1. Helps an organization identify how it creates value for customers and locate where its sources of competitive advantage lie.
2. Can be created in both qualitative and quantitative forms.
3. Many organizations do not consciously make decisions to optimize the sources of advantage resident in their value chain and in so doing, risk losing competitive advantage.
Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. (Developed in the early 1985 by Harvard Business School Professor Michael Porter in his book "Competitive Advantage: Creating and Sustaining superior Performance")
Most mangers know that their organization’s value chain represents the sequence of activities necessary to create a product or service, produce or deliver it, market and sell it to customers, distribute or provide it to those customers while ensuring necessary post sales service is completed. They also know that internal firm infrastructure activities such as human capital development or procurement support the main stages in the value chain. What managers sometimes aren’t as knowledgeable of is the fact that the value chain within a firm or industry is actually comprised of a very specific model of performance that depicts the discrete stages of organizational value creation. Further, they don’t always use the model to compare and contract activities across firms for the purpose of determining where competitive advantages lie.
Profit Margin:
Depends on the Effectiveness in performing these Supporting Activities “Efficiently"
- Revenues (customer is willing to pay for the products) must exceed the cost of the activities in the value chain.
Generate Superior Value: A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation.
Use the value chain model to define a firm's core competencies and the activities in which it can pursue a competitive advantage:
• Cost advantage: Better understanding and reducing costs
• Differentiation: Focus on those activities associated with core competencies and capabilities
Cost Advantage and the Value Chain Porter
1- reduce the cost of individual value chain activities
2- reconfigure the value chain.
A- Define the value chain is define via a cost analysis, by assigning costs to the value chain activities.
B- Accounting reports are studied in order to modify or reallocate costs and produce value creating activities.
Porter identified 10 cost drivers related to value chain activities:
• Economies of scale
• Learning
• Capacity utilization
• Linkages among activities
• Interrelationships among business units
• Degree of vertical integration
• Timing of market entry
• Firm's policy of cost or differentiation
• Geographic location
• Institutional factors (regulation, union activity, taxes, etc.)
NOTE:
1- A firm develops a cost advantage by controlling these drivers better than do the competitors.
2- Reconfigure the value chain.
Structural changes - such a new production process, new distribution channels, or a different sales approach.
*Goal : offer the customer a level of value that exceeds the cost of the activities, resulting in a profit margin. The term “Margin” implies that organizations realize a profit margin that depends on their ability to manage the linkages between all activities in the value chain Porter. In other words, the organization is able to deliver a product / service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain.
The model can and should be reconfigured to account for activities specific to the industry in which the firm competes. For example, in a service industry - such as professional services - inbound logistics might be replaced with methodology development or client acquisition. Regardless of industry however, the value chain Porter is a powerful framework for analyzing both industry and firm specific activities.