The value chain is defined as the sequence of business activities that add value to products or services from the perspective of the end user. It examines all activities a firm performs and how they interact. The value chain breaks a firm down into its strategically relevant activities to understand costs and potential sources of differentiation. Vertical linkages refer to the relationships between firms in the value system, where firms can increase their value through maximizing their own value or collaborating with others to increase total value available.
2. CIMA Official Terminology: VALUE CHAIN
The sequence of business activities by which, in the perspective
of the end user, value is added to the products or services
produced by an entity.
According to Michael Porter, the value chain is defined as:
“a systematic way of examining all the activities a firm performs and
how they interact … [the value chain] desegregates a firm into its
strategically relevant activities in order to understand the behaviour
of costs and the existing and potential sources of differentiation.”
3. firm infrastructure
human resource management
technological development
support
activities procurement
service
operations
marketing
outbound
& sales
logistics
inbound
logistics
primary activities
4. firm infrastructure
human resource management
technological development
support
activities procurement
service
operations
marketing
outbound
& sales
logistics
inbound
logistics
primary activities
5. firm infrastructure
human resource management
technological development
support
activities procurement
service
operations
marketing
outbound
& sales
logistics
inbound
logistics
primary activities
6. Vertical linkages are the relations between the firms in the value system.
A firm in the value system can increase its value by different actions:
1. Taking steps to ensure it gains maximum value
2. Collaborating with others to increase total value available
Critical enabler for vertical linkages is information systems.
7.
8. support
activities
Problem
acquisition
& diagnosis
Finding
possible
procurement
solutions
Choice
firm infrastructure
between
primary activities
solutions
Implementing
technological development
chosen
human resource management
solutions
Control &
feedback
Editor's Notes
Porter views the individual firm as a sequence of value-creating activities instead of as an organisation chart detailing business functions. He suggests the business unit of the firm can be visualised as a business system, as depicted in the diagram.The business unit receives inputs into the left-hand side of its value chain, passes them through a series of activities, and passes them on to its customer. The difference between the costs of inputs and activities it performs and the revenue it earns from the sale of its outputs is margin (i.e. long-term profit).Focusing on each of the nine activities enables management to see how each activity creates value that may be understood as the difference between cost and revenue. Management can then decide to improve the activity in one of two ways:1. Enhance the capacity of the activity to differentiate the firm's output in the eyes of customers as part of a differentiation strategy.2.Reduce the costs involved in conducting the activity without harming the competitive position of the final output as part of a cost leadership strategy.The objective of the value chain is to analyse competitive advantage by disintegrating an organisation into discrete activities or processes and examine how each activity contributes to the organisation’s relative cost position or the customer’s comparative willingness to pay.The analysis provides: insight into why the firm does or does not have added value; a way to identify opportunities to improve added value; an understanding how added value may change over time.
Inbound logistics :Receipt and handling of inputs into the process and disseminating them within the firm, such as warehousing, inventory control and vehicle scheduling.2. Operations: Transforms the inputs into final product such as machining, packaging,testing and equipment maintenance.3. Outbound logistics: Collecting, storing and distributing the products to buyers. Thismay include finished goods warehousing, delivery vehicle operation, order processing and scheduling.4. Marketing and sales: Concerned with providing customers with a means to buy and enjoy the product and inducing them to do so. Includes advertising and promotion, channel selection, sales force management and pricing policy.5. Service: Post-purchase service to enhance or maintain the value of a service such as installation, maintenance, training and supply of parts and consumables.
These activities support the primary activities of the business. They are normally classified as overheads because they do not have a discernible relationship to the product of the firm.Porter disputes this. He observes that a so-called overhead like purchasing (or procurement as he calls it) is not a central function but rather is carried out by a number of departments across the firm. For example, the purchasing of raw materials will be part of inbound logistics, whereas the purchasing of advertising space will take place in marketing and sales.By disaggregating overheads according to the primary activities that give rise to them, Porter believes that opportunities for value creation can be identified more accurately:Procurement :Purchasing of inputs needed by the firm.2. Technology development: This includes a broad range from basic product and process research, through media research to servicing procedures.3. Human resource management: The recruitment, training, development, retention and discharge of staff. In some firms the creation of a set system of working and its inculcation through training is the key resource of the firm.4. Firm’s infrastructure: The activities of the firm which cannot be tied back to specific primary activities. These include general management, accounting and finance and legal services. You will note that in his diagram Porter does not attempt to segment this support activity according to the primary activities.
Porter uses the concept of the value system to describe the position of the firm relative to the firms upstream and downstream of it. In the diagram above, the firm inhabits a point in the value system between supplier's value chain and the distributor's value chain.The value added by the entire system is the difference between the revenue received from the last-time buyer and the costs generated in the system. This is shared between the firms at the various stages of the value system.1. Take steps to ensure it gains as much of this value as possible: (a) by inhabiting the highest value segments of the system through backward or forward integration; (b) by striking good deals with suppliers (low prices) and customers (high prices) to take as much of the available value for itself.2. Collaborate with others in the system to increase the total value available in the chain: (a) by increasing the ability of the final product to generate satisfaction (reflected in the price); (b) by working together to reduce the total costs in the value system.In a JIT manufacturing value system suppliers, transporters, manufacturers and retailers work together to eliminate stocks of components and finished products.They develop a demand-pull system which produces and supplies the product very swiftly upon receipt of the customer's order: It increases satisfaction because the customer can have a customised or recent product and does not suffer long delays if the final seller is out of stock (e.g. fresh sandwiches delivered just in time at the supermarket). Firms reduce the costs associated with maintaining high inventories.Every value creation activity has both a physical component and an information-processing component. Physical = physical tasks required to perform the activity. Information processing = steps required to capture, manipulate, and channel the data necessary to perform the activity.Porter and Millar (1985) stress the importance of linking (or integrating) technologies throughout the firm. Despite the significant capital investment required, they are confident that this can bring benefits such as improved productivity, less bureaucracy, cost reduction and the opportunity to 'spawn new businesses'.
For a generic value chain for a professional services firm, the support activities remain the same, but, the primary activities have been changed from those of a typical manufacturing firm. These are more representative of the type of process that a management consultancy or architects practice might employ in its work. ● Problem acquisition and diagnosis – Persuading clients and potential clients to bring their problems to the firm may well involve marketing activities in commercial environments or, whilst dealing with governmental agencies, by ensuring that the firm is on the preferred supplier list by making presentations.● Finding possible solutions – Using the professional expertise and knowledge of the staff within the firm.● Choice between solutions – Making the choice between the possible alternatives, or facilitating the choice by the client.● Implementing chosen solutions – Putting in to effect the solution agreed with the client.● Control and feedback – Monitoring the effect of the solution to ensure that it has actually solved the original problem.There are a number of differences between a professional services firm and a typical manufacturing firm. 1. There is far less division of labour in the typical service firm and those that contribute to the solution of the problem are often expected to bring the problems into the firm in the firstplace. 2. The importance of specialist human resources in this type of firm cannot be emphasised enough. 3. The primary activities are more like a cycle than a chain. The knowledge and experience gained in the solution of one problem will frequently contribute to future problems acquired by the firm.
![CIMA Official Terminology: VALUE CHAIN
The sequence of business activities by which, in the perspective
of the end user, value is added to the products or services
produced by an entity.
According to Michael Porter, the value chain is defined as:
“a systematic way of examining all the activities a firm performs and
how they interact … [the value chain] desegregates a firm into its
strategically relevant activities in order to understand the behaviour
of costs and the existing and potential sources of differentiation.”](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)