Page 102 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes the extent the value it receives exceeds the total cost involved in creating its products. Creating
value for buyers that exceeds the cost of production (i.e. margin) is a key concept used in
analyzing a firm’s competitive position.

Notes The concept of value chain analysis was introduced by Michael Porter in 1985 in his
seminal book “Competitive Advantage”. This concept is derived from an established
accounting practice that calculates the value added to a product by individual stages in a
manufacturing or service process. Porter has applied this idea to the activities of an
organisation as a whole, arguing that it is necessary to examine activities separately in
order to identify sources of competitive advantage.

According to Porter, customer value is derived from three basic sources.
1. Activities that differentiate the product

2. Activities that lower its costs
3. Activities that meet the customer’s need quickly.
Competitive advantage, argues Michael Porter (1985), can be understood only by looking at a
firm as a whole, and cost advantages and successful differentiation are found in the chain of
activities that a firm performs to deliver value to its customers.

6.2.1 Analysis

According to Porter, value chain activities are divided into two broad categories, as shown in
the figure.
1. Primary activities
2. Support activities

Primary activities contribute to the physical creation of the product or service, its sale and
transfer to the buyer and its service after the sale.
Support activities include such activities as procurement, HR etc. which either add value by
themselves or add value through primary activities and other support activities.
Advantage or disadvantage can occur at any one of the five primary and four secondary activities,
which together form the value chain for every firm.

Primary Activities

Inbound Logistics

These activities focus on inputs. They include material handling, warehousing, inventory control,
vehicle scheduling, and returns to suppliers of inputs and raw materials.

Operations

These include all activities associated with transforming inputs into the final product, such as
production, machining, packaging, assembly, testing, equipment maintenance etc.

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