Value chain analysis is identifying the activities which are creating value towards competitive advantage.
Ways to stay ahead of competitors
- Cost leadership
- Differentiation
It involves five ‘primary’ and four support activities and then we have to see if each of them is giving cost advantage or differentiation quality advantage.
Value = Amount customer is ready to pay.
Chain Analysis = Series of activities that a firm performs in order to deliver the product.
Value chain analysis is identifying the activities which are creating value towards competitive advantage.
Concept is given by Michael Porter.
Its objective is to stay ahead of competitors
Ways to achieve objectives as per Porter:
1. Cost leadership
2. Differentiation
It involves five ‘primary’ and four ‘support’ activities and then we have to see if each of them is giving cost advantage or differentiation quality advantage.
Table of Activities:
Porter’s Value Chain:
Primary Activities:1. Inbound Logistics
2. Operations
3. Outbound logistics
4. Marketing and sales
5. Service
Support Activities:
1. Human resource
2. Technology
3. Procurement
4. Infrastructure
| Primary and Support Activities | Low cost, low selling price | High end (differentiation) |
Inbound logistics | Standardised components and materials with little customisation | Premium materials |
Operations | Bulk production | Facilitation of customisation |
Outbound logistics | Bulk delivery and careful management of delivery loads | Flexible (possibly free) delivery |
Marketing and sales | Minimal levels of marketing | High levels of promotion |
Service | Very little service | Extensive service |
Human resource | Use low skilled staff | Use higher skilled staff |
Technology | Use e-procurement to reduce costs procurement | Less use of technology in operations |
Procurement | Seek out cheapest and most efficient supplies | Seek premium suppliers |
Infrastructure | Produce in cheapest locations | National independence |
In an exam situation you might use Porter’s value chain analysis to decide how individual activities might be changed to reduce cost of operation or to improve value of organisation.
Assume that we are producing covers of mobile phone.
Now, initially we used to provide packaging of medium quality so pricing was also according to it. But now we have changed our packaging and made it more attractive & we increased our price.
But, here the customers are not valuing the packaging and they are least concerned about the packaging. So, here our hard work and efforts failed because customer is not valuing the packaging.
But if we think logically from the customer’s perspective that because of premium packaging they are not getting anything extra and still they have to pay price and so even after giving premium packaging our sales will not increase.
So we should review our activities that whether they are creating any cost advantage or quality advantage or not.
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