Value Chain

Value Chain

Porter argued that an understanding of strategic capability must start with an identification of separate value chain activities. According to him, there is a chain of two activities — Primary activities and Support activities. The primary activities of the organization are grouped into five main areas— inbound logistics operations, outbound logistics, marketing and sales, and service. A support activity has four areas— firm infrastructure, human resources, technology and procurement.

Primary Activities:

1. Inbound logistics are the activities concerned with receiving, storing and distributing the inputs to the product/service. This includes materials handling, stock control, transport, etc.
2. Operations transform these inputs into the final product or service: Machining, Packaging, Assembly, Testing, etc.
3. Outbound logistics collect, store and distribute the product to customers. For tangible products, this would be warehousing, materials handling, transport, etc. In the case of services, it may be more concerned with arrangements for bringing customers to the service, if it is a fixed location (e.g. sports events).
4. Marketing and sales provide the means whereby consumers/users are made aware of the product/service and are able to purchase it. This would include sales administration, advertising, selling and so on. In public services, communication networks which help users access a particular service are often important.
5. Services are all those activities, which enhance or maintain the value of a product/ service, such as installation, repair, training and spares.

 

Support Activities:

Each of these groups of primary activities is linked to support activities. These can be divided into four areas:

1. Infrastructure: The systems of planning, finance, quality control, information management, etc. are crucially important to an organization’s performance in its primary activities. Infrastructure also consists of the structures and routines of the organization which sustain its culture.
2. Human Resource Management: This is a particularly important area which transcends all primary activities. It is concerned with those activities involved    in recruiting, managing, training, developing and rewarding people within the organization.
3. Technology Development: All value activities have a ‘technology’, even if it is simply know-how. The key technologies may be concerned directly with the product (e.g. R&D product design) or with processes (e.g. process development) or with a particular resource (e.g. raw materials improvements).
4. Procurement: This refers to the processes for acquiring the various resource inputs to the primary activities (not to the resources themselves). As such, it occurs in many parts of the organization.

Value chain analysis was originally introduced as an accounting analysis to shed light on the ‘value added’ of separate steps in complex manufacturing processes.

Value chain analysis focuses on linkage of each area of both activities for value creation for customers. Organizations are much more than a random collection of resources such as man, money, machine, material, motivations.It must make routines which ensure that products or services are produced which are valued by the final consumer/user.

In other words, it is these competences to perform particular activities and the ability to manage linkages between activities which are the source of competitive advantage for organizations.

Use of Value Chain Analysis for Identifying Core Competencies

A business must focus on each and every activity to make it as its core competency. It is important to identify those competencies which critically find out the organizationsCompetitive advantage.

In this case company will be able to develop core competencies and will differ from one organization to another depending on how the company is positioned and the strategies it is pursuing.

Value chain analysis is a reminder that the long-term competitive position of an organization is concerned with its ability to sustain value-for-money products or services, and it can be helpful in identifying those activities which the organization must undertake at a threshold level of competence and those which represent the core competences of the organization. However, in order to do this, it is necessary to identify the basis on which an organization has gained competitive advantage, and hence which are the core competences in sustaining this advantage.

Managing Linkages:

Core competences in separate activities may provide competitive advantage for an organization, but nevertheless over time may be imitated by competitors. Core competences are likely to be more robust and difficult to imitate if they relate to the management of linkages within the organization’s value chain and linkages into the supply and distribution chains. It is the management of these linkages which provides ‘leverage’ and levels of performance which are difficult to match.

The ability to co-ordinate the activities of specialist teams or departments may create competitive advantage through improving value for money in the product or service. Specialization of roles and responsibilities is common in most organizations and is one way in which high levels of competence in separate activities is achieved. However, it often results in a set of activities which are incompatible — different departments pulling in different directions — adding overall cost and/or diminishing value in the product or service.

This management of internal linkages in the value chain could create competitive advantage in a number of ways:

1. There may be important linkages between the primary activities. For example, a decision to hold high levels of finished stock might ease production scheduling problems and provide for a faster response time to the customer. However, an assessment needs to be made whether the value added to the customer by this faster response through holding stocks is greater than the added cost.
2. It is easy to miss this issue of managing linkages between primary activities in an analysis if, for example, the organization’s competences in marketing activities and operations are assessed separately. The operations may look good because they are geared to high-volume, low variety, low unit cost of production. However, at the same time, the marketing team may be selling speed, flexibility and variety to the customers. So, competence in separate activities needs to be compatible.
3. The management of the linkages between a primary activity and a support activity may be the basis of a core competence. It may be key investments in systems or infrastructure which provides the basis on which the company outperforms competition. Computer-based systems have been exploited in many different types of service organization and have fundamentally transformed the customer experience.
4. Linkages between different support activities may also be the basis of core competences. For example, the extent to which human resource development sis in tune with new technologies has been a key feature in the implementation of new production and office technologies. Many companies have failed to become competent in managing this linkage properly and have lost out competitively.