Page 92 - DMGT550_RETAIL_MANAGEMENT

Unit 5: Retailing Strategy

5.5 The Retail Value Chain Notes

To get a bird’s eye view of an organisation’s operations is the purpose of the value chain model
of corporate activities, developed by Michael Porter. Competitive advantage, says Porter, arises
out of the way in which firms organize and perform activities. One should keep in mind that in
Porter’s analysis, retail business activities are not the same as retail business functions.
1. Functions are the familiar departments of a retail business and reflect the formal
organizations structure and distribution of labour.
2. Activities are what actually goes on, and the work that is done. A single activity can be
performed by a number of functions in sequence.

Activities are the means by which a firm creates value in its products. Activities incur costs, and
in combination with other activities, provide a product or service, which earns revenue. Firms
create value for their buyers by performing these activities. The ultimate value a firm creates is
measured by the amount customers are willing to pay for its products or services above the cost
of carrying out value activities. A firm is profitable if the realized value to customers exceeds the
collective cost of performing the activities. There are two points to note here:
1. Customer’s purchase value, which they measure by comparing a firm’s products and
services with similar offerings by competitors.
2. The retail business creates value by carrying its activities either more efficiently than
other retail businesses, or combined in such a way as to provide a unique product or
service. Porter analysed the various activities of an organization into a value chain. Figure
5.1 depicts Porter’s Value Chain model.
Figure 5.1: Porter’s Value Chain

Source: www.12manage.com
This is a model of value activities and the relationships between them:
1. Primary Activities are those directly related with production, sales, marketing, delivery
and services. The diagram shows five primary activities.
2. Inbound logistics are those activities involved with receiving, handling and storing inputs
to the production system.

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