Due to copyright restrictions, this post only introduces the major concepts of Value Chain Analysis. If the technique is to be applied, refer to Michael Porter's great book on competitive aedvanctage. Value Chain Every organization is comprised of processes and activities that are performed to develop,
produce, sell, and distribute its services and products. These activities can be depicted using a value chain. The value chain describes how an organization does what it does [i.e., how it implements its Value Activities Value activities are the activities within an organization that create a product or service of value to the organization's Primary Activities Primary Activities are the activities involved in the development, production, sale, and distribution of an organization's products and services to its customers and after sale support: · receiving, storing, and distributing incoming products [i.e., inputs to the
· creating the final product or service,
· gathering, storing, and distributing the product to the customer,
· marketing and selling the product or service to the customer,
· enhancing or maintaining the product or service.
Support Activities
Support Activities are the activities that sustain primary activities and other support activities:
· purchasing materials/inputs used in the organization's value chain [i.e., primary and support activities],
· developing technologies to improve the product or process,
· employee staffing, training, and compensation,
· support activities [e.g., planning, finance, accounting, legal, and information systems management].
Activity Classification
There are three activity types present for both primary activities and support activities that play a distinct role in an organization's competitive advantage:
· direct activities [i.e.,
value added tasks] that create value for the customer,· indirect activities that support direct activities [e.g., maintenance and administration],
· quality assurance activities that ensure the quality of products and services.
Linkages
Activities in a value chain are not a collection of autonomous activities, but a structure of interdependent activities connected by linkages within the value chain. Linkages are the relationships between activities. To reduce cost and improve performance an organization must not focus on each value activity independently; the analysis must include both related activities and linkages between activities. There are three types of linkages, internal linkages, vertical linkages, and customer value chain linkages.
Internal Linkages
Linkages may exist between activities in the same category or between categories [i.e., primary activities and support activities] within an organization [e.g., the quality of purchased goods affect the cost of production, the quality of a product affects the cost of maintenance].
Vertical Linkages
Linkages exist not only within an organization's value chain but also cross organizational boundaries [e.g.,
suppliers and intermediaries]. These linkages are comparable to an organization's internal linkages and affect the cost or performance of the organization's activities [and vice versa] [e.g., "just in time" inventory management].Customer Value Chain
An organization's product and/or service is an input to its customer's value chain. To be successful an organization must create competitive advantage for its customer through its influence on the customer's value chain [i.e., must have a positive affect on its customer's costs and/or performance].
References
Porter, Michael E. 1998. Competitive Advantage - Creating and Sustaining Superior Performance. New York: The Free Press.