Michael Porter introduced the value chain analysis concept in his 1985 book ‘ The Competitive Advantage’ . Porter suggested that activities within an organisation add value to the service and products that the organisation produces, and all these activities should be run at optimum level if the organisation is to gain any real competitive advantage. If they are run efficiently the value obtained should exceed the costs
of running them i.e. customers should return to the organisation and transact freely and willingly. Michael Porter suggested that the organisation
is split into ‘primary activities’ and ‘support activities’
The diagram below divides activities into primary and support activities as suggested by Porter's Value Chain Analysis
Inbound logistics : Refers to goods being obtained from the organisation's suppliers and to be used for producing the end product.
Operations : Raw materials and goods are manufactured into the final product. Value is added to the product at this stage as it moves through the production line.
Outbound logistics : Once the products have been manufactured they are ready to be distributed to distribution centres, wholesalers, retailers or customers. Distribution of finished goods is known as outbound logistics.
Marketing and Sales: Marketing must make sure that the product is targeted towards the correct customer group. The marketing mix is used to establish an effective strategy, any competitive advantage is clearly communicated to the target group through the promotional mix.
Services: After the product/service has been sold what support services does the organisation offer customers?. This may come in the form of after sales training, guarantees and warranties.
With the above activities, any or a combination of them are essential if the firm are to develop the "competitive advantage" which Porter talks about in his book.
Support activities assist the primary activities in helping the organisation achieve its competitive advantage. They include:
Procurement: This department must source raw materials for the business and obtain the best price for doing so. The challenge for procurement is to obtain the best possible quality available (on the market) for their budget.
Technology development: The use of technology to obtain a competitive advantage is very important in today’s technological driven environment. Technology can be used in many ways including production to reduce cost thus add value, research and development to develop new products and the internet so customers have 24/7 access to the firm.
Human resource management: The organisation will have to recruit, train and develop the correct people for the organisation to be successful. Staff will have to be motivated and paid the ‘market rate’ if they are to stay with the organisation and add value. Within the service sector such as the airline industry, employees are the competitive advantage as customers are purchasing a service, which is provided by employees; there isn't a product for the customer to take away with them.
Firm infrastructure: Every organisations needs to ensure that their finances, legal structure and management structure work efficiently and helps drive the organisation forward. Inefficient infrastructures waste resources, could affect the firm's reputation and even leave it open to fines and sanctions.
As you can see the value chain encompasses the whole organisation. It looks at how primary and support activities can work together to help the organisation create a superior competitive advantage. If an activity is performed well it is said to add value.
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