Porters Value Chain

[Internal position analysis]

Concept:

The idea of the value chain is based on the process view of organizations, the idea of seeing a
manufacturing (or service) organisation as a system, made up of subsystems each with inputs,
transformation processes and outputs. Inputs, transformation processes, and outputs involve the
acquisition and consumption of resources - money, labor, materials, equipment, buildings, land,
administration and management. How value chain activities are carried out determines costs and
affects profits.

Primary Activities:
Primary activities relate directly to the physical creation, sale, maintenance and support of a
product or service. They consist of the following:

Inbound logistics – These are all the processes related to receiving, storing, and distributing
inputs internally. Your supplier relationships are a key factor in creating value here.

Operations – These are the transformation activities that change inputs into outputs that are sold
to customers. Here, your operational systems create value.

Outbound logistics – These activities deliver your product or service to your customer. These are
things like collection, storage, and distribution systems, and they may be internal or external to
your organization.

Marketing and sales – These are the processes you use to persuade clients to purchase from
you instead of your competitors. The benefits you offer, and how well you communicate them, are
sources of value here.

Service – These are the activities related to maintaining the value of your product or service to
your customers, once it's been purchased.
Support Activities:
These activities support the primary functions above. In our diagram, the dotted lines show that
each support, or secondary, activity can play a role in each primary activity. For example,
procurement supports operations with certain activities, but it also supports marketing and sales
with other activities.

Procurement (purchasing) – This is what the organization does to get the resources it needs to
operate. This includes finding vendors and negotiating best prices.

Human resource management – This is how well a company recruits, hires, trains, motivates,
rewards, and retains its workers. People are a significant source of value, so businesses can
create a clear advantage with good HR practices.

Technological development – These activities relate to managing and processing information, as

well as protecting a company's knowledge base. Minimizing information technology costs, staying
current with technological advances, and maintaining technical excellence are sources of value
creation.

Infrastructure – These are a company's support systems, and the functions that allow it to
maintain daily operations. Accounting, legal, administrative, and general management are
examples of necessary infrastructure that businesses can use to their advantage.

Performing a Value Chain Analysis

There are typically two types of competitive advantage that are striven for, cost and differentiation.

To gain a differentiation advantage:

 Identify the value creating activities for the customer, and focus on the specific actions that
create the most customer value.
 Evaluate the differentiation strategies to improve value to the customer, such as adding
more product features, putting an emphasis on customer service responsiveness, increase
the ability to customize and tailor the products, and offer a range of complementary
products that enhance your overall product mix
 Identify the best differentiation method that is sustainable long term, which is often a mix of
many different activities to promote delivering a higher customer value. The right
combination will give you a sustainable differentiation advantage.
To gain a cost advantage:

 Determine the primary activity of the company, and all the support activities performed
 Look at each activity (back to even receiving the inventory, marketing, sales, and after
sales support) and clearly identify each, and make sure they are separate from each other.
 This step is difficult, as it requires a strong knowledge of an organizations value chain, and
often the value chain activities are not organized in the same way as the company is.
 Analyze how the work is done surrounding every separate activity, and identify how it adds
customer value
 Rank each activity in terms of relative importance to the total cost of the product
 Investigate all of the costs of producing the product or the service behind each activity
 Here you can use activity based costing to calculate specific costs at each process step
 Address any major sources of cost, or areas where you are lacking (i.e. more expensive
than your competitors)
 Identify all of the cost drivers, for every activity. You need to understand these before you
can work at improving them.
 Identify if there are any links between the activities, because reducing costs in one may
lead to further cost reductions in another.
 Identify opportunities where you are able to reduce costs. Once you know these, you can
make plans at improving each and every one.

In business, the more value you can create, the more your customers will be willing to pay a good
price for your products and services. If you exceed the value that all of your competition provides,
your clients will continue buying from you. But how does this all apply in practice?

Pizza Hut:
As an example, let’s look at the value chain of Pizza Hut:

Primary activities

 Inbound logistics: This includes all of the sourcing activities to procure and standardize all
of the produce, ingredients and materials to bake pizza’s fast, consistently, and delicious –
in house. They capitalize on economies of scale, and use massive global purchase orders
to source the best prices on raw products for their restaurants.
 Operations: By targeting areas where there is an affinity for Italian food, Pizza Hut
operates in a huge number of countries globally with a licensing model where stores are
managed by a local franchise owner.
 Outbound logistics: There are two models that Pizza Hut capitalizes on, in store dining and
their home delivery service.
 Marketing and Sales: There is a large investment in marketing to drive additional sales,
and compete with the other fast food chains.
 Service: The entire goal of Pizza Hut is to offer value to their customers in affordable and
convenient pizza that everyone can enjoy.
Support activities

 Infrastructure: Again, this includes every other activity that is required to keep the stores in
business, such as finance, legal, etc.
 Human Resources: To keep the costs down staff are typically junior, and unskilled.
 Technological development: The process they have created to have unskilled chefs
cooking the pizza is their biggest asset. Breaking down the complicated method into simple
steps that can be repeated again and again for consistently great pizza.
 Procurement: The purchasing and activities required producing the pizza, the raw food,
and all of the buildings, and equipment needed to cook and deliver the pizzas.

Based on these activities, Pizza Hut is leading the market in producing pizza that is both
affordable, and can be delivered to your door in 30 minutes (in most cities). This convenience is
what sets them apart from many other competing options for meals, like going out to dinner or
preparing a meal at home yourself, and they use a strong campaign and marketing focus to entice
customers to use them over similar competitors in the fast food delivery industry.

Assignment # 2

Take the steps outlined above and apply the same methodology to your company or any
manufacturing company.