The value chain was a concept initially proposed by McKinsey and later developed and made public by Harvard strategy guru Michael Porter. According to Porter, the value chain is defined as the complete flow of products from the suppliers to the customers and management of the information flow in a way that maximizes the consumer satisfaction with the increase in the profit margins of the company. Simply, it includes a series of value-adding activities connecting a company's supply side (raw materials, inbound logistics, and production processes) with its demand side (outbound logistics, marketing, and sales). And these activities are supported by the infrastructure of the firm, human resource management, technology and development, procurement. The value chain model is a useful analysis tool for defining a firm’s core competencies and the activities in which it can pursue a competitive advantage. Firstly, we mention about cost advantage. A firm may create a cost advantage either by reducing the cost of the individual value chain of activities or as what have been said before reconfiguring the value chain to suit lower production costs. Once the value chain is defined, a cost analysis can be performed by assigning costs to the value chain activities. The costs obtained from the accounting report may need to be modified in order to allocate them properly to the value creating activity. In this way, cost advantage is achieved by the firm in the industry it is operating. Porter identified 10 cost drivers related to value chain activities such as: economies of scale, learning, capacity utilization, geographic location…ect. And a firm develops a cost advantage by controlling these drivers better than the competitors do. A cost advantage also can be pursued by reconfiguring the value chain. Reconfiguring means structural changes such as a new production process, new distribution channels, or a different sales approach. Secondly, in order to gain competitive advantages, a firm has to have a differentiation. A differentiation advantage can arise from any part of the value chain. For example, procurement of inputs that are unique and not widely available to competitors can create differentiation. A firm must either provide a similar value to its client, or perform the activities in a unique way that create a higher value for the client that allows the firm to ask the better price. This is the differentiation. Porter identified several drivers of uniqueness: policies and decisions, linkages among activities, timing, location, interrelationships, learning, integration, scale and institutional factors.
Many of these also serve as cost drivers. Differentiation often results in greater costs, resulting in tradeoffs between cost and differentiation. There are several ways in which a firm can reconfigure its value chain in order to create uniqueness. It can forward integrate in order to perform functions that once were performed by its customers. It can backward integrate in order to have more control over its inputs. It may implement new process technologies or utilize new distribution channels. Ultimately, the firm may need to be creative in order to develop a novel value chain configuration that increases product differentiation.
Thirdly, technology also plays an important role for the firm to gain competitive advantage over its competitor in the industry. Almost if not all modern firms employ technology in all its value creating activity. Technologies have a very significant role in the organization, changes in technology can impact competitive advantage by incrementally changing the activities themselves or by making new possible configurations in the value chain. There are various types of technologies used in both primary activities and support activities. There is the inbound logistic technology which involves transportation, handling, storage communications etc. Technologies that are used in the production of...
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