What is Michael Porters Value Chain Analysis
A value chain refers to the whole series of activities that create and build value at every step for a particular company. The concept of value chain analysis is developed by Michael Porter in 1980 in his very famous book 'Competitive Advantage'. Value chain analysis used to analyze those specific activities which can create competitive advantages for a company. In simple words we can say that the value chain analysis separates useful and effective activities from the wasteful activities and provide a better chance to the companies for getting competitive advantage. So the main goal of value chain analysis is to know about those activities which creates value that exceed the cost of providing products and services, and generate a profit margin for the companies.
Types of Activities in Porter’s Value Chain Model
Porter’s value chain model is made up of primary and support activities. So here in this article I would discuss both types of activities.
Primary Activities of Value Chain
- Inbound Logistics refers to getting the material as an input for adding value by processing it. This also includes relationships with suppliers and all other activities that are required by a company to receive raw material or input, store, and disseminate it.
- Operations refer to the manufacturing process and it includes all the activities that are required to transform raw material (inputs) into final products (outputs).
- Outbound Logistics refers to the distributions of final products to the point of sale. This includes all those activities that are required to collect, store, and distribute the final products.
- Marketing & Sales refers to how to sale and promote final products. This includes those activities required to inform customers about products and services, motivate or induce customers to purchase them, and facilitate customer their purchase.
- Service refers to the activities which maintain the functionality of a product. These are the activities required to keep the product or service working effectively for the customers after it is sold and delivered to them.
Supportive or Secondary Activities of Value Chain
- Firm infrastructure allows managers to monitor the environment well. This consists of different activities or departments such as finance, planning, public affairs, government relations, quality assurance and legal and quality management etc.
- Procurement refers to the acquisition of raw materials and other inputs, or required resources, for the company to create value.
- Human Resource management it is the development of skills those are needed to steer the company well. This includes all those activities associated with hiring, training, development and compensation of employees.
- Technological Development means activities which can give the firm speed, accuracy and quality. This pertains to research and development, process automation, and all other procedures and technical knowledge used to support the value chain activities.
How to Use Porter’s Value Chain
To have a better look on value chain a company should following steps
- Specify sub-activities for every primary activity examples of sub activities are direct activities, indirect activities & quality insurance
- Specify sub-activities for every secondary activity for example how one company’s department can add value to another department
- Specify links
- Grab the opportunities to create value
By summarizing all of above we can say that both primary and supportive activities of value chain allow a company to charge a margin. So, all successful companies require evaluate and analyze all these activities, in order to get competitive advantages and to accomplish desired company goals and objectives.