Concept of Value chain approaches

Introduction:
The value chain approach was developed by Michael Porter in the 1980s in his book Competitive
Advantae! Creatin and "ustainin "uperior Per#ormance$ %Porter& 198'() The concept o# value
added& in the #orm o# the value chain& can be utili*ed to develop an oranisation+s sustainable
competitive advantae in the business arena o# the ,1st C) All oranisations consist o# activities
that link toether to develop the value o# the business& and toether these activities #orm the
oranisation+s value chain) "uch activities may include purchasin activities& manu#acturin the
products& distribution and marketin o# the company+s products and activities %-ynch& ,00.() The
value chain #ramework has been used as a power#ul analysis tool #or the strateic plannin o# an
oranisation #or nearly two decades) The aim o# the value chain #ramework is to ma/imise value
creation while minimi*in costs)

Main aspects of Value Chain Analysis
0alue chain analysis is a power#ul tool #or manaers to identi#y the key activities within the #irm
which #orm the value chain #or that orani*ation& and have the potential o# a sustainable
competitive advantae #or a company) Therein& competitive advantae o# an oranisation lies in its
ability to per#orm crucial activities alon the value chain better than its competitors)
The value chain #ramework o# Porter %1990( is an interdependent system or network o# activities&
connected by linkaes$ %p) 11() 2hen the system is manaed care#ully& the linkaes can be a vital
source o# competitive advantae %Pathania34ain& ,001() The value chain analysis essentially entails
the linkae o# two areas) 5irstly& the value chain links the value o# the oranisations+ activities with
its main #unctional parts) Then the assessment o# the contribution o# each part in the overall added
value o# the business is made %-ynch& ,00.() 6n order to conduct the value chain analysis& the
company is split into primary and support activities %5iure 1() Primary activities are those that are
related with production& while support activities are those that provide the backround necessary
#or the e##ectiveness and e##iciency o# the #irm& such as human resource manaement) The primary
and secondary activities o# the #irm are discussed in detail below)
Primary activities
The primary activities %Porter& 198'( o# the company include the #ollowin!
Inbound logistics
These are the activities concerned with receivin the materials #rom suppliers& storin these
e/ternally sourced materials& and handlin them within the #irm)

7 Operations

These are the activities related to the production o# products and services) This area can be split
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into more departments in certain companies) 5or e/ample& the operations in case o# a hotel would
include reception& room service etc)
7 Outbound logistics

These are all the activities concerned with distributin the #inal product and8or service to the
customers) 5or e/ample& in case o# a hotel this activity would entail the ways o# brinin customers
to the hotel)

Marketing and sales:

This #unctional area essentially analyses the needs and wants o# customers and is responsible #or
creatin awareness amon the taret audience o# the company about the #irm+s products and
services) Companies make use o# marketin communications tools like advertisin& sales
promotions etc) to attract customers to their products)
7 ervice
There is o#ten a need to provide services like pre3installation or a#ter3sales service be#ore or a#ter
the sale o# the product or service)
upport activities
The support activities o# a company include the #ollowin!
7 Procurement

This #unction is responsible #or purchasin the materials that are necessary #or the company+s
operations) An e##icient procurement department should be able to obtain the hihest 9uality oods
at the lowest prices)

7 !uman "esource Management

This is a #unction concerned with recruitin& trainin& motivatin and rewardin the work#orce o# the
company) :uman resources are increasinly becomin an important way o# attainin sustainable
competitive advantae)

7 #echnology $evelopment

This is an area that is concerned with technoloical innovation& trainin and knowlede that is
crucial #or most companies today in order to survive)

7 %irm Infrastructure
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This includes plannin and control systems& such as #inance& accountin& and corporate stratey
etc)
%-ynch& ,00.()
5iure 1

The 0alue Chain
"ource! Porter %198'(
Porter used the word ;marin+ #or the di##erence between the total value and the cost o# per#ormin
the value activities %5iure 1() :ere& value is re#erred to as the price that the customer is willin to
pay #or a certain o##erin %Macmillan et al& ,000() <ther scholars have used the word ;added value+
instead o# marin in order to describe the same %-ynch& ,00.() The analysis entails a thorouh
e/amination o# how each part miht contribute towards added value in the company and how this
may di##er #rom the competition)

6n a study o# "audi companies& =hamdi %,00'( #ound that ,,> o# the companies in the study used
value chain #re9uently& while 1?> reported that they somewhat used it& and 1,> did not use the
tool at all) An interestin #indin o# the study was that the manu#acturin #irms were #re9uent users
o# the tool compared to their service counterparts %=hamdi& ,00'()

!o& to &rite a 'ood Value Chain Analysis
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The ability o# a company to understand its own capabilities and the needs o# the customers is
crucial #or a competitive stratey to be success#ul) The pro#itability o# a #irm depends to a lare
e/tent on how e##ectively it manaes the various activities in the value chain& such that the price
that the customer is willin to pay #or the company+s products and services e/ceeds the relative
costs o# the value chain activities) 6t is important to bear in mind that while the value chain analysis
may appear as simple in theory& it is 9uite time3consumin in practice) The loic and validity o# the
proven techni9ue o# value chain analysis has been riorously tested& there#ore& it does not re9uire
the user to have the same in3depth knowlede as the oriinator o# the model %Macmillan et al&
,000() The #irst step in conductin the value chain analysis is to break down the key activities o#
the company accordin to the activities entailed in the #ramework) The ne/t step is to assess the
potential #or addin value throuh the means o# cost advantae or di##erentiation) 5inally& it is
imperative #or the analyst to determine strateies that #ocus on those activities that would enable
the company to attain sustainable competitive advantae)
6t is important #or analysts to remember to use the value chain as a simple checklist to analyse
each activity in the business with some depth %Pearson& 1999() The value chain should be
analysed with the core competence o# the company at its very heart %Macmillan et al& ,00.() The
value chain #ramework is a handy tool #or analysin the activities in which the #irm can pursue its
distinctive core competencies& in the #orm o# a low cost stratey or a di##erentiation stratey) 6t is to
be noted that the value chain analysis& when used appropriately& makes the implementation o#
competitive strateies more systematic overall) Analysts should use the value chain analysis to
identi#y how each business activity contributes to a particular competitive stratey) A company may
bene#it #rom cost advantaes i# it either reduces the cost o# individual activities in the value chain or
the value chain is essentially recon#iured& throuh structural chanes in the activities) <ne o# the
problematic areas o# the value chain model& however& is that the costs o# the di##erent activities o#
the value chain need to be attributed to an activity) There are #ew costin systems that contain
detailed activity level costin& unless an Activity @ased Costin %A@C( system is in place in the
company %Macmillan et al& ,00.() Another relevant area o# concern that analysts must pay
particular attention to is the customers+ view point o# value) The customers o# the #irm may view
value in a eneric way& thereby makin the process o# evaluatin the activities in the value chain in
relation with the total price increasinly di##icult) 6t is imperative #or analysts to note that the overall
di##erentiation advantae may result #rom any activity in the value chain) A di##erentiation advantae
may be achieved either by chanin individual value chain activities to increase uni9ueness in the
#inal product or service o# the company& or by recon#iurin the company+s value chain)

The di##erence between a low cost stratey and di##erentiation in practice is unlike the riidity that is
provided reardin the same in theory) Analysts must note that the di##erence between these two
strateies is one o# the shades o# rey in real li#e compared to the black and white that is o##ered in
theory) 5or e/ample& Amerson Alectric& which is a cost leader& has 9uality as a strateic concern in
achievin its ;best costs+ stratey %Pearson& 1999() 6vory "oap& a leadin product o# PB=& is a
broad di##erentiator that turned into a cost leader) Cuality is a strateic concern #or manaers o#
6vory "oap& alon with deliverin a hih value product consistently)
Dote that in a company with more than one product area& it is appropriate to conduct the value
chain analysis at the product roup level& and not at the corporate stratey level) 6t is crucial #or
companies to have the ability to control and make most o# their capabilities) 6n the advent o#
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outsourcin& proressive companies are increasinly makin their value chains more elastic and
their oranisations inherently more #le/ible %=ott#redson et al& ,00'() The important 9uestion is to
see how the companies are sourcin every activity in the value chain) A systematic analysis o# the
value chain can #acilitate e##ective outsourcin decisions) There#ore& it is important to have an in3
depth understandin o# the company+s strenths and weaknesses in each activity in terms o# cost
and di##erentiation #actors)
The stratey o# 2al3Mart worked when the company improved its business throuh innovative
practices in activities such as purchasin& loistics& and in#ormation manaement& which resulted in
the value o##erin o# everyday low prices$ %Maretta& ,00,() 6t is important to note that re#inin
business models on a constant basis is as critical to the success o# the company as its business
stratey) Dotably& both the stratey and business model o# an oranisation are crucial #or the
robustness o# the overall value chain)

5or e/ample& ?3Aleven had been vertically interated& controllin most activities in the value chain
by itsel#) The company has now outsourced many parts o# its business includin #unctions like :E&
6T manaement& #inance& loistics& distribution& product development& and packain) Accordin to
=ott#redson et al %,00'(& the value chain decisions o# companies will increasinly shape their
overall oranisational structure) Moreover& the value chain decisions will play a role in determinin
the type o# manaement skills that companies may need to develop or ac9uire to survive in #iercely
competitive business markets)
The Apple podcastin value chain is comprised o# nine steps that essentially move #rom raw
content to the listener) All the steps o# the value chain include content& advertisin& production&
publishin& hostin8bandwidth& promotion& searchin& catchin& and listenin) 6t is important to note
that each step in the value chain adds value to the podcast in distinctive ways& has its own sets o#
challenes and opportunities)
6t is important to note that the nature o# value chain activities di##ers reatly in accordance with the
types o# companies and industries) 5or companies with comple/ systems like 6@M& Accenture and
Cisco etc)& it is not possible #or one member o# the value chain to provide all the products and
services #rom start to #inish) The marketin #unction in such companies #ocuses on alinin with
key partners and allies that must collaborate with each other) 5or e/ample& installin "APFs AEP
system re9uires direct involvement #rom companies like :P& <racle& and Accenture& alon with
indirect involvement o# companies like AMC& Cisco& and Microso#t& and collaboration between
many departments within the company) The market assets contrast starkly between the companies
with comple/ systems and those that are driven by volume operations) 5or e/ample& in case o#
Apple+s leadin products like Macintosh and the iPod& the entire o##er is inside a packae& and the
entire value chain is preassembled) The chane o# supplier #or the Macintosh #rom 6@M& to 6ntel&
improved the system per#ormance while retainin the value in terms o# price to the consumer) The
only variable to manae in Apple+s case is the consumers+ pre#erences) The role o# creatin
di##erentiation throuh uni9ue 9uality #eatures& alon with promotion in order to create brand
awareness& imae and eventually brand e9uity becomes imperative #or volume operations driven
companies like Apple %Moore& ,00'()
6t is imperative to note that the value chains o# companies have underone many chanes over the
last two decades& due to the rapidly chanin business environment) 6n#ormation technoloy and
the 6nternet have played a #undamental role in trans#ormin certain parts and the interlinkaes
between parts o# the value chains o# companies today) Moreover :EM is increasinly becomin a
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vital asset in the value chain that contributes to competitive advantae) "trateic alliances are also
becomin an interal part o# the value chains) 5or e/ample& 6@M once enGoyed backward vertical
interation into the disk drive industry and #orward vertical interation into the consultin services
and computer so#tware industries %:ill et al& ,00?() Accordin to the chanin business
environment& 6@M had more than 100 strateic alliances as o# ,00. %Thompson et al& ,00.()
:erein& the value chain analysis is use#ul in providin a #ramework to e/amine the advantaes that
partners can ive to each other %Pathania34ain& ,001() 6t is important to note the source o#
competitive advantae o# a company #or the value chain analysis) The competitive advantae #or
6@M& #or e/ample& lies in depth& breadth and the eoraphic spread o# its lobal operations %Eai&
,00H( and the loyalty that the bi blue enGoys #rom its clientele)
-astly& analysts should look #or the manaerial implications that the new era o# capability
outsourcin may brin) The value chain decisions o# companies will increasinly shape their
oranisational structure) 5urthermore these decisions will determine the types o# manaerial skills
that companies may need to develop to survive in an increasinly competitive business
environment)

(here to find information for Value Chain Analysis
Analysts can e/plore various sources to #ind in#ormation necessary #or conductin the value chain
analysis) Ip to three years o# annual reports o# the company can be analysed to see how the
costin o# the activities are chanin over the period and whether they are in unison with the
competitive stratey o# the #irm) These annual reports o# the company can be compared to the
annual reports o# the key competitors in order to see how competitive strateies di##er between the
companies& alon with #indin the di##erence in the contribution o# activities to the company+s
pro#itability)
6n order to ain knowlede about the core competence o# the company& analysts can look at the
company and competitor websites) "2<T analysis o# the companies done by companies like
Jatamonitor etc) can help the analyst to understand the key strenths and weaknesses o# the
company and how the #irm di##ers #rom its competitors) 5urthermore& Gournal articles& trade
publications and maa*ines are use#ul sources o# in#ormation to identi#y how value is created in the
particular industry in which the company operates and which activities play a key role in the
eneration o# that value)
)imitations of Value Chain Analysis
<ne o# the limitations o# the value chain model is that it describes an industrial orani*ation which
essentially buys raw materials and trans#orms these into physical products) Dotably& at the time
when the model was introduced %Porter& 198'(& service industries in the western countries
employed lesser work#orce compared to today+s statistics o# the same %www)wikipedia)or()
Academics and practitioners alike have criti9ued the model and its applicability in the conte/t o#
service oranisations) Partnerships& alliances and collaboration alon with di##erentiation and low
costs are common drivers o# value today)
The limitations o# the model include the #act that ;value+ #or the #inal customer is the value only in its
theoretical conte/t %"vensson& ,00.(& and not practical terms) The real value o# the product is
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assessed when the product reaches the #inal customer& and any assessment o# that value be#ore
that moment is only somethin that is true in theory) Jespite this limitation& analysts can e##ectively
use the value chain model to determine the value to the #inal customers in a theoretical way) Ise o#
other plannin tools and techni9ues like Porter+s eneric strateies& analysis o# critical success
#actors etc) is recommended in conGunction with the value chain #ramework #or a more
comprehensive analysis o# a company+s stratey and plannin)

Conclusion
The value chain #ramework has been used as a power#ul analysis tool #or oranisational strateic
plannin #or nearly two decades now) The value chain #ramework shows that the value chain o# a
company may be use#ul in identi#yin and understandin crucial aspects to achieve competitive
strenths and core competencies in the marketplace) The model also reveals how the value chain
activities are tied toether to ultimately create value #or the consumer) The #ive primary activities
and #our support activities #orm an interdependent system that is connected by linkaes) Analysts
conductin the value chain analysis should break down the key activities o# the company accordin
to the activities entailed in the #ramework& and assess the potential #or addin value throuh the
means o# cost advantae or di##erentiation) 5inally& it is important to determine strateies that #ocus
on those activities that would enable the company to attain sustainable competitive advantae)

6t is important to analyse the value chain o# a company with the core competence at its very heart)
The nature o# value chain activities di##ers reatly in accordance with the types o# companies and
industries) The value chains o# companies have underone many chanes in the last two decades
due to advancements in technoloy #acilitatin chane at a very rapid pace in the business
environment) <utsourcin will cause maGor chanes in oranisations and their value chains& with
sini#icant manaerial implications)
"ources #or #indin in#ormation on value chain analysis include three years annual reports o# the
particular company and its key competitors& company websites& Gournal articles& and other reputed
trade maa*ines etc) Ise o# other plannin tools and techni9ues like Porter+s eneric strateies&
analysis o# critical success #actors etc) is suested in conGunction with the value chain #ramework
#or a more comprehensive analysis o# a company+s strateic plannin)
"eferences
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Ampirical study& 6nternational 4ournal o# Manaement& 0ol) ,,& Do) .& p) .?H3.9')
=ott#redson& M) B Puryear& E) B Phillips& ") %,00'(& "trateic "ourcin 5rom Periphery to the Core&
:arvard @usiness Eeview& 0ol) 8.& Do) ,& p) 1.,31.9)
:ill& 2) -) C) B 4ones& E) =) %,00?(& "trateic Manaement! An 6nterated Approach& ?th ed)&
:ouhton Mi##lin Company& @oston! Dew Kork)
-ynch& E) %,00.(& Corporate "tratey& .rd ed)& Prentice :all 5inancial Times)
Macmillan& :) B Tampoe& M) %,000(& "trateic Manaement& </#ord Iniversity Press)
Maretta& 4) %,00,(& 2hy business models matter& :arvard @usiness Eeview)
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Moore& =) A) %,00'(& "tratey and your stroner hand& :arvard @usiness Eeview)
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strateies o# media #irms in 6ndia& 4ournal o# Media Aconomics& 0ol) 11& Do) .& p) 1H9318?)
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Eai& ") %,00H(& 6ndia becomin a crucial co in the machine at 6@M& The Dew Kork Times)
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4ournal o# Physical Jistribution B -oistics Manaement& 0ol) .1& Do) .81)
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Thompson& A) A) B "trickland& 4) A) %,00.(& "trateic Manaement! Concepts and Cases&
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2ikipedia& The #ree encyclopaedia& LAccessed on H81080HM
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