Value chain analysis

Value chain analysis

The term value chain was first used by Micheal porter in his book "Competitive advantage: creating and sustaining superior performance" (1985). A value chain is a linked set of value creating activities that begins with basic raw materials from suppliers,moving on to a series of value added activities involved in producing and marketing a product or service and ending with distributors getting the final goods into the hands of the ultimate consumer.

Value chain analysis describes the activities within and around an organization and relates them to an analysis of the competitive strength of the organization. The value chain analysis helps to evaluate which value each particular activity adds to the organizations products or services. Porter states that a" firm's value chain and the way it performs individual activities are a reflection of its history,its strategy,its approach to implementing its strategy and the underlying economics of the activities themselves". Porter argues that the ability to perform particular activities and to manage the linkages between these activities is a source of competitive advantage.

Porter identifies two major categories of business activities which are primary activities and support activities. Primary activities are directly involved in transforming inputs into outputs and in delivering after sales support. The primary activities can be grouped into five main areas which are:

a) Inbound logistics: This involves material handling and warehousing.

b) Operations: This are processes involved in transforming inputs into outputs.

c) Outbound logistics: Deals with order processing and distribution.

d) Marketing and sales: Involves communication,pricing and channel management

e) Service: which covers installation,repair and parts.

Support activities supports primary activities,and they are:

Procurement: Procurement is the acquisition of goods, services or works from an outside external source.

Technology development: This are the know how,procedures and technological inputs needed in every value chain activity.

Human resource management: Human resource management ( HRM ) is the area of administrative focus dealing with an Organisation's employees.It involves the selection,placement and promotion , appraisal, management,development, rewards and labour /employee relations.

Firm infrastructure: Which includes the systems for planning,finance,quality,information management, accounting,legal and government affairs.

John Shank and V.Govindarajan (1993) state that "the value chain for any firm is the value-creating activities all the way from basic raw materials sources from component suppliers through to the ultimate end-use product delivered into the final consumers hands.

Industry chain value analysis: The value chain of most industries can be split into two segments which are the upstream and downstream segments. An industry can be analyzed in terms of profit margin available at any point along the value chain,for example in the auto industry,there includes manufacturing,lease financing,auto insurance,after sales services along the value chain.In analyzing a value chain,it should come to notice of the analyst that there is usually an area where the company would derive most of its strength from and where its primary activities lie, it might be a product or a specialty service in which the company has a competitive advantage. This area of expertise is called the company's center of gravity.

A company's center of gravity is part of the chain where its primary activities lie. According to Gallbraith,a company's center of gravity is usually the point at which the company started. This is true because after a firm establishes itself and start operations of a few products or service,it strifes to gain a competitive advantage,and when it does so,it then moves forward or backwards along the value chain in order to reduce costs,guarantee access to key raw materials or to guarantee distribution.

Corporate value chain analysis:

Each corporation has its own internal value chain of activities. Porter proposed that a manufacturing firm's primary activities usually begin with inbound logistics (raw material, handling and warehousing) then go through an operations process in which a product is manufactured,and continue on to outbound logistics (warehousing and distribution), to marketing and sales and finally to service (installation,repair and sales of parts).

Support activities such as procurement,human resource management, technology development and firm infrastructure ensure that primary activities are carried out both effectively and efficiently.