INTRODUCTION :
A value chain is a chain of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market.
The concept comes from business management and was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.
The idea of the value chain is based on the process view of organizations, the idea of seeing a manufacturing (or service) organization as a system, made up of subsystems each with inputs, transformation processes and outputs.
Inputs, transformation processes, and outputs involve the acquisition and consumption of resources - money, labour, materials, equipment, buildings, land, administration and management.
How value chain activities are carried out determines costs and affects profits.
How value chain activities are carried out determines costs and affects profits.
FIRM LEVEL :
The appropriate level for constructing a value chain is the business unit, not division or corporate level. Products pass through activities of a chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities.
The activity of a diamond cutter can illustrate the difference between cost and the value chain. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. Typically, the described value chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of the business, e.g. ISO 9001.
A firm's value chain forms a part of a larger stream of activities, which Porter calls a value system .
A value system, or an industry value chain, includes the suppliers that provide the inputs necessary to the firm along with their value chains.
A value system, or an industry value chain, includes the suppliers that provide the inputs necessary to the firm along with their value chains.
After the firm creates products, these products pass through the value chains of distributors (which also have their own value chains), all the way to the customers. All parts of these chains are included in the value system. To achieve and sustain a competitive advantage, and to support that advantage with information technologies, a firm must understand every component of this value system.
Primary activities:
1. Inbound Logistics:
Arranging the inbound movement of materials, parts, and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses, or retail stores.
2. Operations:
Concerned with managing the process that converts inputs (in the forms of raw materials, labor, and energy) into outputs (in the form of goods and/or services).
3.Outbound Logistics:
It is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user.
4.Marketing and Sales:
Selling a product or service and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.
5. Service:
Includes all the activities required to keep the product/service working effectively for the buyer after it is sold and delivered.
Support activities:
1.Procurement:
The acquisition of goods, services or works from an outside external source.
2.Human Resources Management:
Consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel.
3.Technological Development:
Pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm's transformation of inputs into outputs.
4. Infrastructure:
Consists of activities such as accounting, legal, finance, control, public relations, quality assurance and general (strategic) management.
INDUSTRY-LEVEL
An industry value-chain is a physical representation of the various processes involved in producing goods (and services), starting with raw materials and ending with the delivered product (also known as the supply chain).
It is based on the notion of value-added at the link (read: stage of
production) level. The sum total of link-level value-added yields total
value.
Advantages Of Value Chain Analysis
1. The value chain
is a very flexible strategy tool for looking at business, competitors and the respective places in the industry’s value system.
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2.The value chain can be used to diagnose and create competitive advantages on both cost and differentiation.
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3. It helps in understanding the organisation issues involved with the promise of making customer value commitments and promises because it focuses attention on the activities needed to deliver the value proposition.
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4. Comparing a business model with thecompetitors using the value chain can give you a much deeper understanding of your strengths and weaknesses to be included in your SWOT analysis.
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5. It can be adapted for any type of business – manufacturing, retail or service, big or small.
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2.The value chain can be used to diagnose and create competitive advantages on both cost and differentiation.
.
3. It helps in understanding the organisation issues involved with the promise of making customer value commitments and promises because it focuses attention on the activities needed to deliver the value proposition.
.
4. Comparing a business model with thecompetitors using the value chain can give you a much deeper understanding of your strengths and weaknesses to be included in your SWOT analysis.
.
5. It can be adapted for any type of business – manufacturing, retail or service, big or small.
IMPLICATIONS OF VALUE CHAIN :
Value chain analysis (VCA) can expose strategic and operational misalignments within chains, and the consequential misallocation of resources, and hence opportunities for improvements which create value and economic sustainability.VCA variants need to be developed which incorporate all three pillars of sustainability.The development of sustainable VCA tools should identify business opportunities consistent with Porter and Kramer’s imperative for value chains to create shared value between business and society.
Originality/value – Adopting the broader dimensions identified will allow VCA to become more widely applicable, and more relevant in business scenarios where there is a growing imperative to include social and environmental impacts into “mainstream” business strategies.
