Value Chain Analysis and Five Force Analysis

Value Chain Analysis
Industry Structure Analysis through

Porter’s 5 forces analysis and
value chain analysis
Learning Objectives
1. Identify how a situation gets affected .
2. How to analyse your situation with respect
to competitors, technology, substitutes,
buying power of customers.
3. Understand the business value and how
value/money comes to you and how it
disappears. Understanding core and
support with value chain analysis.
Let us first understand
• Porter’s 5 forces analysis and then we will
use this information for value chain
analysis.
Porter’s Five Forces of New Market Entrants, eg:
entry ease/barriers
Competitive Position geographical factors
incumbents resistance
new entrant strategy
routes to market
Supplier Power, eg: Competitive Rivalry, eg: Buyer Power, eg:

brand reputation number and size of firms buyer choice
geographical coverage industry size and trends buyers size/number
product/service level quality fixed v variable cost bases change cost/frequency
relationships with customers product/service ranges product/service importance
bidding processes/capabilities differentiation, strategy volumes, JIT scheduling
Product/Technology
development, eg:
alternatives price/quality
market distribution changes
fashion and trends
legislative effects
© alan chapman 2005, based on Michael Porter's Five Forces of Competitive Position Model.
Not to be sold or published. More free online training resources are at www.businessballs.com. Alan Chapman accepts no liability.
The Porter Competitive Model
Used to understand and evaluate the

structure of an industry’s business
environment and the threats of
competition to a specific company.
Porter Competitive Model-simplified
version
Potential
New Entrants
Bargaining Intra-Industry Bargaining

Power Rivalry Power
of Suppliers Strategic Business Unit of Buyers
Substitute
Products
and Services
Source: Michael E. Porter

“Forces Governing Competition in
Industry Figure 3-1
Harvard Business Review, Mar.-Apr. 1979
Two Strategic Objectives
 Create effective links with customers and
suppliers
 Create barriers to new entrants and substitute

products
Primary and Supporting Strategies
 Differentiation Strategy (Primary)

 Low Cost Strategy (Primary)
 Innovation (Supporting)
 Growth (Supporting)
 Alliance (Supporting)
Value Chain
 Developed by Michael Porter but different

from competitive model because it focuses
within the company.
 Analyzes the cross-functional flow of

products or services within an organization
that add value to customers.
SUPPORT ACTIVITIES
Generic Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS AND SALES
PRIMARY ACTIVITIES
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from
COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright Figure 3-6
© 1985 by Michael E. Porter.
Value Chain and Information
technology Support
 The Value Chain can be used to determine
where IS can strengthen the flow of primary
and support activities within an
organization.
 Every segment of an organization needs IT
and IS to be competitive. So this model is
essential to visualizing the flow of activities
within segments through the use of IS and
IT.
Awareness of competitive forces can
help a company stake out a position
in its industry that is less vulnerable
to attack.
Michael E. Porter
Competitive Strategy
Porter Competitive Model
• Was not developed for IS use.
• Breaks an industry into logical parts,
analyzes them and puts them back together.
• Avoids viewing the industry too narrowly.
• Provides an understanding of the structure
of an industry’s business environment.
• Provides an understanding of competitive
threats into an industry.
Strategic Advantage
Competitive Strategies Cost
Leadership
Differentia-
tion
Innovation
Growth
Alliance
Other
Strategies
Rivalry of Threat of Threat ofBargainingBargaining
Competitors New Substitutes Power of Power of
Entrants Customers Suppliers
Competitive Forces
Value Chain
(Michael Porter in his book "Competitive Advantage: Creating and Sustaining
superior Performance" (1985).
It evaluates which value each particular activity adds to the

organizations products or services.
This idea was built upon the insight that an organization is more than a
random compilation of machinery, equipment, people and money.
Only if these things are arranged into systems and systematic

activates it will become possible to produce something for which
customers are willing to pay a price.
Porter argues that the ability to perform particular activities and to

manage the linkages between these activities is a source of
competitive advantage.
Primary Activities
http://www.marketingteacher.com/Lessons/lesson_value_chain.htm
Primary activities are directly concerned with the

creation or delivery of a product or service.
• inbound logistics,
• operations,
• outbound logistics,
• marketing and sales,
• and service.
Each of these primary activities is linked to support

activities which help to improve their
effectiveness or efficiency.
Inbound Logistics
Here goods are received from a company's suppliers. They are stored until they are needed on
the production/assembly line. Goods are moved around the organization.
Operations
This is where goods are manufactured or assembled. Individual operations could include room
service in an hotel, packing of books/videos/games by an online retailer, or the final tune for a
new car's engine.
Outbound Logistics
The goods are now finished, and they need to be sent along the supply chain to wholesalers,
retailers or the final consumer.
Marketing and Sales

In true customer orientated fashion, at this stage the organization prepares the offering to meet
the needs of targeted customers. This area focuses strongly upon marketing communications
and the promotions mix.
Service
This includes all areas of service such as installation, after-sales service, complaints handling,
training and so on.
Secondary Activities
There are four main areas of support
activities:
• procurement
• technology development (including R&D),
• human resource management, and
• infrastructure (systems for planning,
finance, quality, information management
etc.).
Procurement
This function is responsible for all purchasing of goods, services and
materials. The aim is to secure the lowest possible price for purchases of
the highest possible quality.
Technology Development
Technology is an important source of competitive advantage. Companies
need to innovate to reduce costs and to protect and sustain competitive
advantage. This could include production technology, Internet marketing
activities, lean manufacturing, Customer Relationship Management (CRM),
and many other technological developments.
Human Resource Management (HRM)
Employees are an expensive and vital resource. An organization would

manage recruitment and selection, training and development, and rewards
and remuneration.
Firm Infrastructure
This activity includes and is driven by corporate or strategic planning. It
includes the Management Information System (MIS), and other mechanisms
for planning and control such as the accounting department.
NOW YOU CAN LINK
PRIMARY AND
SECONDARY
ACTIVITIES.
Porter’s original Model
Typical Value Chain Analysis
• Analysis of own value chain – which costs
are related to what activities
• Analysis of Customer value chain
• Identification of cost advantage
• Identification of potential “value” added for
the customer—lower cost/high
performance-where does customer see
“value”

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Value Chain Analysis

Industry Structure Analysis through

Supplier Power, eg: Competitive Rivalry, eg: Buyer Power, eg:

Used to understand and evaluate the

Bargaining Intra-Industry Bargaining

Source: Michael E. Porter

 Create barriers to new entrants and substitute

 Differentiation Strategy (Primary)

 Developed by Michael Porter but different

 Analyzes the cross-functional flow of

HUMAN RESOURCE MANAGEMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

superior Performance" (1985).

It evaluates which value each particular activity adds to the

Only if these things are arranged into systems and systematic

Porter argues that the ability to perform particular activities and to

Primary activities are directly concerned with the

Each of these primary activities is linked to support

Marketing and Sales

Employees are an expensive and vital resource. An organization would

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