Value Chain : Michael Porter
A framework developed by Michael Porter for analyzing the various activities a firm performs to create value for its customers. By analyzing the value chain, the firm can understand how it is adding value, in which activities it is strong, where it is weak and how it can further streamline the value addition process.

The value chain breaks down the firm into various activities in order to understand the behavior of costs and the existing or potential sources of differentiation. A firm gains competitive advantage by performing these activities more cheaply or better than its rivals.

Value is the amount buyers are willing to pay for what a firm provides them. A firm is profitable if the value created exceeds the costs incurred. Creating value for buyers that exceeds the cost of doing so, is the goal of any generic strategy.

Porter emphasizes that a firmís value chain must be viewed as an interdependent system or network of activities, connected by linkages. Linkages occur when the way in which one activity is performed, affects the cost or effectiveness of other activities. Linkages often create trade-offs in performing different activities that must be optimized. For example, more expensive components can reduce after-sale service costs.

Linkages also require activities to be coordinated. Coordinating linked activities reduces transaction costs, allows better information for control purposes, substitutes less costly operations in one activity for more costly ones elsewhere and can also reduce cycle time. For example, dramatic time savings can be achieved through such coordination in the design and introduction of new products and in order processing and delivery.

The value chain can help managers understand the sources of cost advantage. Many managers view cost too narrowly and concentrate on manufacturing. They also need to look at product development, marketing and service and draw cost advantage from throughout the value chain. Gaining cost advantage also usually requires optimizing the linkages among activities as well as close coordination with suppliers and channels. Value chain activities can be categorized into Primary & Support.

Primary Value Chain Activities
    Inbound logistics: Receiving, warehousing, and inventory control of input materials.

    Operations: Activities that transform the inputs into the final product.

    Outbound logistics: Comprise the activities that get the finished product to the customer, including warehousing, order fulfillment, etc.

    Marketing & Sales: Activities that try to persuade buyers to purchase the product, including channel selection, advertising, pricing, etc.

    Service: Activities like customer support, after sales service, etc.

One or more of these primary activities may be vital in developing a competitive advantage. For example, logistics activities are critical for a retail chain. Marketing may be a critical activity for a company offering branded consumer goods.

Support Activities
    Procurement: Purchasing the raw materials and other inputs used in the value-creating activities

    Technology Development: Activities like research and development and process automation.

    Human Resource Management: Activities like recruiting, development, and compensation of employees.

    Firm Infrastructure: Activities such as finance, legal services, and management information systems

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