Examples Of Value Chain Analysis

Many theories have been proposed to explain and indicate how value can be added through a business’s activities and operations. This section will represent the literature review and theoretical background of the value chain analysis approach. For this approach a brief overview and summary will be discussed in the paragraphs to follow. Although available literature covers a wide variety of such theories, this review will focus on Porter’s Value Chain. The theme of Porter’s value chain will emerge repeatedly throughout the literature reviewed. The abovementioned topic is represented in a variety of literature contexts, this paper will primarily focus on the value that can be added through using Porter’s Value chain for analysing this.

The Value

The value chain is primarily based on a generic value chain model by Michael Porter (Porter 2001), that was developed in 1985 and used to explore Porter’s model of competitive advantages through cost leadership strategy or differentiation. This is Porter’s three generic strategies (Porter 1980) and can be applied to any form or size of business. These generic strategies of Porter details the interaction between market focus strategies, cost minimization strategies, product differentiation strategies and product differentiation. It is unfortunately so that many businesses fall into the trap of being “stuck in the middle” of the generic strategies of cost leadership and differentiation. Businesses don’t offer the high value for money and distinctive services or products that you get from a differentiated business. Low prices also don’t get offered from buying from the cost leader. This situation is caused because the managers of the business is not informed well enough to know that they should choose between the two strategies. By trying to compromise, the business becomes “stuck in the middle” and it creates a

By implementing the abovementioned point of view, a chain of activities well known to all businesses was described by Porter. Porter divided the business activities into primary and support activities, as Fig. 1.2 shows. By breaking down the value chain into primary and support activities it allows a business to understand which components of its operations creates value and which components do not create any value (Ketchen and Hult 2007).

The profit margin is the value that’s captured and created by a company:

Value Captured and Created – Cost of Creating that Value = Margin

If a company creates more value, it is likely that the company would be more profitable. By providing more value to the business’s customers, will build a competitive advantage for the business itself.

Hergert and Morris (1989) stated the following: “The Fundamental notion in the value chain analysis is that a product gains value as it passes through the vertical stream of production within the firm. When created value exceeds costs a profit is generated.”

Primary activities can be directly related to the maintenance and support of a product or service, physical creation, sales and distribution after-sales service. More defined this involves the inbound logistics, operations, outbound logistics, marketing and sales and after-sales service