Porter's Value Chain - Explained
What is Porter's Value Chain?
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What is Porter's Value Chain?
A value chain is a model that states what activities need to be performed to deliver the value proposition to a customer, client, or end user.
The value chain of companies that manufacture goods follow several steps including:
- formulating the concept of a product,
- arranging inventory or raw materials,
- production process,
- promotional activities, and
- the final distribution of product.
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What are the Elements of the Value Chain?
The element of the value chain are broken down into nine activities of the business.
These activities are broken into two groups:
- Primary Activities,
- Support Activities
Key points to remember about activities:
- Value chain makes a business more efficient, and helps it in adding maximum value at least costs possible.
- The ultimate objective of a value chain is to achieve core competence.
- Value-chain theory consists of 5 primary activities and 4 support activities of a company.
What are the Primary Activities in the Value Chain?
There will be variations in particular activities depending on the nature of the industry. There are 5 elements involved in primary activities, and each one of them contributes significantly to the value adding process:
- In-Bound Logistics - This section regards the processes relating to the supply of raw materials or inputs. What processes does the firm understand when acquiring, handling, storing, and transferring materials within the business?
- Operations - Operations are the actual processes or undertakings that creates a product or service (processes) that has value to the customer. In a product-based business this would be the manufacturing or assembly process.
- Outbound Logistics - Outbound logistics regards any of the processes necessary for transferring the product or delivering the service to the customer. It is most closely related to storing and distributing the product to the distributor or customer.
- Marketing and Sales - This section accounts for the processes or activities employed to deliver information to potential clients. This section will contain the actual activities and individuals responsible for the processes outlined in the marketing plan.
- Service - This section regards the processes you employ to support your product or service following the sale. In the value chain it serves to maintain the value for the customer.
What are Support Activities?
Support activities main aim is to enhance the efficiency of primary activities. If there is an increase in the efficiency of any of the given support activities, it will lead to offering benefits to at least one primary activity indeed. A company records these support activities as overhead costs on its income statement, and the four support activities are:
- Organization of Firm Structure - This section regards how the firm is organized around the value creation process. It outlines the administrative processes and positions necessary to carry out operations. It generally includes the non-primary disciplines of business: Accounting, Finance, Management, Legal & Claims, etc.
- Human Resources - This section involves the discovery, hiring, training, and managing the employment benefits of internal personnel. This section is particularly important in non-product-based businesses, such as consulting, accounting, legal, medical or other professional practices.
- Technology Development - This section pertains to the technological processes necessary to support operations. It may involve information technology (communications) or technology that relates to the carrying out of a primary process. This will be a primary section for a technology-based service company.
- Purchasing (Procurement or Acquisitions) - This section involves purchasing or otherwise acquiring the resources necessary to carry out the operations that create value. It can involve accessing information or databases in service industries or acquiring raw material or parts in product-based businesses.
What is Value Chain Analysis?
The Value Chain Analysis is a process used to divide the various activities of a business into primary and support activities and analyze them in the context of a firms value delivery.
The objective is to increase a firms competitive strength by maximizing the efficiency with which an activity consumes inputs and generates outputs - allowing for either product differentiation or a decrease in cost.
How is the Value Chain Analysis Used?
The value chain analysis is an analytical framework to better understand the activities of the firm and to support strategy formulation.
Improvements in the value delivery process can be found in any activity along the value chain. Efficiency and effectiveness in these activities could lead to a sustained competitive advantage.
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