Model:
Summary:
The primary goal of Michael Porter's Value Chain Analysis is to maximize value creation while minimizing costs. This model enables businesses to understand where their value lies and how it can be enhanced. By dissecting an organization's activities into primary and support functions, the model helps identify areas that contribute significantly to creating customer value and those that are less effective. This deep insight allows firms to focus on optimizing the most valuable activities and either improving or outsourcing less valuable ones.
Moreover, Porter's Value Chain Analysis assists businesses in distinguishing their unique value proposition. By understanding differentiators in their value chain, companies can emphasize these areas to gain a competitive advantage. The model also encourages organizations to view their operations from a holistic perspective, considering both internal activities and external influences, such as supplier and customer interactions. This comprehensive approach helps in aligning various parts of the business towards a common goal of value maximization, leading to increased efficiency, reduced wastage, and improved customer satisfaction.
Ultimately, Porter's model is not just a tool for operational analysis, but a strategic framework that guides decision-making, resource allocation, and long-term planning, ensuring the organization's activities are closely aligned with its overall strategic objectives.
Primary Activities:
These are activities directly involved in creating and delivering a product. There are five primary activities:
- Inbound Logistics:
- Involves receiving, storing, and distributing inputs internally.
- Activities include material handling, warehousing, inventory control, transportation scheduling.
- Operations:
- Encompasses the processes of transforming inputs into the final product form.
- Activities include machining, packaging, assembly, equipment maintenance, testing and quality control.
- Outbound Logistics:
- The activities required to get the finished product to the customers.
- Activities include warehousing, order fulfillment, transportation, distribution management.
- Marketing & Sales:
- Activities associated with getting buyers to purchase the product.
- Includes advertising, promotions, sales force organization, channel selection, pricing, and managing the final product to ensure it addresses the needs of targeted customers.
- Service:
- Activities that maintain and enhance the product’s value, including customer support, repair services, installation, and training.
Support Activities:
Support activities assist the primary activities in helping the firm to gain a competitive advantage. There are four main support activities:
- Procurement:
- The process of acquiring the inputs needed for the production of goods and services.
- Activities include sourcing and negotiation with suppliers, strategic selection of goods and services, and contract management.
- Technology Development:
- Pertains to the activities related to managing and processing information, as well as the development of technology in the product itself.
- Includes research and development, process automation, and other technology-driven activities that support primary activities.
- Human Resource Management:
- Focuses on activities involved with hiring, training, developing, and compensating all personnel.
- Encompasses employee recruitment, training programs, development, performance management, and compensation policies.
- Firm Infrastructure:
- Consists of activities such as management, planning, finance, legal, quality management, and information systems.
- Supports the entire value chain and not individual activities, including activities like financial accounting, legal support, and strategic planning.
Resources:
Competitive Strategy - Michael E. PorterTools:
Prospect / Industry Analysis ToolQuotes:
"Value chain analysis illuminates the stage of activity where a firm can best create value for its customers and build a competitive advantage.” - Michael E. Porter
"The essence of strategy is choosing what not to do.” - Michael E. Porter
