The Porter's value chain is the set of activities carried out by a company that operates in a specific industry from the acquisition of raw materials to deliver a product or service that is valuable to the market.
Porter proposed a general-purpose value chain that companies can use to examine all of their activities and see how they are connected. Understanding how a company creates value and looking for ways to add even more value are fundamental elements in developing a competitive strategy..
Michael Porter analyzed it in his well-known book Competitive advantage, published in 1985, where it first introduced the concept of a value chain. The idea of the value chain is based on the process vision of organizations. It is about being able to see a production or service company as a system.
This system is made up of subsystems, each with input materials, transformation processes and output products. Input materials, transformation processes and output products involve the acquisition and consumption of resources: money, labor, materials, equipment, buildings, land, administration and management.
Products pass in order through a chain of activities, and as a result of each activity the product gains value. The chain of activities gives products more added value than the sum of the added values of all activities.
The more value an organization creates, the more profitable it can be; and by providing more value to customers, you create a competitive advantage.
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The strength of Porter's value chain is that it focuses on systems and how inputs are transformed into finished products, with the customer as a central point, rather than looking at departments and types of accounting expenses..
Using this approach, Porter detailed a chain of activities that are common to all companies, dividing them into core and support activities.
Businesses use these core and supporting activities as “building blocks” to create a valuable product or service..
They are directly related to the production, sale, maintenance and support of a product or service. They consist of the following:
They are all the processes related to the reception, storage and internal distribution of raw materials. Vendor relationships are a key factor in creating value here.
They are the transformation activities that change raw materials into products to be sold to customers. Here, operating systems create value.
These activities are what deliver the product or service to the customer. They are elements such as collection, storage and distribution systems, and can be internal or external to the organization.
They are the processes used to persuade customers to buy from the company rather than from its competitors. Here are sources of value the benefits offered by the company and how well it communicates them.
They are the activities related to maintaining the value of the product for customers after they have been purchased.
They provide support to the main activities. Each support activity can perform functions in different core activities.
For example, Purchasing supports Operations with certain activities, but also supports Marketing and sales with other activities..
This is what the company does to obtain the resources it needs to operate. Includes finding suppliers and negotiating the best prices.
This is how a company recruits, hires, trains, motivates, rewards and retains its workers. People are an important source of value. Companies can create a clear competitive advantage with good human resource practices.
It is related to the management and processing of information, as well as the protection of the knowledge base of a company.
They are sources of value creation, minimizing information technology costs, keeping up with technological advances and taking care of technical excellence..
They are the support systems of a company and the functions that allow it to maintain its daily operations. Accounting, legal and general management are examples of the necessary infrastructure that companies can use for their benefit.
The way in which the activities of the value chain are carried out determines their costs and affects their profits. This tool can help to understand the sources of value of a company.
The value chain approach quickly moved to the forefront of management as a powerful analytical tool for strategic planning.
The value chain concept can be applied to both supply chains and entire distribution networks. Delivering a combination of products to the end customer will mobilize different economic factors, each managing its own value chain.
This approach could also be an excellent alternative to evaluate companies when you have publicly known competitor data..
For example, the company in question is compared to a known industry; this gives you a better idea of their value by creating useful correlations with downstream companies.
The synchronized industry-wide interaction of these local value chains creates an extended value chain, sometimes global in scope. Porter calls this great interconnected system of value chains the "value system.".
A value system includes the value chain of a company's supplier, that of the company itself, that of the distribution channels and that of the company's buyers..
Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a manufacturer may require that its parts suppliers be located close to its assembly plant to minimize the cost of transportation..
By exploiting the bottom-up and bottom-up information that flows along the value chain, companies can try to bypass intermediaries, creating new business models or creating improvements in their value system..
After the value has been analyzed and the contributing parts of the business have been identified, other models can be used alongside the value chain to assess how these areas can be improved..
For example, a SWOT analysis can be used within the “Outbound logistics” activity to understand what your strengths and weaknesses are and what opportunities there may be to improve that area, or identify threats to what may be a critical part of the business. delivery system value.
Likewise, other models can be used to evaluate performance, risk, market potential, environmental waste, among other aspects..
This analysis links systems and activities together and demonstrates the effect this has on costs and benefits. Clarifies where sources of value and losses can be found in the organization.
There are four basic steps that must be followed if the value chain is to be used as an analysis model.
It is determined which sub-activities defined generate value for each main activity. There are three different types of sub-activities:
Direct subactivities generate value on their own. For example, in a book publisher's sales and marketing subactivity, direct subactivities include calling bookstores, advertising, and selling online..
Indirect subactivities enable direct subactivities to run smoothly. In the book publisher's sales and marketing subactivity, indirect subactivities include managing the sales team and maintaining customer records..
Quality assurance sub-activities ensure that both direct and indirect sub-activities meet the necessary standards.
For the book publisher's sales and marketing subactivity, this could be proofreading and ad editing.
The sub-activities that create value in each main activity are determined for each of the support activities.
For example, consider how human resource management adds value to operations, inbound logistics, marketing and sales, etc. As in step one, indirect, direct and quality subactivities are sought.
The various value-creating sub-activities in the company's infrastructure are then identified. These will generally be cross-functional in nature, rather than specific to each major activity..
Links are found between the value sub-activities that have been identified. It will take time, although links are key to increasing competitive advantage within the value chain framework.
As an example, there is a link from sales team training (HR subactivity) to sales volume. There is another link between order delivery time and frustrated customer phone calls waiting for their shipments..
Each of the sub-activities and links that have been identified is reviewed, and it is considered how they can be optimized so that the value offered to customers is the maximum possible.
These are quantitative and qualitative sub-activities that can eventually contribute to increasing customer base, competitive advantage, and profitability..
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