VALUE CHAINS AND BUSINESS STRATEGY

Value chain analysis (VCA) is a process where a firm identifies its primary and
support activities that add value to its final product and then analyze these
activities to reduce costs or increase differentiation.
Value chain represents the internal activities a firm engages in when transforming
inputs into outputs.

he industry value chain

The industry value chain is composed of all the value-creating activities within the industry,
beginning with raw materials, and ending with the completed product delivered to the customer.
So an example the chemical industry value chain may look like:

Raw minerals (e.g. oil, gas, air, water)

Basic chemicals production (e.g. inorganics and organics such e.g. ammonia, salts,
benzene)

Chemical processing

Advanced chemicals production (fertilizers, industrial chemicals, plastics)

Advanced processing and technology (speciality chemicals, consumer care products, life
science)

Consumer

The objective of industry value chain analysis is to work out how your part in the industry value
chain fits in with your suppliers and customers value chains.

The internal value chain

The internal value chain of a business consists of all physically and technologically distinct
activities within the firm that add value to the customers experience. The key to this is
understanding the activities that create a competitive advantage, and then managing those
activities better than other companies in the industry.
Porter (1985) suggested that business activities can fall into two headings: primary activities,
those that are directly involved with the physical creation and delivery of the product or service;
and support activities, which feed both into primary activities and into each other. Support
activities (e.g., human resource management, technology development) are not directly involved
in production, but have the potential to increase effectiveness and efficiency.

Porters generic value chain looks like the following:

Primary activities consist of:

1. Inbound Logistics the receiving and warehousing of raw materials, and their
distribution to manufacturing as they are required
2. Operations the processes of transforming inputs into finished products and services.
3. Outbound Logistics the warehousing and distribution of finished goods.
4. Marketing & Sales the identification of customer needs and the generation of sales.
5. Service the support of customers after the products and services are sold to them.
Support activities consist of:
1. Organizational infrastructure support systems and functions, such as finance, planning,
quality control, and general senior management.
2. Human resource management activities concerned with recruiting, developing,
motivating, and rewarding the workforce of the organization.
3. Technology development managing information processing and the development and
protection of knowledge in the organization.
4. Procurement how resources are acquired for the organization (e.g., sourcing and
negotiating with suppliers).
The internal value chain model is a useful analysis tool for defining a firms core competencies
and the activities in which it can pursue a competitive advantage as follows:

Cost advantage: by better understanding costs and squeezing them out of the valueadding activities.

Differentiation: by focusing on those activities associated with core competencies and

capabilities in order to perform them better than do competitors.

The hard part is actually doing this for you company and there are not that many examples
available. In my next post I will be going through an example step-by-step to get an idea of what
a value chain looks like in practice.

The Value Chain

To analyze the specific activities through which firms can create a competitive
advantage, it is useful to model the firm as a chain of value-creating activities. Michael
Porter identified a set of interrelated generic activities common to a wide range of firms.
The resulting model is known as the value chain and is depicted below:

Primary Value Chain Activities

Inbound
Logistics

>

Operations

>

Outbound
Logistics

>

Marketing
& Sales

>

Service

The goal of these activities is to create value that exceeds the cost of providing the
product or service, thus generating a profit margin.

Inbound logistics include the receiving, warehousing, and inventory control of

input materials.

Operations are the value-creating activities that transform the inputs into the
final product.

Outbound logistics are the activities required to get the finished product to the
customer, including warehousing, order fulfillment, etc.

Marketing & Sales are those activities associated with getting buyers to
purchase the product, including channel selection, advertising, pricing, etc.

Service activities are those that maintain and enhance the product's value
including customer support, repair services, etc.

Any or all of these primary activities may be vital in developing a competitive advantage.
For example, logistics activities are critical for a provider of distribution services, and
service activities may be the key focus for a firm offering on-site maintenance contracts
for office equipment.
These five categories are generic and portrayed here in a general manner. Each
generic activity includes specific activities that vary by industry.

Support Activities
The primary value chain activities described above are facilitated by support activities.
Porter identified four generic categories of support activities, the details of which are
industry-specific.

Procurement - the function of purchasing the raw materials and other inputs
used in the value-creating activities.

Technology Development - includes research and development, process

automation, and other technology development used to support the value-chain
activities.

Human Resource Management - the activities associated with recruiting,

development, and compensation of employees.

Firm Infrastructure - includes activities such as finance, legal, quality

management, etc.

Support activities often are viewed as "overhead", but some firms successfully have
used them to develop a competitive advantage, for example, to develop a cost
advantage through innovative management of information systems.

Value Chain Analysis

In order to better understand the activities leading to a competitive advantage, one can
begin with the generic value chain and then identify the relevant firm-specific activities.
Process flows can be mapped, and these flows used to isolate the individual valuecreating activities.
Once the discrete activities are defined, linkages between activities should be identified.
A linkage exists if the performance or cost of one activity affects that of another.
Competitive advantage may be obtained by optimizing and coordinating linked activities.

The value chain also is useful in outsourcing decisions. Understanding the linkages
between activities can lead to more optimal make-or-buy decisions that can result in
either a cost advantage or a differentiation advantage.

The Value System

The firm's value chain links to the value chains of upstream suppliers and downstream
buyers. The result is a larger stream of activities known as the value system. The
development of a competitive advantage depends not only on the firm-specific value
chain, but also on the value system of which the firm is a part.

Question
Using Value Chains to Model An e-Commerce Business

Answer
A value chain for a product is the chain of actions that are performed by the business to add
value in creating and delivering the product. For example, when you buy a product in a store or
from the web, the value chain includes the business selecting products to be sold, purchasing the
components or tools necessary to build them from a wholesaler or manufacturer, arranging the
display, marketing and advertising the product, and delivering the product to the client.
In the book Designing Systems for Internet Commerce by G. Winfield Treese and Lawrence
C. Stewart, the authors suggest breaking down the aspects of your business into four general
value-chain areas:

Attract -- in which you get and keep customer interest, and includes
advertising and marketing

Interact -- in which you turn interest into orders, and includes sales and
catalogs

Act -- in which you manage orders, and includes order capture, payment, and
fulfillment

React -- in which you service customers, and includes technical support,

customer service, and order tracking.

According to Treese and Stewart, looking at the value chain for your business helps
you to define areas of focus -- what your company is good at, or where you should
concentrate your efforts to gain competitive advantage. Within System Architect,

the Process Decomposition diagram is a handy vehicle for establishing what

business processes are performed within each of these value-chain areas.

The Process Decomposition diagram enables you to model three model elements -- Primary
Process Groups, Process Threads, and Elementary Business Processes. Each of the value-chain
areas listed above can represent a Primary Process Group . Each group contains one or more
process threads (a process thread is a grouping of process flows that deal with a central process -for example, ordering). Each process thread contains the elementary business processes that
make up the thread (these are modeled on one or more Process Chart diagrams for each Process
Thread).