In this marketing and strategic management tutorial, you will learn porter’s value chain analysis, a strategic tool developed by Michael Porter. In this article, you will learn the important elements, activities and how to use this management tool in your business.
What is Value Chain Analysis?
The value chain analysis sometimes refers to Porter’s value chain analysis model is a well-known business management tool developed by Michael Porter in 1985 in his all-time influential book “Competitive Advantage”. In his book, Porter first time introduced value creation concept. According to Michael Porter, value chain consists all those activities an organization performs to create value for its customers. In the business process organizations create value, more value creation means a more profitable organization. The ultimate goal of value creation is to gain a competitive advantage over your competitors in the market.
Porter’s Value Chain and Competitive Advantage
There are two types of competitive advantages i.e. cost advantage and differentiation advantage. Being a part of management you should know what type of generic business strategy you want. You should have a clear idea of how you want to gain a competitive edge, having a lower cost or separate yourself from competitors. Porter’s value chain is a powerful management tool that let you break down the activities so you have a full insight of cost drivers and differentiation that help you make necessary changes.
Porter’s Value Chain Activities
The main idea behind Porter’s Value Chain approach is to focus on systems and activities that means how you process your inputs into outputs and offer to consumers. Using this viewpoint Porter described the chain of activities that are common to all business. He divided them (value chain activities) into primary activities and support activities.
Primary activities directly add value to a production process. Primary activities of Porter’s value chain help companies to gain competitive advantage in the industry in which they are operating.
Inbound Logistics. These are internal activities related to the receiving of raw material and warehousing and further, distribute it for manufacturing purpose.
Operations. There are the transformations and processes that change inputs into outputs. The outputs are products that can be sold in the market to end users.
Outbound Logistics. These activities involve warehousing and distribution activities of finished goods and services to your customers.
Marketing and Sales. These activities are part of the value chain process where products are introduced in the marketing and awareness is created (advertising and promotional campaigns) among customers to purchase your company product instead of competitors products. The product value and effective communication are key to success.
After Sale Service. You are not in the market for one time sale, it involves customer support once you make a sale. It helps you to maintain your product and service value.
According to Porter’s value chain analysis these secondary activities support primary activities to create and deliver value to customers.
Firm Infrastructure. These activities include support systems and functions that help in day to day activities, for example, accounting, finance, company structure, culture, systems and public relations.
Procurement. The procurement activities include acquisition of inputs like raw materials and supplies from external sources and vendors. For example, you have to manage a strong relationship and negotiation with vendors to avail best prices.
Human Resource Management. HRM support activities include recruitment, selection, orientation, maintaining better working conditions, employees’ relations, training and development. Employees are valuable assets of any organization. Organizations can create competitive advantage if having good HR policies in place.
Technological Advancement. This means how your company machinery, software, systems, procedure and technical skill that help your transformation of inputs into outputs.
3 Steps to Use Value Chain Analysis
There are two ways any firm can use to gain a competitive advantage. The first type of competitive advantage is cost advantage where firms try to compete with low cost. For example, Walmart, Amazon and Tesco, such companies have understood the sources of cost advantage and cost disadvantage. The second type of competitive advantage is differentiation advantage. Here the firms try to produce a superior value product and service. A good example is Apple, T Mobile and Starbucks.
Following are the steps to understand how to use porter’s value chain analysis.
Define Primary and Secondary Activities
Primary activities involved in the creation of a physical product, marketing the product, deliver the product to end users and after-sales services to end users. Support activities as the name suggest providing support to primary activities in value creation.
Cost Allocation and Cost Drivers to each Activity
Providing each activity cost and cost drivers enable managers to have an insight into organizational internal capabilities and resources.
Identify those Activities Lead to Customer Satisfaction
Keep in mind three considerations when you are evaluating value chain activities
- Company Mission. It affects the choice of activities you have undertaken
- Industry Types. It affects the relative importance of each activity in the value chain. For example value chain of service industry will be quite different from a manufacturing concern.
- Value System. Consist all those value chains links of a business upstream and downstream i.e. suppliers and buyers.