Michael Porter published the Value Chain Analysis in 1985 as a response to criticism that his Five Forces framework lacked an implementation methodology that bridged the gap between internal capabilities and opportunities in the competitive landscape. This framework focused on industry attractiveness as a determinant of the profit potential of all companies within that particular industry. However, significant differences in performance exist between companies operating within the same industry that can be explained either by the company's participation in a successful strategic group or by a firm's specific competitive advantages. Value Chain Analysis helped identify a firm's core competencies and distinguish those activities that drive competitive advantage. The cost structure of an organisation can be subdivided into separate processes or functions assuming that the cost drivers for each of these activities behave differently. When the value chain, used by the organization to develop a product, is capable of creating additional value but with no additional costs, a competitive advantage is realized. As shown in figure 1 below, Porter distinguishes two types of activities that constitute the value chain, primary activities and support activities. Primary activities:
These are line activities associated with production, transformation, delivery, and sales. They are classified into four main categories: Inbound Logistics: are activities involved in receiving, storing, and provisioning the inputs needed to deliver a product. They include warehousing and control of materials and inventory. Inbound logistics: materials handling, warehousing, inventory control, transportation; Operations: are activities that package, maintain, and transform inbound logistics into the final product. These activities can lead to differentiation and lower costs if performed in an efficient manner. Operations: machine operating, assembly, packaging, testing and maintenance; Outbound Logistics: are activities that pick, pack, store, and deliver the finished product to the end customers. Outbound logistics: order processing, warehousing, transportation and distribution;
Marketing and Sales: are activities involved in advertisement, promotion, distribution channel management, marketing and sales of products. They ensure all customer needs are considered in order to develop better future products. Marketing and sales: advertising, promotion, selling, pricing, channel management; Service: are activities that maintain and improve the value of the product to the customers by providing installation, repair, training, and supporting services after delivery. Service: installation, servicing, spare part management; Support activities:
These activities support the primary activities and include human resource management, procurement, technology development, and organizational infrastructure. Procurement: are activities involved in purchasing raw materials, supplies, and fixed assets (equipment, machinery) and transmitting them across the value chain. Procurement: purchasing raw materials, lease properties, supplier contract negotiations. Technology Development: are activities including R&D, design, processing, and servicing of the product manufacturing process and the product itself. Technology development: research & development, IT, product and process development;
Human Resource Management: are activities involved in recruiting, training, developing, empowering, and rewarding employees. Human resource management: recruitment, education, promotion, reward systems; Organizational Infrastructure: are activities including finance, accounting, planning, legal, governmental, and quality, and general management matters. Firm infrastructure: general management, planning, finance, legal, investor relations; Support activities if used efficiently can help in achieving differentiation and in lowering production costs. For example, human resource...
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