Companies generate worth through various stages of production, otherwise known as the value chain, by:
In the dynamic world of business, it's essential to have a clear understanding of how value is created and competitive advantage is achieved. Michael Porter's value chain model, introduced in the 1980s, provides a framework for analysing a company's activities and their impact on its success.
Porter's model divides a company's activities into primary and support activities, each playing a crucial role in the creation, sale, and service of a product or service.
**Primary Activities**
These activities are directly involved in the creation, sale, and service of the product or service:
1. **Inbound Logistics**: This involves receiving, storing, and managing inputs or raw materials coming from suppliers. Efficient inbound logistics can contribute to a positive customer experience by ensuring a steady supply of materials and reducing delays.
2. **Operations**: Transforming inputs into finished products or services is the core of any business. Operational efficiency can lead to cost savings and improved quality, which in turn can enhance customer satisfaction.
3. **Outbound Logistics**: Collecting, storing, and distributing the finished products to customers is crucial for timely delivery and customer satisfaction. Efficient outbound logistics can reduce costs, optimize inventory, and contribute to a positive customer experience.
4. **Marketing and Sales**: Activities to inform buyers, induce purchases, and facilitate sales are essential for generating demand. Effective marketing strategies can increase demand generation, raise awareness of products and services, and create a compelling value proposition.
5. **Service**: Supporting the product or service after sale through maintenance, customer support, etc., is crucial for building customer loyalty and reducing customer churn. Excellent customer service builds trust with customers by addressing concerns promptly and resolving issues efficiently.
**Support Activities**
These support the primary activities by providing infrastructure and resources:
1. **Procurement**: Sourcing and purchasing inputs is a crucial support activity. Smart procurement practices can lead to cost savings through discounts, bulk purchase agreements, and optimized delivery schedules.
2. **Technology Development**: Researching and developing technologies, equipment, software, and technical know-how to improve products or processes is essential for staying competitive.
3. **Human Resource Management**: Recruiting, training, developing, and managing employees is crucial for ensuring a skilled workforce. Effective HR management enhances customer experience, contributes to increased productivity, improved service quality, and customer satisfaction.
4. **Firm Infrastructure**: General management, planning, finance, accounting, legal, and quality control systems that support the entire value chain are vital for the smooth functioning of a business.
This clear separation enables firms to pinpoint competitive advantages and optimize their value creation process effectively. Other activities, such as handling and maintaining technology for other business activities, developing a strong brand, and selecting the right production system, also play significant roles in value creation and cost reduction.
By understanding and optimizing these activities, businesses can improve their performance, create value for their customers, and achieve a competitive advantage in their respective industries.
[1] Porter, Michael E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. Free Press. [2] Porter, Michael E. (1996). On Competition. Harvard Business Review. [3] Porter, Michael E. (2001). Strategy and the Internet. Harvard Business Review. [4] Porter, Michael E. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review.
- To create a sustainable competitive advantage in the business world, technology development is crucial, as it enables firms to stay competitive by researching and developing technologies, equipment, software, and technical know-how.
- In the sales and marketing process, effective investing in understanding the customer's financial needs and preferences can lead to better value proposition and improved customer satisfaction.
