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Value Chain AnalysisIntroductionValue Chain Analysis describes the activities that take place in a business andrelates them to an analysis of the competitive strength of the business. Influentialwork by Michael Porter suggested that the activities of a business could be groupedunder two headings:(1) Primary Activities - those that are directly concerned with creating anddelivering a product (e.g. component assembly); and(2) Support Activities, which whilst they are not directly involved in production,may increase effectiveness or efficiency (e.g. human resource management). It israre for a business to undertake all primary and support activities.Value Chain Analysis is one way of identifying which activities are bestundertaken by a business and which are best provided by others ("out sourced").Linking Value Chain Analysis to Competitive AdvantageWhat activities a business undertakes is directly linked to achieving competitiveadvantage. For example, a business which wishes to outperform its competitorsthrough differentiating itself through higher quality will have to perform its valuechain activities better than the opposition. By contrast, a strategy based onseeking cost leadership will require a reduction in the costs associated with thevalue chain activities, or a reduction in the total amount of resources used.Primary ActivitiesPrimary value chain activities include:PrimaryActivityDescriptionInboundlogisticsAll those activities concerned with receiving and storingexternally sourced materialsOperations The manufacture of products and services - the way in whichresource inputs(e.g. materials) are converted to outputs (e.g.
products)OutboundlogisticsAll those activities associated with getting finished goods andservices to buyersMarketing andsalesEssentially an information activity - informing buyers andconsumers about products and services (benefits, use, price etc.)Service All those activities associated with maintaining productperformance after the product has been soldSupport ActivitiesSupport activities include:SecondaryActivityDescriptionProcurement This concerns how resources are acquired for a business (e.g.sourcing and negotiating with materials suppliers)HumanResourceManagementThose activities concerned with recruiting, developing,motivating and rewarding the workforce of a businessTechnologyDevelopmentActivities concerned with managing information processing andthe development and protection of "knowledge" in a businessInfrastructure Concerned with a wide range of support systems and functionssuch as finance, planning, quality control and general seniormanagementSteps in Value Chain AnalysisValue chain analysis can be broken down into a three sequential steps:(1) Break down a market/organisation into its key activities under each of themajor headings in the model;(2) Assess the potential for adding value via cost advantage or differentiation, oridentify current activities where a business appears to be at a competitivedisadvantage;
(3) Determine strategies built around focusing on activities where competitiveadvantage can be sustainedValue ChainAs propounded by Michael Porter in his 1985 book Competitive Advantage, aValue Chain provides a structural framework to analyze the primary and secondaryactivities of a business. This framework, as shown below, portrays the business asa value delivery organization. In this figure, the margin is what the business claimsor captures as value from the customers. So, Margin = Value Captured = ValueDelivered to Customers – Value Created by the Business. Since businesssuccess is all about strategizing how to CREATE VALUE, how to DELIVERVALUE, and how to CAPTURE VALUE, Value Chain Analysis remains asingularly important framework in spite of more and more businesses getting aservice (as opposed to a manufacturing) orientation.The above figure depicts that primary activities like inbound logistics, outboundlogistics, operations; and support activities like procurement, technologydevelopment, and human resource management; are geared towards discerning
value at each of these important activity levels withina manufacturing organization.Between then (1985) and now (2007), the world of manufacturing has changed.High-tech manufacturers in Silicon Valley and elsewhere do not consider thelogistics of manufacturing a core competency; consequently volume manufacturingis outsourced through contract manufacturers like Solectron to Taiwan, China,Singapore, etc. In this changed scenario, Porter’s Value Chain can’t be applieddirectly to discern value within manufacturing organizations.Moreover, services organizations constitute bulk of the businesses in first worldcountries. For such organizations, inbound logistics, operations, etc. have a verydifferent meaning. For example, for software firms, inbound activities mightinclude understanding and synthesizing customer requirements prior to productdevelopment, which can be off-shored through third-party vendors to India, Russia,and elsewhere.Similarly, for software and services firms, outbound activities might includeeducating the channels on the features and benefits of the upcoming products andservices, talking to analyst firms like Gartner, Forrester, and IDC, etc. Some ofthese outbound tasks might come under the domain of marketing and sales.