The value chain, or known as value chain analysis, is a concept from business management that was first described and popularized by Michael Porter.
(Porter) Most of business strategy is to achieve a sustainable competitive advantage. Cost advantage and differentiation advantage are the two basic types of competitive advantage. Cost advantage can be obtained when the firm is able to deliver the same benefits as competitors, but at a lower cost, while differentiation advantage is obtained through deliver benefits that exceed those of competing products. Both of these are called positional advantages. A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. The following diagram combines the resource-based and positioning views to illustrate the concept of competitive advantage:
According to the resource-based view, in order to develop a competitive advantage, the firm must have resources and capabilities that are superior to those of its competitors. Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. Capabilities refer to the firm’s ability to utilize its resources effectively. The firm’s resources and capabilities together form its distinctive competencies. All of these activities can be obtained through value chain analysis.
Value Chain Analysis
Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation. It is necessary to have a systematic way of examining all the activities a firm performs to analyze the sources of competitive advantage. Value chain is the basic tool for doing so.
Value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of cost and the existing and potential sources of differentiation.
The value chain displays total value, and consists of value activities and margin. Value activities are the physically and technologically distinct activities a firm performs. Margin is the difference between total value and the collective cost of performing the value activities. Value activities can be divided into two broad types; primary activities and support activities. Primary activities are the activities involved in the physical creation of the product and its sale and transfer to the buyer as well as after-sale assistance. Support activities support the primary activities and each other by providing purchased inputs, technology, human resources, and various firm wide functions. Value activities are therefore the discrete building blocks of competitive advantage. An analysis of the value chain rather than value added is the appropriate way to examine competitive advantage. To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors.
Below is the summary of primary activity:
|Activities |Description | |Inbound Logistic |Activities associated with receiving, storing, and disseminating inputs to the | | |products. | |Operations |Activities associated with transforming inputs into the final product form. | |Outbound Logistics |Activities associated with collecting, storing, and physically distributing the product| | |to buyers....