Value Chain Analysis using Porter's Model

• A value chain is a set of activities that a firm operating in a specific industry
performs in order to deliver a valuable product or service for the market.
• It is a set of activities that an organization carries out to create value for its
customers.
• The concept comes from business management and was first described and
popularized by Michael Porter in his 1985 best-seller, Competitive Advantage:
Creating and Sustaining Superior Performance.
• The idea of the value chain is based on the process view of organizations, the idea
of seeing a manufacturing (or service) organization as a system, made up of
subsystems each with inputs, transformation processes and outputs.
• Inputs, transformation processes, and outputs involve the acquisition and
consumption of resources – money, labour, materials, equipment, buildings, land,
administration and management.
• How value chain activities are carried out determines costs and affects profits.

 Primary Activities
Primary activities relate directly to the physical creation, sale, maintenance and
support of a product or service. They consist of the following:
1) Inbound logistics – These are all the processes related to receiving, storing, and
distributing inputs internally. Your supplier relationships are a key factor in
creating value here.
2) Operations – These are the transformation activities that change inputs into
outputs that are sold to customers. Here, your operational systems create value.
3) Outbound logistics – These activities deliver your product or service to your
customer. These are things like collection, storage, and distribution systems,
and they may be internal or external to your organization.
4) Marketing and sales – These are the processes you use to persuade clients to
purchase from you instead of your competitors. The benefits you offer, and how
well you communicate them, are sources of value here.
5) Service – These are the activities related to maintaining the value of your
product or service to your customers, once it's been purchased.

 Support Activities
These activities support the primary functions above. In our diagram, the dotted lines
show that each support, or secondary, activity can play a role in each primary activity.
For example, procurement supports operations with certain activities, but it also
supports marketing and sales with other activities.
1) Procurement (purchasing) – This is what the organization does to get the resources
it needs to operate. This includes finding vendors and negotiating best prices.
2) Human resource management – This is how well a company recruits, hires, trains,
motivates, rewards, and retains its workers. People are a significant source of
value, so businesses can create a clear advantage with good HR practices.
3) Technological development – These activities relate to managing and processing
information, as well as protecting a company's knowledge base. Minimizing
information technology costs, staying current with technological advances, and
maintaining technical excellence are sources of value creation.
4) Infrastructure – These are a company's support systems, and the functions that
allow it to maintain daily operations. Accounting, legal, administrative, and general
management are examples of necessary infrastructure that businesses can use to
their advantage.

 Using Porter's Value Chain
To identify and understand your company's value chain, follow these steps.
Step 1 – Identify sub activities for each primary activity
For each primary activity, determine which specific sub activities create value.
There are three different types of sub activities:
Direct activities create value by themselves. For example, in a book
publisher's marketing and sales activity, direct sub activities include
making sales calls to bookstores, advertising, and selling online.
Indirect activities allow direct activities to run smoothly. For the book
publisher's sales and marketing activity, indirect sub activities include
managing the sales force and keeping customer records.
Quality assurance activities ensure that direct and indirect activities meet
the necessary standards. For the book publisher's sales and marketing
activity, this might include proofreading and editing advertisements.

Step 2 – Identify sub activities for each support activity
For each of the Human Resource Management, Technology Development
and Procurement support activities, determine the sub activities that create
value within each primary activity. For example, consider how human
resource management adds value to inbound logistics, operations,
outbound logistics, and so on. As in Step 1, look for direct, indirect, and
quality assurance sub activities.
Then identify the various value-creating sub activities in your company's
infrastructure. These will generally be cross-functional in nature, rather
than specific to each primary activity. Again, look for direct, indirect, and
quality assurance activities.

Step 3 – Identify links
Find the connections between all of the value activities you've identified.
This will take time, but the links are key to increasing competitive
advantage from the value chain framework. For example, there's a link
between developing the sales force (an HR investment) and sales volumes.
There's another link between order turnaround times, and service phone
calls from frustrated customers waiting for deliveries.

Step 4 – Look for opportunities to increase value
Review each of the sub activities and links that you've identified, and
think about how you can change or enhance it to maximize the value
you offer to customers (customers of support activities can internal as
well as external).

Significance of Value Chain
The value chain framework quickly made its way to the forefront of management
thought as a powerful analysis tool for strategic planning. The simpler concept of
value streams, a cross-functional process which was developed over the next
decade,[13] had some success in the early 1990s.
The value-chain concept has been extended beyond individual firms. It can apply to
whole supply chains and distribution networks. The delivery of a mix of products and
services to the end customer will mobilize different economic factors, each
managing its own value chain. The industry wide synchronized interactions of those
local value chains create an extended value chain, sometimes global in extent. Porter
terms this larger interconnected system of value chains the "value system". A value
system includes the value chains of a firm's supplier (and their suppliers all the way
back), the firm itself, the firm distribution channels, and the firm's buyers (and
presumably extended to the buyers of their products, and so on).
Capturing the value generated along the chain is the new approach taken by many
management strategists. For example, a manufacturer might require its parts
suppliers to be located nearby its assembly plant to minimize the cost of
transportation. By exploiting the upstream and downstream information flowing
along the value chain, the firms may try to bypass the intermediaries creating new
business models, or in other ways create improvements in its value system.

Value chain analysis has also been successfully used in large
petrochemical plant maintenance organizations to show how work
selection, work planning, work scheduling and finally work execution can
(when considered as elements of chains) help drive lean approaches to
maintenance. The Maintenance Value Chain approach is particularly
successful when used as a tool for helping change management as it is
seen as more user-friendly than other business process tools.
A value chain approach could also offer a meaningful alternative to
evaluate private or public companies when there is a lack of publicly
known data from direct competition, where the subject company is
compared with, for example, a known downstream industry to have a
good feel of its value by building useful correlations with its downstream
companies.

Value Chain Analysis using Porter's Model

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Value Chain Analysis using Porter's Model