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Value Chain

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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.
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Planning through Performancesm Brief
Value Chain
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

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.

Copyright ©2009

Planning through Performancesm Brief
Primary Activities: These activities are the direct, value creating activities of the firm. Bringing
raw materials into an organization, manufacturing a product or service, distributing it as well as
marketing, selling and servicing the product are considered primary activities.

The model can and should be reconfigured to account for activities specific to the industry in
which the firm competes. For example, in a service industry—such as professional services—
inbound logistics might be replaced with methodology development or client acquisition.
Regardless of industry however, the value chain is a powerful framework for analyzing both
industry and firm specific activities.

As an Example:
The fol owing is an example of the value chain for copier manufacturer.

Figure 2: Value Chain for a Copier Manufacturer (adapted from Porter, 1985)

Although the value chain has been in the public domain for over 20 years, it’s not often used
expressly as part of the strategy development process. This could be because managers aren’t
always sure how to go about developing one or are suspicious of the insight the analysis actually
provides. To creating one, the most basic way is to simply catalog the activities an organization
performs as is the case in Figure 2. This provides an initial way of understanding what an
organization does and more specifically, where it might differentiate within the value chain to
achieve advantage over competitors. The base version can then be contrasted to competitor
value chains, which can be created as separate analysis as well. As the value chain template is
incrementally built up over time, total costs can be identified for each activity. Then, depending
costs can be identified on a per unit basis—which is the ultimate goal of the analysis. Again, this
can be done for competitors as well. When complete, a solid understanding of relative cost
position will have been gained from which effective strategies can then be created.

For More Information See:

Copyright ©2009

Planning through Performancesm Brief
Porter, Michael E., 1985. Competitive Advantage: Creating and Sustaining Superior
Free Press, New York.
Copyright ©2009

Value Chain



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