Strategy Management : Porter's Value Chain

PORTER’S VALUE CHAIN

Understanding How Value is Created Within Organizations

STRATEGY

MANAGEMENT

How does your organization create value?BIG QUESTIONFOR THE GROWTH OFYOUR INDUSTRY

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Creating value is a matter of fundamental importance to companies, because it addresses the economic logic of why the organization exists in the first place.

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The concept of value chains was developed by Michael E. Porter as early

as 1979

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How does your organization create

value?Manufacturing companies create value by acquiring raw materials and using them to produce something useful.

Retailers bring together a range of products and present them in a way that's convenient to customers, sometimes supported by services such as fitting rooms or personal shopper advice.Insurance companies offer policies to customers that are underwritten by larger re-insurance policies. Here, they're packaging these larger policies in a customer-friendly way, and distributing them to a mass audience.5

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The value that's created and captured by a company is the profit marginValue Created and Captured – Cost of Creating that Value = Margin6

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The more value an organization creates, the more profitable it is likely to be. When an organization provide more value to its customers, then it build a competitive advantage.

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COMPETITIVE ADVANTAGE

When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage.8

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Firm A is said to possess a competitive advantage over its rivals.9

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MICHAEL E. PORTER10

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COST ADVANTAGEA competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost

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DIFFERENTIATION ADVANTAGEA competitive advantage exists when the firm is able to deliver benefits that exceed those of competing products 12

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Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.13

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VALUE CHAIN

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PORTER'S CORPORATE VALUE CHAIN

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The idea of the value chain is based on the process view of organizations.How value chain activities are carried out determines costs and affects profits.

These activities can be classified generally as either primary or support activities that all businesses must undertake in some form.

PORTER'S VALUE CHAIN

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Rather than looking at departments or accounting cost types, Porter's Value Chain focuses on systems, and how inputs are changed into the outputs purchased by consumers. Using this viewpoint, Porter described a chain of activities common to all businesses, and he divided them into primary and support activities

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PRIMARY ACTIVITIES

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SECONDARY ACTIVITIES

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Companies use these primary and support activities as "building blocks" to create a valuable product or service.

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USING PORTER'S VALUE CHAINTo identify and understand a company's value chain, follow these steps.

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For each primary activity, determine which specific sub-activities create value. There are three different types of sub-activitiesIDENTIFY SUB-ACTIVITIES FOR EACH IDENTIFY SUB-ACTIVITIES FOR EACH PRIMARY ACTIVITYPRIMARY ACTIVITYM V S SAI HEMANT

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IDENTIFY SUB-ACTIVITIES FOR EACH SUPPORT ACTIVITY.M V S SAI HEMANT

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Conclusion Porter's Value Chain is a useful strategic management tool. It works by breaking an organization's activities down into strategically relevant pieces, so that a firm can see a fuller picture of the cost drivers and sources of differentiation, and then make changes appropriately.

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