PORTER'S VALUE CHAIN: ACTIVITIES AND WHAT IT IS FOR - DUDAS - 2025

The value chain Porter is the set of activities carried out by a company operating in a specific industry from procurement of raw materials to deliver a product or service that is valuable to the market.

Porter proposed a general-purpose value chain that companies can use to examine all of their activities and see how they are connected. Understanding how a business creates value and looking for ways to add even more value are key elements in developing a competitive strategy.

Michael Porter analyzed it in his well-known book Competitive advantage, published in 1985, where he first introduced the concept of the value chain. The idea of ​​the value chain is based on the process vision of organizations. It is about being able to see a production or service company as a system.

This system is composed of subsystems, each one with input materials, transformation processes and output products. Input materials, transformation processes and output products involve the acquisition and consumption of resources: money, labor, materials, equipment, buildings, land, administration and management.

Products go through a chain of activities in order, and as a result of each activity the product gains value. The chain of activities gives products more added value than the sum of the added values ​​of all activities.

The more value an organization creates, the more profitable it can be; And by providing more value to customers, you create a competitive advantage.

Activities

The strength of Porter's value chain is that it focuses on systems and how inputs are transformed into finished products, with the customer as the central point, rather than looking at departments and types of accounting expenses.

Using this approach, Porter detailed a chain of activities that are common to all companies, dividing them into core and support activities.

Companies use these core and supporting activities as "building blocks" to create a valuable product or service.

Main activities

They are directly related to the production, sale, maintenance and support of a product or service. They consist of the following:

Inbound logistics

They are all the processes related to the reception, storage and internal distribution of raw materials. Vendor relationships are a key factor in creating value here.

Operations

They are transformation activities that change raw materials into products to be sold to customers. Here, operating systems create value.

Outbound logistics

These activities are what deliver the product or service to the customer. They are elements such as collection, storage and distribution systems, and can be internal or external to the organization.

Marketing and sales

They are the processes used to persuade customers to buy from the company instead of its competitors. Here are sources of value the benefits that the company offers and how well it communicates them.

Service

They are the activities related to maintaining the value of the product for customers after they have been purchased.

Support activities

They provide support to the main activities. Each support activity can play roles in different core activities.

For example, Purchasing supports Operations with certain activities, but also supports Marketing and Sales with other activities.

Purchases

This is what the company does to obtain the resources it needs to operate. It includes finding suppliers and negotiating the best prices.

Human resources management

This is how a company recruits, hires, trains, motivates, rewards and retains its workers. People are an important source of value. Companies can create a clear competitive advantage with good human resource practices.

Technological development

It is related to the management and processing of information, as well as to the protection of a company's knowledge base.

They are sources of value creation, minimizing information technology costs, keeping up with technological advances and taking care of technical excellence.

Financial infrastructure

They are the support systems of a company and the functions that allow it to maintain its daily operations. Accounting, legal and general management are examples of the necessary infrastructure that companies can use to their advantage.

What is it for?

The way in which the activities of the value chain are carried out determines their costs and affects their profits. This tool can help to understand the sources of value of a company.

The value chain approach quickly moved to the forefront of management as a powerful analytical tool for strategic planning.

The value chain concept can be applied to both supply chains and entire distribution networks. Delivering a combination of products to the end customer will mobilize different economic factors, each managing its own value chain.

This approach could also be an excellent alternative for evaluating companies when you have publicly known competitor data.

For example, the company in question is compared to a known industry; This gives you a better idea of ​​its value by creating useful correlations with downstream companies.

Values ​​system

The synchronized industry-wide interaction of these local value chains creates an extended value chain, sometimes global in scope. Porter calls this large interconnected system of value chains the "value system."

A value system includes the value chain of a company's supplier, that of the company itself, that of the distribution channels and that of the company's buyers.

Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a manufacturer may require that its parts suppliers be located close to its assembly plant to minimize the cost of transportation.

By exploiting the bottom-up and bottom-up information that flows along the value chain, companies can try to bypass middlemen, creating new business models or creating improvements to their value system.

Use with other models

After the value has been analyzed and the contributing parts of the business have been identified, other models can be used alongside the value chain to assess how these areas can be improved.

For example, a SWOT analysis can be used within the 'Outbound logistics' activity to understand what your strengths and weaknesses are and what opportunities there may be to improve that area, or to identify threats to what may be a critical part of the business. value of the delivery system.

Likewise, other models can be used to evaluate performance, risk, market potential, environmental waste, among other aspects.

Analysis of the value chain

This analysis links systems and activities together and demonstrates the effect this has on costs and benefits. Clarifies where the sources of value and losses can be found in the organization.

There are four basic steps that must be followed if the value chain is to be used as an analysis model.

Step one: establish the sub-activities for each activity

It is determined which sub-activities defined generate value for each main activity. There are three different types of sub-activities:

Direct subactivities generate value on their own. For example, in a book publisher's sales and marketing subactivity, direct subactivities include calling bookstores, advertising, and selling online.

Indirect subactivities enable direct subactivities to run smoothly. In the book publisher sales and marketing subactivities, indirect subactivities include managing the sales team and maintaining customer records.

Quality assurance sub-activities ensure that both direct and indirect sub-activities meet the necessary standards.

For the book publisher's sales and marketing subactivity, this could be proofreading and ad editing.

Step two: identify sub-activities of each support activity

The sub-activities that create value in each main activity are determined for each of the support activities.

For example, consider how human resource management adds value to operations, inbound logistics, marketing and sales, etc. As in step one, indirect, direct and quality subactivities are sought.

Then the various value-creating sub-activities in the company's infrastructure are identified. These will generally be cross-functional in nature, rather than specific to each major activity.

Step three: identify the links

Links are found between the value sub-activities that have been identified. It will take time, although links are key to increasing competitive advantage within the value chain framework.

As an example, there is a link from sales team training (HR subactivity) to sales volume. There is another link between order delivery time and frustrated customer phone calls waiting for their shipments.

Step four: look for opportunities to increase value

Each of the sub-activities and links that have been identified is reviewed, and it is considered how they can be optimized so that the value offered to customers is the maximum possible.

These are quantitative and qualitative sub-activities that can eventually contribute to increasing customer base, competitive advantage, and profitability.

References

1. Mind Tools (2018). Porter's Value Chain, Understanding How Value Is Created Within Organizations. Taken from: mindtools.com.
2. IfM Management Technology Policy (2016). Porter's Value Chain. Taken from: ifm.eng.cam.ac.uk.
3. Wikipedia, the free encyclopedia (2018). Value chain. Taken from: en.wikipedia.org.
4. Hitesh Bhasin (2017). Porter's Value Chain - Value Chain of Porter. Marketing91. Taken from: marketing91.com.
5. Van Vliet (2010). Porter's Value Chain Analysis. ToolsHero. Taken from: toolshero.com.