Value chain

1. What is value chain?            
            In order to survive and grow in the competitive market, an organization must develop and successfully execute its business strategy.
 Value chain, also known as value chain analysis, is definitely one of the most useful tools that helps business leaders develop and execute their business plans. The concept of value chain was first described and popularized by Michael porter on his 1985 book Competitive Advantage. It views organization as a series of processes, each of which adds value to the product or service for each customer (Baltzan & Phillips, 2009).  Value chain includes all the activities which either directly or indirectly contribute to the finishing of the end products or services. All activities included in the value chain are categorized into two groups—primary value activities and support value activities.

Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services (Baltzan & Phillips, 2009). They are activities that directly involved in making the final products or services available for customer. On the other hand, support value activities, which include firm infrastructure, human resource management, technology development, and procurement (Baltzan & Phillips, 2009), are indirectly involved in the production of the final product or service. Support value activities help support the primary value activities, therefore they are vital for the success of the making the produce or providing the service for customers (Wikipedia).

Value chain sometimes also referred as supply chain; it does not only take into account the organization’s own value-creating activities, but also includes upstream suppliers and downstream channel members who encounter with the organization in the value system (Baltzan & Phillips, 2009). According to the NetMBA website, the activities in the value chain are not isolated from each other, they are often related and interdependent. Linkages may exist between primary activities and also between primary and support activities. For instance, the advance in technology development, one of the support value activities, can lead to the development of a new product which will be easier to deliver and has a larger market. It enables the organization to reduce the delivery cost and expands its market, it adds value to the organization’s value chain and promotes the organization’s competitive advantage.

2. Value Chain Analysis

Value chain is an activities based concept, examining the organization as a value chain or numerous distinct but inseparable value chains allow organization managers to identify the important activities that add value for customers, and then finding IT systems that help support these activities(Wikipedia). According to Tutor2u, there are three sequential steps that must be taken when implementing the value chain analysis, which include:

 (1) Break down a market/organization into its key activities under each of the major headings in the model (Tutor2u). It gives managers a clearer look of the organization’s business process, and makes it easier for them to find the strategy objective.

(2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage (Tutor2u). Cost reduction is one of the main focuses of value chain analysis. By examining the value-adding activities, managers can seize the opportunity of performing cost reduction on the target activities.

(3) Determine strategies built around focusing on activities where competitive advantage can be sustained (Tutor2u). According to Baltzan&Phillips' publication in 2009, there are three different way to development the strategy, stated as followed:

a. Focus on high value-adding activities and try to further enhance their value.

b. Focus on low value-adding activities and try to increase their net value

c. Perform some combination of the two.

            For example, the raising labor and material cost will lead to the cost of production to increase. When that happens, the value of manufacturing activities is lower because its cost is higher. Higher manufacturing cost results in the increase of price, which will become a disadvantage for the organization in the market. To turn manufacturing into high value-adding activities, managers need to develop a strategy that helps lower the manufacturing cost.  One way of doing that is outsourcing, in which manufacturing activities will be allocated to places where labor or material cost is lower. By doing so, the cost of manufacturing is decreased, thus the net value of the manufacturing activities in the value chain is increased.



Wikipedia: Value chain , Michael Porter, Outsourcing

Baltzan, Paige & Phillips, Amy (2009) Business Driven Information Systems. New York: McGraw-Hill/Irwin.

NetMBA. Strategic Management.

Totur2u. Strategy- Value Chain Analysis.







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Also see:Business process, Competitive advantage