Value Chain Analysis
Porter's (1985) value chain framework analyzes the value creation at the firm level. Value chain analysis decomposes the firm into its activities and then studies the economic implications of those activities. He suggested that the organisation is split into ‘primary activities' and ‘support activities'.
Primary Activities are: Operations, Outbound Logistics, Marketing, Sales and Services. The support activities assist the primary activities in helping the organisation to achieve its competitive advantage. They include: Procurement, Human Resource Management and Finally, Firm Infrastructure
The value chain analyzes all primary and support activities of an enterprise, but also can be applied together to help the organization gain a competitive advantage.
The value chain refers to the product increase in value, as it moves through the different areas of the company.
The idea of the value chain, introduced by Porter, Michael E. (1985) focuses on that organizations should think and act as a joint entity, which begin to develop new products or services (buying what inputs) and end with the satisfaction of consumers, always striving to meet the interests of the company (benefits, profitability).
A firm is profitable if the value it creates exceeds the cost of producing the product. A competitive advantage over rivals is achieved by producing the same competition but at a lower price or can also be achieved by differentiation, which could put higher prices.
The value chain is key to determining the strategy, either cost leadership or differentiation. The overall costs of business are determined by the sum of all individual costs of each activity. If you control those costs with the value chain, it can achieve a competitive advantage over competitors.
If you link the activities and value chains are joined, for example, purchase of raw materials and production, it's overwhelming for a deeper analysis of the activities.
The firm's competitive advantage depends not only on the specific value chain activity; joint action is needed across the organization.
ADVANTAGES AND DISADVANTAGES
Some of the advantages of this model are:
The analysis of the value chain can be displayed quickly and accurately the weaknesses and threats of the company. It also helps managers to develop an effective strategy, and shows them how to develop the strategy. Porter, M. E. (1990).
This model helps to analyze the cost structure of the company, clearly and effectively. Moreover, managers also show the opportunities for specialization of their products.
Porter focuses on analyzing the activities that created a competitive advantage and then the links necessary to implement it.
This model demonstrates that the company need to analyze only direct competitors, not all companies competing in the sector.
This model is also a clear example of how to make a product, taking into account all the phases through which the product passes. Thompson, A & Strickland, J. A. (2003)
By contrast, some of the most important disadvantages of this model are:
The value chain analysis only direct rivals, ignores the threat of potential entrants, or new substitute products.
The value chain is a complicated model to install in the company in the short term. If the company is focused on the analysis of costs by activities should be analyze our cost structure, and this involves a lengthy and costly process. Pearson, G. (1999)
Furthermore, to increase product differentiation, it takes many resources and much time for research. Porter focuses on the analysis of the tangible products with this model not specify anything for the services or intangible assets. The company always depends on the client. The client decides whether or not to buy the product, if you are willing to pay a higher price for that differentiation. Henderson, Bruce D. (1989).
Hine (1993) elaborated a critique of Porter's model, and then published his own model, the value chain of Hine which was published in 1993.
Peter Hines said that Porter's model helps to improve the strategy of managers in areas such as: materials management and customer that placed a very important position within the company.
The main problems found by Hines (1993) at the Porter model were:
Porter's model focused only on achieving profitability and profit ever in the consumer satisfaction. If the consumer is satisfied, the purchase, thus increasing profits.
In the supply chain, as the company is divided into two parts, Porter always had the idea of working together. Hines believed that the primary activities should have more importance.
The model of Porter's value chain is a static model, based on the past, where growth is very slow. Hines criticised this aspect, because the present model could not be applied because the environment of the 21st century is dynamic. For all these criticisms, Hines decided to create his own alternative model.
In this new model, he solved many of Porter's model errors. Some of the features of this new model are:
This model focuses on meeting the business objectives, using available resources. The customer was made a key factor of the process, as it is demanded by the good produced. With this model, companies can co-operate, and can avoid rivals.
According to Porter's model competitive advantage can not be understood by looking at the company as a whole. The benefits derived from the many discrete activities, a firm performs - the design, production, marketing, supply and product support. Each of these activities may contribute to the relative cost position of the company and create a basis for differentiation
Stabell and Fjeldstand (1998) believed it was impossible to achieve real competitive advantage, without analyzing the relations between activities. Porter's model is complicated to install, because it provides data with rigor and simply raises a hypothesis for a stable environment. A lot of managers reject this model by providing simple and abstract results.
Charles Stabell and Fjeldtad (1998) in the Norwegian School of Management criticized for not being valid model for services or intangible products. The model was designed only to tangible products. Currently over half of economic activity is developed by companies dedicated to the service sector. In his view, the value chain does not sufficiently value creation logic of these organizations
Norman and Ramirez (1993) believed that the main function of the strategy is "the art of creating value." They create their own strategy to with Porter's value chain model. Porter's model was conceived as a process of adding value to resources in an organized way that will enable businesses to achieve and sustain competitive advantage.
These authors are in agreement with Porter, because the model of the value chain is a good model to obtain a competitive advantage in costs, and is ideal for achieving goals. With this model an organisation can obtain various solutions for the same problem.
The value chain shows the options of investing in each activity, with the cost structure.
Norman and Ramirez also propose an alternative, one that is claimed to be more appropriate under its dynamic character. The rationale for a "new model" is the observation that many companies no longer limited to a value added: the most successful re-creation of value through the recognition of a constellation is "value".
This last criticism focuses on the failure of the model in the industry; the services in the economic sectors have changed.
These are now dynamic, and focused on the service sector. The business world has changed and become more sophisticated, this model was used for many years, especially in industrial companies. In the 21st century, most firms engaged in services, and they do not have the same actual operation of the logistics of entry or exit of goods.
The operations in the manufacturing sector are very different from the service industry. In manufacturing, operations can be taken in isolation from the client. In the services sector, production and use of the service occur simultaneously. The infrastructure needed in the service industry may also be different from that of the service industry.
Supporting activities may be similar in most cases, however, how to manage them may be different; therefore, they need to consider the elements of marketing. This model is totally inappropriate to use in companies which are engaged in services.
REFERENCES FOR THIS MODEL:
· Gabriel, E. (2005) “Managing the Expanded Marketing Mix (EMM): A critical Perspective Approach” The African Journal of Finance and Management.
· Henderson, Bruce D. (1989) “The Origin of Strategy”. Harvard Business Review 1989 pp: 139-43.
* Hines, P. (1993) “Integrated material management: the value cahin redefined”, International journal of Logistics Management, Vol 4, No.1 1993, pp 13-22.
* Lysons, Kennetth and Farrington, Brian. (2006). Purchasing and Supply Chain Management. Prentince Hall pp 103-109.
* Pearson, G. (1999). “Strategy in Action” Prentice Hall Financial Times.
* Porter, Michael E. (1985). “Competitive Advantage: Creating and Sustaining Superior Performance”. The Free Press.
* Porter, M. E. (1990). The competitive advantage of nations, New York: Free Press.
* Porter, M. (1996) "What is Strategy", Harvard Business Review, Nov/Dec 1996.
* Stabell, C B., Fjeldstad O D. (1998) “Configuring Value for Competitive Advantage: On chains, Shops, and Network”. Strategic Management Journal, Vol 19, 413-437.
* Thompson, A. A. & Strickland, J. A. (2003). Strategic Management: Concepts and Cases 13th Edition, McGraw-Hill.