enable the company to attain sustainable competitive
advantage.
It is important for analysts to remember to use the value chain as
a simple checklist to analyse each activity in the business with
some depth (Pearson, 1999). The value chain should be analysed
with the core competence of the company at its very heart
(Macmillan et al, 2003). The value chain framework is a handy
tool for analysing the activities in which the firm can pursue its
distinctive core competencies, in the form of a low cost strategy
or a differentiation strategy. It is to be noted that the value
chain analysis, when used appropriately, makes the
implementation of competitive strategies more systematic
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overall. Analysts should use the value chain analysis to identify

how each business activity contributes to a particular
competitive strategy. A company may benefit from cost
advantages if it either reduces the cost of individual activities in
the value chain or the value chain is essentially reconfigured,
through structural changes in the activities. One of the
problematic areas of the value chain model, however, is that the
costs of the different activities of the value chain need to be
attributed to an activity. There are few costing systems that
contain detailed activity level costing, unless an Activity Based
Costing (ABC) system is in place in the company (Macmillan et al,
2003). Another relevant area of concern that analysts must pay
particular attention to is the customers view point of value. The
customers of the firm may view value in a generic way, thereby
making the process of evaluating the activities in the value chain
in relation with the total price increasingly difficult. It is
imperative for analysts to note that the overall differentiation
advantage may result from any activity in the value chain. A
differentiation advantage may be achieved either by changing
individual value chain activities to increase uniqueness in the
final product or service of the company, or by reconfiguring the
companys value chain.
The difference between a low cost strategy and differentiation in
practice is unlike the rigidity that is provided regarding the same
in theory. Analysts must note that the difference between these
two strategies is one of the shades of grey in real life compared
to the black and white that is offered in theory. For example,
Emerson Electric, which is a cost leader, has quality as a
strategic concern in achieving its best costs strategy (Pearson,
1999). Ivory Soap, a leading product of P&G, is a broad
differentiator that turned into a cost leader. Quality is a strategic
concern for managers of Ivory Soap, along with delivering a high
value
product
consistently.
Note that in a company with more than one product area, it is
appropriate to conduct the value chain analysis at the product
group level, and not at the corporate strategy level. It is crucial
for companies to have the ability to control and make most of
their capabilities. In the advent of outsourcing, progressive
companies are increasingly making their value chains more
elastic and their organisations inherently more flexible
(Gottfredson et al, 2005). The important question is to see how
the companies are sourcing every activity in the value chain. A
systematic analysis of the value chain can facilitate effective
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outsourcing decisions.