Michael Porter's Theory Of Value Chain

Michael Porter (1985) first suggested the concept of value chain to illustrate how value adds along a chain of activities, which leads to an end product or service. The goal of this analysis is to identify activities that are a source of cost or differentiation advantage and to identify those that could yield to the firms/projects competitive advantage, thereby helping to create products or services at a price which the customers are willing to pay for.
Porter distinguishes between two sets of activities. Activities that are directly associated with the creation or delivery of a product or service are termed primary activities and support activities are those that are linked to each primary activity that aims to improve its efficiency and effectiveness.

The linkages are flows of information, goods and services, as well as systems and processes for ad- justing activities. Their importance is best illustrated with some simple examples:
Only if the Marketing & Sales function delivers sales forecasts for the next period to all other depart- ments in time and in reliable accuracy, procurement will be able to order the necessary material for the correct date. And only if procurement does a good job and forwards order information to inbound logistics, only then operations will be able to schedule production in a way that guarantees the delivery of products in a timely and effective manner – as pre-determined by marketing.
In the result, the linkages are about seamless cooperation and information flow between the value chain activities.
In most industries, it is rather unusual that a single company performs all activities from product de- sign, production of components, and final assembly to delivery to the final user by itself. Most often, organizations are elements of a value system or supply chain. Hence, value chain analysis should cover the whole value system in which the organization

This is the dif- ference of the final price the customer pays and the sum of all costs incurred with the production and delivery of the product/service (e.g. raw material, energy etc.). It depends on the structure of the value system, how this margin spreads across the suppliers, producers, distributors, customers, and other elements of the value system. Each member of the system will use its market position and negotiating power to get a higher proportion of this margin. Nevertheless, members of a value system can coop- erate to improve their efficiency and to reduce their costs in order to achieve a higher total margin to the benefit of all of them (e.g. by reducing stocks in a Just-In-Time system).
A typical value chain analysis can be performed in the following steps:
• Analysis of own value chain – which costs are related to every single activity
• Analysis of customers value chains – how does our product fit into their value chain
• Identification of potential cost advantages in comparison with competitors
• Identification of potential value added for the customer – how can our product add value to the customers value chain (e.g. lower costs or higher performance) – where does the customer see such potential
Value chain