Value Chain Framework
(Porter)
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Value Chain Framework
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12manage reaches 100.000 members |
Analyse activities through which firms can create value. Explanation of Value Chain Framework of Michael Porter. ('85) |
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The Value Chain framework of Michael Porter is a model that helps to analyze specific activities through which firms can create value and competitive advantage.
The activities of the Value Chain
Creating a cost advantage based on the value chainA firm may create a cost advantage:
Note that a cost advantage can be created by reducing the costs of the primary activities, but also by reducing the costs of the support activities. Recently there have been many companies that achieved a cost advantage by the clever use of Information Technology.
Once the value chain has been defined, a cost analysis can be performed by assigning costs to the value chain activities. Porter identified 10 cost drivers related to value chain activities:
A firm develops a cost advantage by controlling these drivers better than its competitors do. A cost advantage also can be pursued by "Reconfiguring" the value chain. "Reconfiguration" means structural changes such as: a new production process, new distribution channels, or a different sales approach.
Normally, the Value Chain of a company is connected to other Value Chains and is part of a larger Value Chain. Developing a competitive advantage also depends on how efficiently you can analyze and manage the entire Value Chain. This idea is called: Supply Chain Management. Some people argue that network is actually a better word to describe the physical form of Value Chains: Value Networks.
Book: Michael E.
Porter - Competitive Advantage -
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Compare with: Porter Five Forces | Porter Competitive Advantage | Porter Diamond Model | Parenting Advantage | Core Competence | BCG Matrix | Growth Phases | Distinctive Capabilities | Organizational Configurations | 3rd Party Logistics (3PL) | Outsourcing | Just-in-time | Bricks and Clicks | Value Stream Mapping | Delta Model | Vertical Integration | Horizontal Integration | Vendor Managed Inventory | Kraljic Model
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| ● Adam Sheikh (Kenya) | Vaalue chain- Tyre Industry in India | "Value chain and competitive advantage may not be easily comprehensible merely by looking at Tyre industry as a whole. Value chain largely stems from the many discrete activities a particular tyre firm performs, say in designing ,producing, marketing, delivering and supporting its product. For example JK tyres of India's cost advantage may stem from low cost physical distribution system, a highly efficient assembly process or superior expertise. Similarly, dfferentiation can stem from diverse factors such as procurement of high quality raw materials, prompt ordering system or a superior product design. The value chainessentially, disaggregates a firm into its strategically relevant activities in order to understand the behaviour of of costs and the exisiting and potential sources of differentiation . A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors. ''Porter 1985 pg 33'" |
| ● Marc (USA) | Linkages are Key | "The linkages are the key. Wal-Mart is a great example. Their distribution network is "inbound logistics." However, they gain great leverage by linking it to their IT capability. The linkage is the key to the model." | |
| ● Amna (Pakistan) | Value Chain Activities | "V good question" | |
| ● Hannie (Netherlands) | Primary and Support Activities | "According to Porter, the primary activities are involved in the physical creation of the product and its sale and transfer to the buyer as well as after-sale service. The support activities support the primary activities and eachother by providing purchased inputs, technology, human resources, and various firmwide functions. You need to disaggregate the 9 activities to the degree that is relevant for achieving the competitive advantage (differentiation or cost leadership). Now, competitive advantage can derive from: 1. the primary activities 2. the support activities 3. the linkages among activities (internal linkages within the firm, and external or vertical linkages with others firms)." |
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| ● (Netherlands) | How Value Chain can be used for Cost Advantage | "In his book Competitive Advantage, Porter gives a detailed description of a Strategic Cost Analysis Process in which the Cost Drivers of value activities are analyzed as well as their interactions and their Cost Dynamics (changes in drivers over time) to create a cost leadership or differentiation strategy." | |
| ● Sidra Lodhi (Pakistan) | Creation of Cost Advantage from Value chain | "The basis purpose of doing Value chain Analysis is to reduce the cost and developing the competitive advantage. So emphasize will be on reducing the cost of primary as well as support activities." | |
| ● James Gunn (UK) | The Value is in the Linkages | "The linkages are often where the value is created. In my experience, look for improvements between organisations, along the value chain, first within primary activities and then between secondary and primary activities (in that order). Don't forget adding value as well as reducing cost and don't just reduce cost - you may destroy value in your offering !" |
| ● Suzie (Malaysia) | VCA for Restaurant Management | "How can value chain analysis be applied to the management of a restaurant?" | |
| ● (Philippines) | Restaurant Value Chain | "In a restaurant, there are 2 chains - the supply stream and the distribution. The supply stream is analyzed from your supply chain map of suppliers and suppliers' supplier. The distribution is tricky. The process starts with ordering, order taking, order processing, serving, and payment. Its all done in your store front." |
| ● Elias (Israel) | Value Chain and Supply Chain | "The value chain of an individual company is normally part of the total supply chain of value-creating activities. While Porter's value chain concept decomposes all activities of one firm into its parts and analyses each individual activity and their interdepencies, the supply chain concept tries to optimize the supply system as a whole by taking into account the interdependencies between the activities in multiple firms." |
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| ● Hannie (Netherlands) | Value System | "A firm's value chain is embedded in a larger stream of activities that Porter terms the Value System. This value system comprises the Supplier Value Chains, the Firm Value Chains, Channel Value Chains and Buyer Value Chains. Gaining and sustaining competitive advantage depends on understanding not only a firm's value chain but how the firm fits in the overall value system." |
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| ● (ARG) | Value Chain and SCM Emphasis | "But the emphasis should always be on the customer for both perspectives." | |
| ● Paul (Netherlands) | VCA does not stop at company borders | "Improvements of the value chain may result from inside the company or from linking the internal activities in an effective way to suppliers, buyers, customers, partners, etc." | |
| ● Badi (Sweden) | Value Chain driver of SCM | "Remember that value chain is the driver behind the SCM discipline - its main motivator." |
| ● Rob (SA) | Value Networks | "The notion is sound, but it depends on the nature of the business as to which approach fits best. Please refer to Kotler (2004) for the specific marketing use of the value network." |
| ● Jeff (USA) | Primary and Support Activities | "Primary. Watch the picture in this article closely. The bottom half are making up all Primary activities. The activities in the top half are making up the Support activities in the Value Chain." | |
| ● blshaw (USA) | Inventory Replenishment | "Regarding landrine's question: Inventory Replenishment is part of a primary value process. You must also identify your POV. Either you are replenishing your customer's inventory (e.g. You are Procter & Gamble and your customer is Walmart); or you are having your inventory replenished (e.g. You are Walmart and Procter & Gamble is your supplier). Also, see SCOR model from Supply Chain Council." |
| ● Gian Z. (Netherlands) | Value chains and Industries | "That would be a combination of focus, core competencies and specific vertical markets (within banking you can further segment, uncovering even more broad trends...) In my opinion it all boils down to the strategy and positioning of that particular company. The framework is particularly interesting (to me...) when setting up new organizations... It can then be used as a blueprint." |
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| ● Warren Miller (USA) | Value Chains and Industries | "Porter's value chain is much overrated. Unlike his five-forces framework, for which he recently wrote an update in HBR, he never published anything in HBR about his value chain framework. Colleagues of mine have had great difficulty using it as an analytical tool to appraise a company. And it doesn't resonate with clients at all. All in all, it's a better tool conceptually than it is in practice." | |
| ● Wendy (UK) | Value Chains & Industries | "Elias, I agree. Organisations tend to focus on those parts of the value chain in which they perceive there is the greatest opportunity to differentiate themselves from the competitors, and thus save costs or add more value in order to win more market share/ retain existing share." | |
| ● Gustav (Denmark) | Value Chain | "I think that the work by Stabell and Fjelstad is a valuable supplement to Porter value Chain model. They divide organisations into 3 groups: Value Chains, Value Shops and Value Networks. Industries like banking, insurance, telephone companies and airlines work as value networks. Software companies, entrepreneurs, etc work as value shops. And physical product focused companies work as value chains." |
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| ● Enzo Zamboni (Argentine) | Value Chain and Industries | "I agree, Elias.. but depending on the point of view from the organization to Michael Porter´s Value Chain, example: in the Biotech and Nanotech companies the critical path is the Human Resources Management and the Technology Development.. Is our case.." | |
| ● Mohamed A. Farah (Uganda) | Value Chain | "The success or failure of an organisation depends on how it correlated the primary and seconday activities." |
| ● F Lenne (France) | Keep Value chain analysis simple | "OK for taking into account the “Value Networks”: everything is now networked at a global level, but take care not to add too much complexity; don’t “throw the baby away with the bath water”. Remember that complexity (and especially on financial activities!) is one of the main reasons the crisis occurred: n nodes will generate n*(n-1) oriented links! The first steps when analysing your own value chain: Check your segmentation is aligned with your vision, Understand what are the costs of your "support activities" you have for each of your “primary activity”, within each segment, What your most intrinsically profitable primary activities are. Then you will better understand what activities are strategic, and you will be able to focus on those specific parts of your business, reducing the “value networked chain” complexity. Keep in mind the Occam's razor principle "Entities should not be multiplied more than necessary". Then, answer to the Paul questions on this reduced network. Now you have your strategy!" |
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| ● Luiz Flores (Brazil) | Value Chain Analysis from Customer Point of View | "The "internal view" of the value chain is part of the past. Nowadays, we need to understand the value chain from the customer not from the intra-company functions. What are the critical attributes that generate value to the customer in the value chain? For example, in the door to door market there are a few critical attributes like a) personal service; b)sales offers; c) wide product mix w/quick access; d) reliable service and delivery; e) trainned sales rep; f) sales rep loyal to the customer not to the sellers; g) right price considering all service package. How do you act considering this particular value chain structure to benefit your firm in the market? - How to create new value elements recognized by consumers? The entire value chain analysis is a result of valued attributes at the consumer level and the "internal functions" or practices don't necessarily add any special value to the customer mainly when we consider that all competitors are doing the same things as usual. " |
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| ● Atif Ali Khan (UAE) | Bridging the gap between Value Factors and Demand Factors | "Value Chain Analysis by and large revolves around the firms strategic policy to align intuitive value factors with the intuitive demand factors from producers' and consumers' perspective. Both complement each other. Be it the intrinsic value, that satisfies the need and want of consumer on individual level with longevity, or extrinsic value, that co-relates with perceptions and trends associated or related with the product. Both are a need of each other. But it is the bridging of the gap that is often overlooked, the strong role that feedback plays in establishing future value standards is the key to progressive and steady success." |
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| ● Pardeep Kumar (India) | Value chain mgt. | "This is what I want I need the exellent material thanx." | |
| ● Ade-Ajayi Gabriel (Nigeria) | Value Chain | "This is good. Every attempt made by any individual or organisation to create, add and maintain the process / network of adding value appreciated by consumers is an attempt to create wealth and satisfaction!" | |
| ● Gill (UK) | How to bridge the gap between value-delivered to customers and the operations to deliver | "This is a complex subject which includes an understanding of what customers want (and how they value that desire/need both now and in the future) - alongside the operations to deliver these needs. Assuming one can find the perfect operation to best meet individual segments' needs (aligning cost to value delivered) - there is also the question as to how to best combine segments within a single operational unit - and thereby draw out potential market positioning options. Does anyone have any practical advice as to how to consider this?" |
| ● André Lopes (PT) | Issues | "Legal maybe in institutional factors and social perhaps in timing of market entry." |
Primary
activities (line functions)
