Michael E. Porter's Value Chain model analysis the flow of value-adding activities in firms

Summary

Michael E. Porter's Value Chain model, introduced in 1985, dissects a company's activities into nine value-adding segments, from raw materials to the customer, aiming to enhance competitiveness. It includes primary activities like operations and service, and support activities such as procurement and HR management. The model emphasizes the importance of continuous evaluation and innovation to ensure activities provide more value than their costs, leading to higher profits. However, critics argue it may be too rigid for modern, order-based manufacturing and lacks adaptability for significant change.

Takeaways

• 📚 The value chain concept was introduced by Michael E. Porter in 1985 in his book 'Competitive Advantage'.
• 🔍 The value chain is a tool used to analyze the flow of value-adding activities from raw materials to the end customer.
• 🔑 It helps to understand the value a company adds at each stage and how it contributes to the company's competitiveness.
• 🔢 The value chain consists of nine value activities and the company's margin, which is the tenth field representing profit.
• ⚙️ Primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service.
• 🛠️ Support activities encompass procurement, technology development, human resource management, and firm infrastructure.
• 📈 The profit margin is dependent on the value provided to the customer and the total cost of the production process.
• 🔄 Regular review and analysis of the nine activities are crucial for a company to improve its competitiveness.
• 🌐 An example of applying the value chain model is given with a manufacturer of wind turbine blades, illustrating how each activity contributes to the value proposition.
• 💡 The model encourages continuous evaluation and improvement to ensure activities provide more value than they cost.
• 🔍 Critiques of the model highlight its rigidity and potential to stifle creativity and readiness for change, as it was developed in the context of 1980s manufacturing practices.

Q & A

Who introduced the concept of the value chain?

Michael E. Porter introduced the concept of the value chain in 1985.

In which book was the value chain concept introduced?

The value chain concept was introduced in the book 'Competitive Advantage' by Michael E. Porter.

What is the primary purpose of the value chain model?

The primary purpose of the value chain model is to analyze the flow of value-adding activities from raw materials suppliers to the end customer, uncovering the company's competitiveness.

How many value activities does the value chain consist of?

The value chain consists of nine value activities.

What is considered the tenth field in the value chain model?

Profit, also referred to as margin, is considered the tenth field in the value chain model.

What is the relationship between the value chain's total value and the company's profit?

The company's profit is the difference between the total value of the product to the customer (the price they are willing to pay) and the total cost of producing the product (the sum of costs in the nine value chain activities).

How are the nine activities in the value chain categorized?

The nine activities are categorized into two groups: primary activities and support activities.

What are the five primary activities involved in the production and selling of the product?

The five primary activities are inbound logistics, operations, outbound logistics, marketing and sales, and service.

What are the four support activities that facilitate the primary activities?

The four support activities are procurement, technology development, human resource management, and firm infrastructure.

How can a company use the value chain model in practice to improve competitiveness?

A company can use the value chain model in practice by regularly reviewing the nine activities to ensure they provide more value to the customer than the costs they accumulate, and making necessary modifications or discontinuations to improve competitiveness.

What is a critique of the value chain model as presented in the script?

A critique of the value chain model is that it was created based on the 1980s manufacturing context and may not fully accommodate modern manufacturing-to-order practices. It is also considered rigid and static, potentially limiting a company's creativity and readiness for change.