Key Points: The value chain helps an organization identify how it creates value for customers and locate where its sources of competitive advantage lie. Value chain models can be created in both qualitative and quantitative forms. Many organizations do not consciously make decisions to optimize the sources of advantage resident in their value chain and in so doing, risk losing competitive advantage. Main Thoughts: Most mangers know that their organization’s value chain represents the sequence of activities necessary to create a product or service, produce or deliver it, market and sell it to customers, distribute or provide it to those customers while ensuring necessary post sales service is completed. They also know that internal firm infrastructure activities such as human capital development or procurement support the main stages in the value chain. What managers sometimes aren’t as knowledgeable of is the fact that the value chain within a firm or industry is actually comprised of a very specific model of performance that depicts the discrete stages of organizational value creation. Further, they don’t always use the model to compare and contract activities across firms for the purpose of determining where competitive advantages lie. Developed in the early 1980s by Harvard Business School Professor Michael Porter in his book Competitive Advantage, the value chain consists of two main components: primary activities and secondary activities. A generic, firm specific value chain is shown in figure 1.
Figure 1: Porter Value Chain, 1985
Support Activities: These consist of activities that do not directly produce goods or services. Infrastructure activities such as administration, human resource management, information technology management, purchasing and procurement, and research and development are included in the support area of the model.
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