The value chain (also known as Generic Value chain) is one of the greatest models introduced by Michael Porter in his book published in 1985 called “Competitive Advantage”. The model demonstrates how a firm can generate more value to their customers by reducing non value adding activities. Theoretical value chain for a manufacturing firm is as follows.
Michael Porter identified that there are two types of activities will be involving with an entity as Primary Activates and Support Activities.
- Inbound Logistics: The process of receiving and handling of raw materials will involved in this activity.
- Operations: The process of raw material conversion into a finished product is considered here.
- Outbound logistics: Handling and distribution of the finished products was considered on this activity.
- Marketing & Sales: the identification of customer needs and the generation of sales.
- Service: the support of customers after the products and services are sold to them.
- Firms Infrastructure: Organizations control systems, culture, structure was considered on this activity.
- Human Resources Management: This activity concerns about employee recruitment, training and development, etc
- Firms IT/technological development: This involves having the Information Technology to support value chain
- Procurement: This concern about purchasing inputs for the organization. This could be materials, suppliers, equipment, etc
How to maximize Entities profits with value chain
Business entities margin/profit can be maximized by reducing and eliminating any non value adding activities of the above value chain. Removing of an unwanted activity means, is a cost saving on the other way. To be more realistic in general a customers who purchase a finished product of an entity do not bother about the process used during the production (other than the emtity is producing medical or some luxury products). Therefore by removing such non value adding activities a firm can maximize their profitability.
E.G: Assume that a manufacturing entity has following process flow in terms of their production
As per the flow, the entity has to send the material through a quality inspection prior they being released for production. This step may involve a cost for the entity and by the end of the production line this cost will also represent in the selling price.
Removal of non value adding activity
As shown above the entity can remove initial quality check by agreeing the supplier to deliver the quality material for the production since by the end of the product line final product is being again checked for the quality as Toyota does with their Just in time (JIT) production method. Once the initial quality checking was removed from the process, from one side the process becomes little quick and on the other side, a cost saving shall occur which can be transferred to end user or the entity itself can use to maximize their profitability.
Further benefits of values chain other than profit maximization
Further to above mentioned cost advantage an entity use value chain principles to Differentiate them self in market
What if differentiation? Differentiation is proving a different experience to your customer where your rivals can not provide.
Differentiation from value chain?
This seems little questionable at once. But looking more closely on the value chain there can be noted many ways to provide differentiated experiences for customers. Looking more closely on the concept this is all about removing any unwanted process of the business process. Isn’t this leads to improve the efficiency of the entities business process?
E.g: Assume a production company has following distribution process.
As per the illustrated example, entity has to transport their goods to a whole seller where whole seller has to re-transport them to a retail seller before them being sold to customers. When looking at a more realistic manner same goods has to be transported twice before they reach their customers. This process consumes more time, cost and further this leads to carbon omissions due to dual transportation involved.
However the entity can re-design this distribution process where they can differentiate than from their competitors. They can simply remove the whole seller and use advance technology to give a better way of product purchasing.
Entity can open up a web site by including product details where customers go through at their disposal. Therefore the customers will be able to have a look at the products online and can buy it from a retail seller or if the entity can provide online purchasing options, customers will be able to receive the goods directly from the factory to their door steps.
This shall clearly allow the entity to differentiate themselves in a competitive market..
Coming up next, How to apply value chain to a service organization.