HEC GROUP OF INSTITUTIONS

Online notes
Class BBA VI Sem

Business Policy and Strategy

Topic: M Porter’ Value Chain

What Is a Value Chain?
A value chain is a combination of the systems a company or organization
uses to make money. That is, a value chain is made up of various
subsystems that are used to create products or services. This includes the
process from start to finish.

Michael Porter's Value Chain

Given the importance of the value chain, Michael Porter developed a
strategic management tool for analyzing a company’s value chain. 1 Porter,
known for Porter’s five forces, laid out his method of analyzing value chains in
his 1985 book Competitive Advantage.2

Porter sought to define a company’s competitive advantage noting that it

stems from a company’s processes, such as marketing and supporting
activities. Porter breaks value chain analysis into five primary activities. Then,
he further breaks those down into four activities that help support primary
activities. The primary activities of Michael Porter's value chain are inbound
logistics, operations, outbound logistics, marketing and sales, and
service. The goal of the five sets of activities is to create value that exceeds
the cost of conducting that activity, therefore generating a higher profit.3

Here are the five key primary activities.

Porter’s Value Chain Primary Activities

Inbound Logistics
Inbound logistics include the receiving, warehousing, and inventory control of
a company's raw materials. This also covers all relationships with suppliers.
For example, for an e-commerce company, inbound logistics would be the
receiving and storing of products from a manufacturer that it plans to sell. 4

Operations
Operations include procedures for converting raw materials into a finished
product or service. This includes changing all inputs to ready them as
outputs. In the above e-commerce example, this would include adding labels
or branding or packaging several products as a bundle to add value to the
product.5

Outbound Logistics
All activities to distribute a final product to a consumer are considered
outbound logistics. This includes delivery of the product but also includes
storage and distribution systems and can be external or internal. For the e-
commerce company above, this includes storing products for shipping and
the actual shipping of said products. 5

Marketing and Sales

Strategies to enhance visibility and target appropriate customers—such as
advertising, promotion, and pricing—are included in marketing and sales.
Basically, these is all activities that help convince a consumer to purchase a
company’s product or service. Continuing with the above example, an e-
commerce company may run ads on Instagram or build an email list for email
marketing.5

Services
This includes activities to maintain products and enhance consumer
experience—customer service, maintenance, repair, refund, and exchange.
For an e-commerce company, this could include repairs or replacements, or
a warranty.5

Porter's Value Chain Secondary Activities

Now, companies can further improve the primary activities of their value chain
with secondary activities. Value chain support activities do just that, they
support the primary activities. The support, or secondary, activity generally
plays a role in each primary activity. 6 Such as human resource management,
which can play a role in operations, marketing, and sales. Here are the four
supporting activities.

Procurement
Procurement is the acquisition of inputs, or resources, for the firm. This is
how a company obtains raw materials, thus, it includes finding and
negotiating prices with suppliers and vendors. This relates heavily to the
inbound logistics primary activity, where an e-commerce company would look
to procure materials or goods for resale. 7

Human Resource Management

Hiring and retaining employees who will fulfill business strategy, as well as
help design, market, and sell the product. Overall, managing employees is
useful for all primary activities, where employees and effective hiring are
needed for marketing, logistics, and operations, among others. 8

Infrastructure
Infrastructure covers a company's support systems and the functions that
allow it to maintain operations. This includes all accounting, legal, and
administrative functions. A solid infrastructure is necessary for all primary
functions.9

Technological Development
Technological development is used during research and development and
can include designing and developing manufacturing techniques and
automating processes. This includes equipment, hardware, software,
procedures, and technical knowledge. Overall, a business working to reduce
technology costs, such as shifting from a hardware storage system to the
cloud, is technological development. 1 0

The Bottom Line

The primary activities within Michael Porter's value chain are used to provide
a company with a competitive advantage in any one of the five activities so it
has an advantage in the industry in which it operates. 1 1 In general, the
analysis was meant for companies that manufacture goods. But almost any
company can use the value chain analysis laid out by Porter even if they
don’t have all the components.