Porters Value ChainBackground The value chain was introduced by Michael S. Porter in 1985 in the book “Competitive Advantage". Value chain" is used to analyze the flow of value-adding activities such as purchasing, production and marketing that are linking the raw material supplier to the end customer. The model looks at what value each link adds the company and thereby uncovers the company's competitiveness. The value chain consists of 9 value activities that together create added value and thereby the company’s margin. Margin - in many places also called profit - is actually the value chain tenth field. Here, there is no activity, the field's size is dependent on the previous nine fields. The profit is equal to the difference between the value chain's total value - which is the value of the product for the customer - that is the price he is willing to pay for the product - and the total cost of producing the product - which is the total of the costs that are in the value chain nine activities. About the model The 9 activities are divided into two categories. The first is primary activities. These activities include the main activities. All 5 activities are directly involved in the production of the actual product. The second category is support activities. They go across the major activities and aims to coordinate their functions best as possible to each other. The primary activities consist of the five activities at the bottom of the model - which are:
Inbound logistics can consist of receiving goods, inspection, storage, receiving returned goods etc. Operations include activities associated with transforming raw materials and components into new products Outbound logistics are activities associated with order processing, packing, shipping - everything which is dealing with the distribution of the finished product to buyers Marketing and sales are activities associated with providing the customer information about the product's excellence, which should lead to a sale. Marketing and sales are involved in determining the distribution channel, pricing, promotion, personal selling, etc. Service - activities which ensure that the purchased product enhances or preserves value for the customer. The service could include advice - in person or online. Repairs, customer training, ongoing maintenance and so on. This was the five primary activities. Now follows support activities Supporting activities consist of four activities, they are in the upper part of the model, - and consists of
Support activities Procurement are activities that refers to the function of purchasing - not the physical input. Procurement supports all the primary activities. It may be the establishment of procurement routines for the purchase of raw materials for inbound logistics The support activity technology development must be understood broadly. It is the overall systems that provide an overview of the entire organization. The sales department have the opportunity to see whether the products the customer demand is out of stock Support activity - Human Resources Management includes recruitment, training, retention, motivation of the firm’s staff. Many times it is the HR department’s responsibility that the right skills is available at the right time in various departments. A simple example is, that before marketing and sales contact the first potential customer in Japan – HR department helps with hiring a person who understands the Japanese language and their culture. Support activity - Firm infrastructure is a kind of superstructure or umbrella, which covers all other activities. It supports both the primary activities and support activities. It includes the organization of the company, management, planning, quality management, finance, etc. Criticism The model is created on the basis of the 80’s major American companies that produced to stock. Today, many big companies are order producing. The model has a built-in tendency to place the company in a defensive position at the expense of the company's creativity and readiness for change. They are always looking for small improvements in relation to the existing product - a form of incremental innovation. The model does not include the option to switch to something else - it's very static. The good thing about the model is that it continuously forces you to look for improvements
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