VALUE CHAIN

ANALYSIS :
 VALUE
THE VALUE IS THE TOTAL AMOUNT (i.e. TOTAL
REVENUE) THAT BUYERS ARE WILLING TO PAY
FOR A FIRM’S PRODUCTS.
THE DIFFERENCE BETWEEN THE TOTAL VALUE
(OR REVENUE) AND THE TOTAL COST OF
PERFORMING ALL OF THE FIRM’S ACTIVITIES
PROVIDES THE MARGIN .
THE VALUE CHAIN IS A TOOL DEVELOPED BY DR.
MICHAEL PORTER(HARVARD BUSINESS SCHOOL)
 What is the value chain?
Porter’s definition includes all activities to
design, produce, market, deliver, and support the
product/service.
The value chain is concentrating on the activities
starting with raw materials till the conversion into
final goods or services.
Two categories:
Primary Activities (operations, distribution, sales)
Support Activities (R&D, Human Resources)
 TYPES OF VALUE CHAIN:
• Value Chain is categorized into types based
on
the type of organizations.

• Manufacturing based.
• Service based.
• Both manufacturing and service based.
 What is value chain analysis?
• Used to identify sources of competitive advantage
• Specifically:
– Opportunities to secure cost advantages
– Opportunities to create product/service
differentiation
• Includes the value-creating activities of all industry
participants
 Value Chain Model
(FISH BONE DIAGRAM)

SUPPORT Firm Infrastructure (General Management)

ACTIVITIES
Human Resource Management

Technology Development

Procurement

Inbound Ops. Outbound Sales & Service and

Logistics Logistics Marketing Support

PRIMARY ACTIVITIES
 TYPES OF FIRM ACTIVITIES
• Primary activities:
Those that are involved in the
creation, sale and transfer of
products (including after-sales
service)
Inbound logistics
Operations
Outbound logistics
Sales and marketing
Service and support
• Support Activities:
Those that merely support the
primary activities
Human resources
(general and admin.)
Tech. development
Procurement
PRIMARY ACTIVITIES
 Value Chain Model
from Michael E. Porter’s Competitive Advantage

Firm Infrastructure (General Management)

SUPPORT
ACTIVITIES Human Resource Management

Technology Development

Procurement

Inbound Operation Outbound Sales & Service and

Logistics s Logistics Marketing Support

PRIMARY ACTIVITIES
 PRIMARY ACTIVITIES
1.INBOUND LOGISTICS
- CONCERNED WITH RECEIVING, STORING, DISTRIBUTING INPUTS (e.g.
HANDLING OF RAW MATERIALS, WAREHOUSING, INVENTORY
CONTROL)

2. OPERATIONS
- COMPRISE THE TRANSFORMATION OF THE INPUTS INTO THE FINAL
PRODUCT FORM (E.G. PRODUCTION, ASSEMBLY, AND PACKAGING)

3. OUTBOUND LOGISTICS
-INVOLVE THE COLLECTING, STORING, AND DISTRIBUTING THE PRODUCT
TO THE BUYERS (e.g. PROCESSING OF ORDERS, WAREHOUSING OF
FINISHED GOODS, AND DELIVERY)
 PRIMARY ACTIVITIES
4. MARKETING AND SALES
-Identification of customer needs and generation of sales.
(e.g. ADVERTISING, PROMOTION, DISTRIBUTION)

5. SERVICE
-INVOLVES HOW TO MAINTAIN THE VALUE OF THE
PRODUCT AFTER IT IS PURCHASED.(e.g. INSTALLATION,
REPAIR, MAINTENANCE, AND TRAINING)
SUPPORT ACTIVITIES
 Value Chain Model
from Michael E. Porter’s Competitive Advantage

SUPPORT
ACTIVITIES Firm Infrastructure (General Management)

Human Resource Management

Technology Development

Procurement

Inbound Ops. Outbound Sales & Service and

Logistics Logistics Marketing Support

PRIMARY ACTIVITIES
 SUPPORT ACTIVITIES
1.FIRM INFRASTRUCTURE
The activities such as Organization structure, control system, company
culture are categorized under firm infrastructure.
2.HUMAN RESOURCE MANAGEMENT
Involved in recruiting, hiring, training, development and compensation.
3.TECHNOLOGY DEVELOPMENT
These activities are intended to improve the product and the process, can
occur in many parts of the firm.
4.PROCUREMENT
Concerned with the tasks of purchasing inputs such as raw
materials, equipment, and even labor.
USES OF VALUE CHAIN ANALYSIS:

• The sources of the competitive advantage of a firm can be seen from its
discrete activities and how they interact with one one another.
• The value chain is a tool for systematically examining the activities of a firm
and how they interact with one another and affect each other’s cost and
performance.
• A firm gains a competitive advantage by performing these activities better
or at lower cost than competitors.
• Helps you to stay out of the “No Profit Zone”
• Presents opportunities for integration
• Aligns spending with value processes
 VERTICAL LINKAGES:

• LINKAGES CAN ALSO EXIST OUTSIDE THE FIRM; FOR

INSTANCE THERE IS A LINKAGE BETWEEN A FIRM’S CHAIN
AND THE VALUE CHAIN OF ITS SUPPLIERS AND CHANNELS.

e.g. THE ACTIVITIES OF THE RAW MATERIALS SUPPLIERS AFFECT

THE ACTIVITIES OF THE FIRM. SIMILARLY, THE ACTIVITIES OF
THE DISTRIBUTOR ALSO AFFECT THE FIRM.
APPLYING THE VALUE CHAIN TO AN
INDUSTRY

• THE VALUE CHAINS OF THE DIFFERENT FIRMS

WITHIN AN INDUSTRY VARY FROM ONE
ANOTHER.
• IN FACT, THE DIFFERENCES IN THE VALUE
CHAINS AMONG THE DIFFERENT INDUSTRY
PLAYERS PROVIDE THE SOURCE OF
COMPETITIVE ADVANTAGES BETWEEN THESE
PLAYERS.
WALLMART’S VALUE CHAIN