VALUE CHAIN

ANALYSIS
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 activities may include purchasing activities,
manufacturing the products, distribution and
marketing of the company’s products and activities.
 The aim of the value chain framework is to
maximise value creation while minimising cost.
Porter (1980) argued that a business can develop a sustainable competitive advantage based on cost,
differentiation, or both.
DEVELOPING COMPETITIVE
ADVANTAGE:

 To survive in today's highly competitive business

environment, any organization must achieve, at
least temporarily, a competitive advantage.
 A low cost/price strategy focuses on providing
goods or services at a lower cost than the
competition, or superior goods or services at an
equal cost..
 This strategy requires tight cost-control system,
benefiting from economies of scale in production,
and experience curve effects.
 The second strategy for gaining competitive advantage
is differentiation.
 The primary focus of this strategy is to create a unique
position in the market through provision of goods or
services that are valued for their uniqueness or fit to the
needs of a particular group of buyers.
 A differentiating strategy also requires ongoing cost
control efforts within a strategic management emphasis
geared towards differentiating offerings.
 A third competitive strategy not depicted by
Porter's framework is called Focus: a strategy
for targeting a very specific segment of the
market as defined.
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.
 The competitive advantage of an organisation lies
in its ability to perform crucial activities along
the value chain better than its competitors.
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 firm’s 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 company’s 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.
EXAMPLES

 The Apple podcasting value chain is comprised of nine

steps that essentially move from raw content to the
listener.

 The steps of the value chain include content,

advertising, production, publishing,
hosting/bandwidth, promotion, searching, catching,
and listening.
 It is important to note that each step in the value chain
adds value to the podcast in distinctive ways, has its
own sets of challenges and opportunities.
7-Eleven had been vertically integrated, controlling most
activities in the value chain by itself.
The company has now outsourced many parts of its
business including functions like HR, IT management,
finance, logistics, distribution, product development, and
packaging.
According to Gottfredson et al (2005), the value chain
decisions of companies will increasingly shape their
overall organisational structure.
Moreover, the value chain decisions will play a role in
determining the type of management skills that
companies may need to develop or acquire to survive in
fiercely competitive business markets.
 For companies with complex systems like IBM,
Accenture and Cisco etc., it is not possible for
one member of the value chain to provide all the
products and services from start to finish.
 The marketing function in such companies
focuses on aligning with key partners and allies
that must collaborate with each other.
 For example, installing SAP's ERP system
requires direct involvement from companies like
HP, Oracle, and Accenture, along with indirect
involvement of companies like EMC, Cisco, and
Microsoft, and collaboration between many
departments within the company.
 In case of Apple’s leading products like Macintosh
and the iPod, the entire offer is inside a package, and
the entire value chain is preassembled.
 The change of supplier for the Macintosh from IBM,
to Intel, improved the system performance while
retaining the value in terms of price to the consumer.
 The only variable to manage in Apple’s case is the
consumers’ preferences. The role of creating
differentiation through unique quality features, along
with promotion in order to create brand awareness,
image and eventually brand equity becomes
imperative for volume operations driven companies
like Apple.
 LIMITATIONS OF VALUE CHAIN ANALYSIS
 One of the limitations of the value chain model is that it
describes an industrial organization which essentially buys
raw materials and transforms these into physical products.
 At the time when the model was introduced (Porter, 1985),
service industries in the western countries employed lesser
workforce compared to today’s statistics of the same .
 Academics and practitioners alike have critiqued the model
and its applicability in the context of service organisations.
Partnerships, alliances and collaboration along with
differentiation and low costs are common drivers of value
today.
 The limitations of the model include the fact that
‘value’ for the final customer is the value only in its
theoretical context (Svensson, 2003), and not practical
terms.
 The real value of the product is assessed when the
product reaches the final customer, and any
assessment of that value before that moment is only
something that is true in theory.
 Use of other planning tools and techniques like
Porter’s generic strategies, analysis of critical success
factors etc. is recommended in conjunction with the
value chain framework for a more comprehensive
analysis of a company’s strategy and planning.
CONCLUSION:
 It has been used as a powerful analysis tool for
organisational strategic planning for nearly two
decades now.
 It shows that the value chain of a company may
be useful in identifying and understanding
crucial aspects to achieve competitive strengths
and core competencies in the marketplace.
 The model also reveals how the value chain
activities are tied together to ultimately create
value for the consumer.
 The value chains of companies have undergone
many changes in the last two decades due to
advancements in technology facilitating change
at a very rapid pace in the business environment.
 Outsourcing will cause major changes in
organisations and their value chains, with
significant managerial implications.