Value Chain

By Michael Porter, Competitive

Advantage: Creating and
Sustaining superior Performance"
(1985)

What is Strategy?

Strategy is to think about that

What we are at the moment?
Where /what we will be after 10 years or so?
How we can achieve that and what resources we will
be required?
Gerry Johnson and Kevan Scholes, authors of
"Exploring Corporate Strategy," say that strategy
determines the direction and scope of an organization
over the long term, and they say that it should
determine how resources should be configured to
meet the needs of markets and stakeholders.

What is Value?
In manufacturing :
Take raw material (input)
do processing
Hand out the final product.

In Services :??????????

time,
knowledge,
equipment and
Systems (IT)
to create services of real value to the person being
served the customer

Definition
THE VALUE CHAIN IS A TOOL FOR SYSTEMATICALLY
EXAMINING THE ACTIVITIES OF A FIRM AND HOW THEY
INTERACT WITH ONE ANOTHER AND AFFECT EACH OTHERS
COST AND PERFORMANCE.
The Process of creating values for customers and indentifying
the sources of Creating those values.
The value chain analysis describes the activities the
organization performs and links them to the organizations
competitive position .
Value Chain-consists of the major activities that have
been added to product during its creation, development or
sale.

The more value an organization creates, the more

profitable it is likely to be. And when you provide more
value to your customers, you build competitive
advantage.
Value = Reward

So how do you find out where you, your team or

your company can create value???????????

Value chain analysis tool

Porter proposed a general-purpose value chain
that companies can use to examine all of their
activities, and see how they're connected.

Activities of a business could be grouped under

two headings:
1. Primary Activities
2. Support Activities

Primary Activies

Primary Activity
Inbound
logistics

All those activities concerned with receiving and storing externally

sourced materials

Operations

The manufacture of products and services - the way in which

resource inputs (e.g. materials) are converted to outputs (e.g.
products)

Outbound
logistics

All those activities associated with getting finished goods and

services to buyers

Marketing
and sales

Essentially an information activity - informing buyers and consumers

about products and services (benefits, use, price etc.)

Service

All those activities associated with maintaining product performance

after the product has been sold

Secondary Activity
Procurement

This concerns how resources are acquired for a business (e.g. sourcing and
negotiating with materials suppliers)

Human
Resource
Management

Those activities concerned with recruiting, developing, motivating and

rewarding the workforce of a business

Technology
Development

Activities concerned with managing information processing and the

development and protection of "knowledge" in a business

Infrastructure Concerned with a wide range of support systems and functions such as
finance, planning, quality control and general senior management

Competitive advantage
A competitive advantage may be achieved by
reconfiguring the value chain to provide lower
cost and better differentiation.
Cost advantage
Differentiation

Competitive Strategies

Cost Advantage and the Value Chain

Cost of individual value chain activity
Porters 10 cost drivers
1. Economies or diseconomies of scale
2. Learning
3. Capacity utilization (When fixed cost is high,
consider it)
4. Linkages (within value chain and vertical linkage)
5. Interrelationship among business units (with in firm)
6. Degree of vertical integration
7. Timing of market entry
8. Discretionary policy (To reflect firms strategy)
9. Geographic location
10. Institutional factors ( Govt. regulations,
Unionization, Incentives etc.)
-->

 Reconfiguring the value chain (Structural Changes)

1. Opportunity to fundamentally restructure the firms
cost, compared to settling for incremental
improvements.
2. By altering the basis of competition in a way that favors
the firms strengths, it may change the important cost
drivers in a way that favors a firm.

Medina Vs DFB

Differentiation and Value chain

Can arise from any part of value chain
Differentiation advantage Can be achieved by
changing value chain activities to increase
uniqueness in the final product
Or by reconfiguration in value chain.
Emphasize on unique sources rather than on
products or markets only.
Should consider the cost of differentiation.
Differentiation base on buyers value not only
difference that buyer do not value.

Drivers for uniqueness (Michael Porter)

1.
2.
3.
4.
5.
6.
7.
8.
9.

Policies and decisions

Linkages among activities
Timing
Location
Interrelationships
Learning
Integration
Scale ( Better service at large scale)
Institutional factor

Technology and value chain

Used in every value creating activity.

Can impact competitive advantage by incrementally

changing the activities.
Or new configuration in value chain
Inbound logistics : Transportation, Material Handling,
Storage, Communication, Info Sys etc.
Operation Technologies : Process, material, machine tools,
material handling, Packaging etc.
Outbound logistics technologies :
Marketing and sales technologies : Media, Audio Video,
Communications, Info System.
Services Technologies : Testing, communication, Info Sys
etc.

Using Porter's Value Chain

3 Process Step
Step 1 Identify sub activities for each primary
activity.

Direct activities:
Create value by themselves. (In dairy business
direct sales calls, advertising, Sales etc.)
Indirect activates:
To run direct activates smooth and efficient.
(Managing sales force and keeping customer Records).
Quality assurance:
To maintain the standard of direct &
Indirect activities. (Proof reading the
advertisement material, checking sales call performance).

 Step 2 Identify sub activities for each support

activity.
Determine the value creating sub activities in
support activities that create value within each
primary activity.
e.g. How HR adds value to Inbound,
outbound logistics operations etc.
Note: These should be cross functional in nature.

 Step 3 Identify links between all the value

activities identified (Time consuming but
Important e.g. Developing a sales team(HR) and
sales volume).

 Step 4 Look for Opportunities to enhance Value

via reviewing all the sub activities and links
discovered.

Example
Ali is a software development manager for a software house. he and his team
handle short software enhancements for many clients. As part of a team
development day, he and his team use Value Chain Analysis to think about how
they can deliver excellent service to their clients.
During the Activity Analysis part of the session, they identify the following
activities that create value for clients:
Order taking
Enhancement specification
Scheduling
Software development
Program testing
Secondary testing
Delivery
Support
Ali also identifies the following non-client-facing activities as being important:
Recruitment: Choosing people who will work well with the team.
Training: Helping new team members become effective as quickly as possible, and
helping team members learn about new software, techniques and technologies as
they are developed.
Ali marks these out in a vertical value chain on his whiteboard (you can see the
first three client-facing activities shown in the "Step 1: Activity Analysis" box in
Figure 1 below):

 THE VALUE CHAINS OF THE DIFFERENT FIRMS

WITHIN AN INDUSTRY VARY FROM ONE
ANOTHER
IN FACT, THE DIFFERENCES IN THE VALUE
CHAINS AMONG THE DIFFERENT INDUSTRY
PLAYERS PROVIDE THE SOURCE OF
COMPETITIVE ADVANTAGES BETWEEN THESE
PLAYERS.

 SINCE THE APPLICATION OF THE VALUE CHAIN

ANALYSIS TO AN INDUSTRY WILL LIKELY BLUR
OR HIDE THESE SOURCES OF COMPETITIVE
ADVANTAGE, DR. PORTER THEREFORE
SUGGESTS THAT:
THE BUSINESS UNIT IS THE CORRECT LEVEL TO
CONSTRUCT A VALUE CHAIN
AND
THE APPLICATION TO AN ENTIRE SECTOR OR
INDUSTRY IS NOT RECOMMENDED.

 www.support4learning.org.uk/education/key
_skills.htm
(a good all-round site for study skills advice and
information)
www.bized.ac.uk/ (a study support site for
business studies students)