Value Chain Overview

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VALUE CHAIN ANALYSIS :

An Overview

By:

Dr. Rizalito L. GregorioUNIVERSITY OF THE PHILIPPINES



THE VALUE CHAIN

A TOOL DEVELOPED BY

DR. MICHAEL PORTER OF

HARVARD BUSINESS SCHOOL



THE VALUE CHAIN

CAN BE USED TO EXAMINE THE VARIOUS ACTIVITIES OF THE FIRM AND HOW THEY INTERACT IN ORDER TO PROVIDE A SOURCE OF COMPETITIVE ADVANTAGE BY:

- PERFORMING THESE ACTIVITIES BETTER

OR - AT A LOWER COST THAN THE COMPET-

ITORS



MARGIN

MARGIN

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND

LOGISTICS

OPER-

ATIONS

OUTBOUND

LOGISTICS

MARKET-ING

& SALES

SERVICE

PRIMARY ACTIVITIES

SUP-

PORT

ACTIV-

ITIES

THE GENERIC VALUE CHAIN



TYPES OF FIRM ACTIVITIES

1. PRIMARY

- THOSE THAT ARE INVOLVED IN THECREATION, SALE AND TRANSFER OFPRODUCTS (INCLUDING AFTER-SALES SERVICE)



TYPES OF FIRM ACTIVITIES

2. SUPPORT

- THOSE THAT MERELY SUPPORT THEPRIMARY ACTIVITIES



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FIRM INFRASTRUCTURE



PROCUREMENT

INBOUND

LOGISTICS

OPER-

ATIONS

OUTBOUND

LOGISTICS

MARKET-ING

& SALES

SERVICE

PRIMARY ACTIVITIES

SUP-

PORT

ACTIV-

ITIES




PRIMARY ACTIVITIES

1. INBOUND LOGISTICS

- CONCERNED WITH RECEIVING,STORING, DISTRIBUTING INPUTS

(e.g. HANDLING OF RAWMATERIALS, WAREHOUSING,INVENTORY CONTROL)



PRIMARY ACTIVITIES

2. OPERATIONS

- COMPRISE THE TRANSFORMATION OFTHE INPUTS INTO THE FINALPRODUCT FORM (E.G. PRODUCTION,

ASSEMBLY, AND PACKAGING)



PRIMARY ACTIVITIES

3. OUTBOUND LOGISTICS

- INVOLVE THE COLLECTING, STORING, AND DISTRI BUTING THE PRODUCT TOTHE BUYERS

(e.g. PROCESSING OF ORDERS,WAREHOUSING OF FINISHED GOODS, ANDDELIVERY)



PRIMARY ACTIVITIES

4. MARKETING AND SALES

- HOW BUYERS CAN BE CONVINCEDTO PURCHASE THE PRODUCT

(e.g. ADVERTISING, PROMOTION,DISTRIBUTION)



PRIMARY ACTIVITIES

5. SERVICE

– INVOLVES HOW TO MAINTAIN THE VALUE OF THE PRODUCT AFTER IT IS

PURCHASED(e.g. INSTALLATION, REPAIR,MAINTENANCE, AND TRAINING)



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FIRM INFRASTRUCTURE



PROCUREMENT

INBOUND

LOGISTICS

OPER-

ATIONS

OUTBOUND

LOGISTICS

MARKET-ING

& SALES

SERVICE

PRIMARY ACTIVITIES

SUP-

PORT

ACTIV-

ITIES




SUPPORT ACTIVITIES

1. PROCUREMENT

-CONCERNED WITH THE TASKS OFPURCHASING INPUTS SUCH AS RAWMATERIALS, EQUIPMENT, AND EVENLABOR



SUPPORT ACTIVITIES

2. TECHNOLOGY DEVELOPMENT

– THESE ACTIVITIES ARE INTENDED TOIMPROVE THE PRODUCT AND THE

PROCESS, – CAN OCCUR IN MANY PARTS OF THE

FIRM



SUPPORT ACTIVITIES

3. HUMAN RESOURCE MANAGEMENT

– INVOLVED IN RECRUITING,

HIRING, TRAINING, DEVELOPMENT

AND COMPENSATION



SUPPORT ACTIVITIES

4. FIRM INFRASTRUCTURE

- THE ACTIVITIES WHICH ARE NOT SPECIFIC TO ANY ACTIVITY AREA SUCH AS GENERAL MANAGEMENT, PLANNING, FINANCE, AND ACCOUNTING ARE CATEGORIZED UNDER FIRM

INFRASTRUCTURE.



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FIRM INFRASTRUCTURE



PROCUREMENT

INBOUND

LOGISTICS

OPER-

ATIONS

OUTBOUND

LOGISTICS

MARKET-ING

& SALES

SERVICE

PRIMARY ACTIVITIES

SUP-

PORT

ACTIV-

ITIES




USES OF VALUE

CHAIN ANALYSIS

THE SOURCES OF THE COMPETITIVE ADVANTAGE OF A FIRM CAN BE SEENFROM ITS DISCRETE ACTIVITIES AND

HOW THEY INTERACT WITH ONE ANOTHER.



USES OF VALUE

CHAIN ANALYSIS

THE VALUE CHAIN IS A TOOL FOR SYSTEMATICALLY EXAMINING

THE ACTIVITIES OF A FIRM AND HOW THEY INTERACT WITH ONE

ANOTHER AND AFFECT EACH OTHER’S COST AND PERFORMANCE.



USES OF VALUE

CHAIN ANALYSIS

A firm gains a competitive advantage by performing these activities

better or at lower cost than competitors.



VALUE

THE VALUE IS THE TOTAL AMOUNT (i.e.

TOTAL REVENUE) THAT BUYERS AREWILLING TO PAY FOR A FIRM’S PRODUCTS.

THE DIFFERENCE BETWEEN THE TOTAL VALUE (OR REVENUE) AND THE TOTALCOST OF PERFORMING ALL OF THE FIRM’S

ACTIVITIES PROVIDES THE MARGIN



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MARGIN

FIRM INFRASTRUCTURE



PROCUREMENT

INBOUND

LOGISTICS

OPER-

ATIONS

OUTBOUND

LOGISTICS

MARKET-ING

& SALES

SERVICE

PRIMARY ACTIVITIES

SUP-

PORT

ACTIV-

ITIES




VALUE ACTIVITIES

THOSE ACTIVITIES THAT ARE

DISTINCT BOTH PHYSICALLY ANDTECHNOLOGICALLY



VALUE ACTIVITIES

SOME ACTIVITIES ARE MORE VITAL THANOTHERS DEPENDING UPON THE

INDUSTRY.

FOR INSTANCE, MARKETING ACTIVITIESWOULD BE MORE VITAL IN A VERY

COMPETITIVE CONSUMER GOODSINDUSTRY THAN IN A TELEPHONEMONOPOLY.



VALUE ACTIVITIES

SOME ACTIVITIES ARE DIRECT IN

THE SENSE THAT THEY AREDIRECTLY INVOLVED IN CREATING

VALUE FOR THE BUYER.



VALUE ACTIVITIES

SOME ACTIVITIES ARE INDIRECT AND ARE INVOLVED ONLY IN MAKING

IT POSSIBLE TO PERFORM THEDIRECT ACTIVITIES ON A CONTINUING BASIS

(e.g. MAINTENANCE, SCHEDULING,OPERATION OF FACILITIES, RECORD

KEEPING).



VALUE ACTIVITIES

SOME ACTIVITIES ARE PRIMARILY INVOLVED IN QUALITY ASSURANCE

AND ARE INVOLVED MAINLY INENSURING THE QUALITY OF OTHER

ACTIVITIES

(e.g. MONITORING, INSPECTING,TESTING, ETC.)



VALUE ACTIVITIES

EVERY ACTIVITY THAT IS DONE BY A FIRM NEEDS TO BE CAPTURED IN A PRIMARY OR SUPPORT ACTIVITY.



VALUE ACTIVITIES

THE ACTIVITIES WITH DISCRETETECHNOLOGIES AND ECONOMICSSHOULD BE ISOLATED.



VALUE ACTIVITIES

THE VALUE LABELS ARE ARBITRARY ANDTHEY SHOULD BE CHOSEN IN ORDER TO

PROVIDE THE BEST INSIGHT INTO THEBUSINESS.

IT IS ADVISABLE TO ASSIGN THE VALUE

ACTIVITIES TO CATEGORIES THAT BESTREPRESENT THEIR CONTRIBUTION TO A FIRM’S COMPETITIVE ADVANTAGE.



VALUE ACTIVITIES

AN ACTIVITY CAN BE SEPARATED FROMOTHER ACTIVITIES IF IT HAS ANY OF THEFOLLOWING CHARACTERISTICS;

A) HAS A DIFFERENT ECONOMICSCOMPARED TO THE OTHERS

B) HAS A HIGH POTENTIAL IMPACT OF

DIFFERENTIATION AND,C) REPRESENTS A SIGNIFICANT OR

GROWING PROPORTION OF THE COSTOF PRODUCTION OR OPERATION.



VALUE ACTIVITIES

SOME ACTIVITIES SHOULD BE

COMBINED IF THEY ARE NOTIMPORTANT TO COMPETITIVE

ADVANTAGE OF THE FIRM OR IF

THEIR ECONOMICS ARE SIMILAR TOTHE OTHER ACTIVITIES.



ANALYZING THE CHAIN

COVER THE ENTIRE COSTSTRUCTURE OF THE COMPANY



ANALYZING THE CHAIN

BE SURE TO INCLUDE THE SUB-CONTRACTED OR OUTSOURCEDPORTIONS



LINKAGES WITHIN

THE VALUE CHAIN

NOT JUST A COMPILATION OF ACTIVITIES THAT ARE INDEPENDENT OF

EACH OTHER; INSTEAD, IT IS A SYSTEM OF ACTIVITIES

THAT ARE INTERDEPENDENT BECAUSETHEY ARE RELATED BY THEIR LINKAGES.

THROUGH THE LINKAGES, THEPERFORMANCE OF ONE ACTIVITY

AFFECTS THE COST OR PERFORMANCE

OF ANOTHER.



LINKAGES WITHIN

THE VALUE CHAIN

THESE LINKAGES BETWEEN THE

ACTIVITIES SUGGEST THAT THE COST ADVANTAGE OR THE DIFFERENTIATION OF A FIRM WOULD DEPEND NOT JUST ON THECOST REDUCTION OR PERFORMANCE

IMPROVEMENT OF AN INDIVIDUAL ACTIVITY.

DO NOT JUST LOOK AT EACH ACTIVITY INDEPENDENTLY



LINKAGES WITHIN

THE VALUE CHAIN

THE LINKAGES BETWEEN THE ACTIVITIESCAN BE IDENTIFIED BY SEARCHING FOR

WAYS IN WHICH EACH VALUE ACTIVITY AFFECTS OR IS AFFECTED BY OTHERS.

OPTIMIZATION AND COORDINATION

BETWEEN THE VARIOUS ACTIVITIES OFTHE FIRM CAN BE ACHIEVED BY EXPLOITING THESE LINKAGES.



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FIRM INFRASTRUCTURE



PROCUREMENT

INBOUND

LOGISTICS

OPER-

ATIONS

OUTBOUND

LOGISTICS

MARKET-ING

& SALES

SERVICE

PRIMARY ACTIVITIES

SUP-

PORT

ACTIV-

ITIES




VERTICAL LINKAGES

LINKAGES CAN ALSO EXIST OUTSIDE THEFIRM; FOR INSTANCE THERE IS A LINKAGEBETWEEN A FIRM’S CHAIN AND THE VALUE

CHAIN OF ITS SUPPLIERS AND CHANNELS.

e.g. THE ACTIVITIES OF THE RAW

MATERIALS SUPPLIERS AFFECT THE ACTIVITIES OF THE FIRM. SIMILARLY, THE ACTIVITIES OF THE DISTRIBUTOR ALSO AFFECT THE FIRM.



SUPPLIER F I R MCHANNEL /

BUYER

VALUE SYSTEM:

LINKAGES OF ACTIVITIESBETWEEN FIRMS



VERTICAL LINKAGES

THESE LINKAGES CAN PROVIDE

OPPORTUNITIES FOR THE FIRM TOENHANCE ITS COMPETITIVE

ADVANTAGE.



VERTICAL LINKAGES

THE VALUE CHAIN OF A FIRM IS A

PART OF THE VALUE SYSTEM , WHICHIS THE LARGER STREAM OF

ACTIVITIES FROM SUPPLIERS TO

BUYERS.



VERTICAL LINKAGES

BECAUSE OF THE INTERACTIONS

BETWEEN THEM, THE SUPPLIERS AND EVEN THE CHANNELS AFFECT A COMPANY’S VALUE CHAIN.



VERTICAL LINKAGES

THE PRODUCT OF A FIRM

REPRESENTS A PURCHASED INPUTTO THE BUYER’S CHAIN.

DIFFERENTIATION CAN RESULTFROM HOW A FIRM’S VALUE CHAIN

RELATES TO THE VALUE CHAIN OF

ITS BUYER



VERTICAL LINKAGES

VALUE IS CREATED WHEN A FIRMCREATES COMPETITIVE ADVANTAGEFOR ITS BUYER.



VERTICAL LINKAGES

A FIRM CAN ALSO ENTER INTOCOALITIONS WITH INDEPENDENT FIRMSTO ACHIEVE BENEFITS FROM THELINKAGES AMONG THEIR VARIOUS VALUECHAINS.

EXAMPLES OF SUCH COALITIONS ARETECHNOLOGY LICENSES AND JOINT

VENTURES.



COMPETITIVE SCOPE AND

BUSINESS DEFINITION

DEFINE THE BUSINESS UNIT IN

WHICH THE VALUE CHAIN WOULD BEOPTIMAL FOR THE FIRM

e.g. EXPORT SALES DIVISION vs.LOCAL SALES DIVISION



APPLYING THE VALUE

CHAIN TO AN INDUSTRY

THE VALUE CHAINS OF THEDIFFERENT FIRMS WITHIN AN

INDUSTRY VARY FROM ONE ANOTHER

IN FACT, THE DIFFERENCES IN THE VALUE CHAINS AMONG THE

DIFFERENT INDUSTRY PLAYERSPROVIDE THE SOURCE OFCOMPETITIVE ADVANTAGESBETWEEN THESE PLAYERS.



APPLYING THE VALUE


SINCE THE APPLICATION OF THE VALUECHAIN ANALYSIS TO AN INDUSTRY WILL

LIKELY BLUR OR HIDE THESE SOURCES OFCOMPETITIVE ADVANTAGE, DR. PORTER THEREFORE SUGGESTS THAT:

THE BUSINESS UNIT IS THE CORRECTLEVEL TO CONSTRUCT A VALUE CHAIN ANDTHE APPLICATION TO AN ENTIRE SECTOR

OR INDUSTRY IS NOT RECOMMENDED.



APPLYING THE VALUE


NEVERTHELESS, VALUE CHAIN ANALYSISON AN INDUSTRY LEVEL HAS BEENPERFORMED IN NUMEROUS INDUSTRY STUDIES ALL OVER THE WORLD.

THE PEARL 2 PROJECT HAS, THEREFORE,

DECIDED TO UTILIZE THE VALUE CHAIN ANALYSIS IN THE VARIOUS STATE-OF-THESECTOR REPORTS

Value Chain Overview

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