Porter's Value Chain Explained

Summary

Porter's Value Chain is a strategic tool that maps internal business activities to understand how they add value to customers. It includes primary activities like operations and marketing, and support activities like HR and technology development. By analyzing these activities, businesses can maximize their margin and competitive advantage. The tool, developed by Michael Porter, helps organizations identify areas for investment and eliminate non-value-adding activities, ultimately increasing efficiency and profitability.

Takeaways

• 🍽️ Porter's Value Chain is a strategic tool used to map internal business activities that add value to customers.
• 👨‍🍳 The example of a chef cooking a meal illustrates how value is added beyond the cost of raw ingredients.
• 💹 The difference between the sales price of a product and the cost of creating it is known as margin.
• 🔍 The purpose of the value chain is to understand activities that create value or margin to enhance competitive advantage.
• 📚 Developed by Michael Porter, the concept is detailed in his book 'Competitive Advantage'.
• 🔗 The value chain is divided into primary activities (directly developing inputs into outputs) and support activities (facilitating primary activities).
• 📊 Primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service.
• 🛠️ Support activities encompass procurement, human resource management, technology development, and firm infrastructure.
• 🔍 Mapping your own value chain involves identifying sub-activities, analyzing their value creation, and examining interactivity between activities.
• 🌟 The value chain can be used for strategic planning, ensuring complete coverage in change initiatives, and assessing acquisition fit.
• 🚀 Amazon's AWS is an example of leveraging a core competency (web hosting) to create a new service, demonstrating the value chain's utility in identifying opportunities.

Q & A

What is Porter's Value Chain?

Porter's Value Chain is a strategic tool that helps map out the internal business activities that add value to customers. It's a way to understand the activities within a business that create value or margin, which can then be optimized to improve competitive advantage.

How does a chef's cooking process relate to the concept of value addition in Porter's Value Chain?

A chef's cooking process exemplifies value addition by creating a meal that is worth more than the sum of its raw ingredients. This is analogous to businesses creating value by transforming inputs into outputs that customers are willing to pay a premium for, thus generating a margin.

What is the significance of the margin in the context of the value chain?

The margin in the context of the value chain refers to the difference between the sales price of a product or service and the cost of creating that output. Understanding and optimizing this margin is key to enhancing a business's profitability and competitive position.

How does the value chain help in identifying areas for investment and cost reduction?

The value chain helps by breaking down all the activities an organization performs into primary and support activities. By analyzing these activities, businesses can identify which ones add more value than they cost and focus on investing in those, while eliminating or streamlining those that do not contribute positively to the margin.

What are the primary activities in Porter's Value Chain?

Primary activities in Porter's Value Chain are those that directly contribute to the creation of a product or service. They include inbound logistics, operations, outbound logistics, marketing and sales, and service.

Can you explain the role of support activities in the value chain?

Support activities in the value chain facilitate the smooth operation of primary activities. They include procurement, technology development, human resource management, and firm infrastructure. These activities provide necessary support across the entire value chain, helping to maintain efficiency and effectiveness.

How does the value chain model differ from traditional accounting cost analysis?

The value chain model differs from traditional accounting cost analysis by focusing on the process view of how an organization transforms inputs into outputs, rather than just examining accounting costs and departmental budgets. It emphasizes the value-adding activities and their interdependencies.

What steps are involved in creating one's own value chain?

Creating one's own value chain involves mapping out sub-activities for both primary and support activities, analyzing each activity to determine if it adds more value than it costs, and examining the linkages between activities to understand how changes in one can impact others.

How can the value chain be used beyond understanding an organization's value creation?

Beyond understanding value creation, the value chain can be used to create a target operating model, ensure complete coverage in major change initiatives, and as a tool for understanding acquisition fit by comparing the value chains of the acquiring and target organizations.

What are some potential advantages and disadvantages of using Porter's Value Chain?

Advantages include increasing margin by clarifying cost and differentiation advantages, creating a shared understanding of value creation, and various strategic uses. Disadvantages include the need for ongoing updates, a focus on internal activities without considering external factors, and the risk of losing sight of the broader strategic picture due to a focus on detailed activities.

Can you provide an example of how Amazon might have used the value chain to identify opportunities for new services?

Amazon's creation of AWS (Amazon Web Services) can be seen as an example of leveraging its core competency in web hosting at scale for its own operations and then offering this as a service to others. This could have been identified through mapping and analyzing the linkages within their value chain.