Value Chain
The Value Chain
From Competitive Advantage, by Michael Porter
Every firm is a collection of activities that are performed to design, produce, market, deliver, and support its product. All these activities can be represented using a value chain. A firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves.
The relevant level for constructing a value chain is a firm’s activities in a particular industry
(the business unit). An industry- or sector-wide value chain is too broad, because it may obscure important sources of competitive advantage. Though firms in the same industry may have similar chains the value chains of competitors often differ. Low cost and full-service airlines both compete in the airline industry, for example, but they have very different value chains embodying significant differences in boarding gate operations, crew policies, and aircraft operations.
Differences among competitor value chains are a key source of competitive advantage. A firm’s value chain in an industry may vary somewhat for different items in its product line, or different buyers, geographic areas, or distribution channels. The value chains for such subsets of a firm are closely related, however, and can only be understood in the context of the business unit chain.
In competitive terms, value is the amount buyers are willing to pay for what a firm provides them. Value is measured by total revenue, a reflection of the price a firm’s product commands and the units it can sell. A firm is profitable if the value it commands exceeds the costs involved in creating the product. Creating value for buyers that exceeds the cost of doing so is the goal of any generic strategy. Value, instead of cost, must be used in analyzing competitive position since firms often deliberately raise their cost to command a premium price via
From Competitive Advantage, by Michael Porter
Every firm is a collection of activities that are performed to design, produce, market, deliver, and support its product. All these activities can be represented using a value chain. A firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves.
The relevant level for constructing a value chain is a firm’s activities in a particular industry
(the business unit). An industry- or sector-wide value chain is too broad, because it may obscure important sources of competitive advantage. Though firms in the same industry may have similar chains the value chains of competitors often differ. Low cost and full-service airlines both compete in the airline industry, for example, but they have very different value chains embodying significant differences in boarding gate operations, crew policies, and aircraft operations.
Differences among competitor value chains are a key source of competitive advantage. A firm’s value chain in an industry may vary somewhat for different items in its product line, or different buyers, geographic areas, or distribution channels. The value chains for such subsets of a firm are closely related, however, and can only be understood in the context of the business unit chain.
In competitive terms, value is the amount buyers are willing to pay for what a firm provides them. Value is measured by total revenue, a reflection of the price a firm’s product commands and the units it can sell. A firm is profitable if the value it commands exceeds the costs involved in creating the product. Creating value for buyers that exceeds the cost of doing so is the goal of any generic strategy. Value, instead of cost, must be used in analyzing competitive position since firms often deliberately raise their cost to command a premium price via