Value Chain Analysis

Porters most brilliant but least

used/understood tool

Creating Value
By exploiting their competitive advantages, firms create
value.
Value is measured by:
Product performance characteristics
Product attributes for which customers are willing to
pay
Firms create value by innovatively bundling and
leveraging their resources and capabilities.
Superior value Above-average returns

Importance of Perceived Value

Buyers seldom pay for value that is not perceived
Price premium of a differentiation strategy reflects
Value actually delivered to the buyer and
Value perceived by the buyer

Actual and perceived value can differ when buyers

are unable to assess their experience with a product

Signaling Value as Well

as Delivering Value

Incomplete knowledge of buyers causes them to

judge value based on such signals as
Price
Attractive packaging
Extensive ad campaigns
Ad content and image
Characteristics of seller
Facilities
Customers
Professionalism and personality of employees
Signals of value may be as important as actual value when
Nature of differentiation is hard to quantify
Buyers are making first-time purchases
Repurchase is infrequent
Buyers are unsophisticated

Value Chain Analysis

Identifies clusters of activities providing
particular benefit to customers
Highlights activities which are less efficient
and which might be de-emphasised or
outsourced
Requires managers to think about the role of
such activities
Can be used to identify the cost and value of
activities

Value Chain Analysis

Allows the firm to understand the parts of
its operations that create value and those
that do not.
A template that firms use to:
Understand their cost position.
Identify multiple means that might be used to
facilitate implementation of a chosen
business-level strategy.

Value Chain Analysis (contd)

Primary activities involved with:
A products physical creation
A products sale and distribution to buyers
The products service after the sale

Support Activities
Provide the assistance necessary for the
primary activities to take place.

The Value Chain

Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985. Used with
permission of The Free Press, a division of Simon & Schuster, Inc. 1985, 1988 by Michael E. Porter. All rights reserved.

The Value-Creating Potential of

Primary Activities (contd)
Marketing and Sales
Activities completed to provide the means through
which customers can purchase products and to
induce them to do so.
Service
Activities designed to enhance or maintain a products
value
Each activity should be examined relative to competitors
abilities and rated as superior, equivalent or inferior.

The Value-Creating Potential of

Primary Activities: Support
Procurement
Activities completed to purchase the inputs needed to
produce a firms products.
Technological Development
Activities completed to improve a firms product and
the processes used to manufacture it.
Human Resource Management
Activities involved with recruiting, hiring, training,
developing, and compensating all personnel.

The Value-Creating Potential of

Primary Activities: Support
(contd)
Firm Infrastructure
Activities that support the work of the entire value chain
(general management, planning, finance, accounting,
legal, government relations, etc.)
Effectively and consistently identify external
opportunities and threats
Identify resources and capabilities
Support core competencies
Each activity should be examined relative to competitors
abilities and rated as superior, equivalent or inferior.

Value-Creating Activities Associated with the

Cost Leadership Strategy

SOURCE: Adapted with the permission

of The Free Press, an imprint of Simon &
Schuster Adult Publishing Group, from
Competitive Advantage: Creating and
Sustaining Superior Performance, by
Michael E. Porter, 47. Copyright 1985,
1998 by Michael E. Porter.

Value-Creating Activities for

Cost Leadership

Cost-effective MIS

Few management layers

Simplified planning

Consistent policies

Effecting training

Easy-to-use manufacturing
technologies

Investments in technologies

Finding low cost raw materials

Monitor suppliers
performances

Link suppliers products to

production processes

Economies of scale

Efficient-scale facilities

Effective delivery schedules

Low-cost transportation

Highly trained sales force

Proper pricing

Differentiation

Value Chain and Value Network

To diagnose strategic capability
To understand how value is created or lost
in terms of the activities undertaken
The
The value
value chain
chain describes
describes the
the activities
activities within
within
and
and around
around an
an organisation
organisation which
which together
together
create
create aa product
product or
or service
service

The Value Network

Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985. Used with
permission of The Free Press, a division of Simon & Schuster Inc. 1985, 1988 by Michael E. Porter. All rights reserved.

The Value Network

The value network
Set of inter-organisational links/relationships necessary
to create a product or service

Specialisation of roles
Underpins excellence in creating best-value products

Need to understand whole process

Where cost/value is created in supply/distribution chains
How to manage links to improve customer value
How product quality is a function of linked activities of
manufacturer, suppliers and distributors

The Value Network Key

Questions (1)

Where are cost and value created?

Which activities are vital to an organisation?

Retain direct control of core capabilities
Outsource less important activities

Where are the profit pools?

Potential profits at different parts of the value network
Availability of competences to compete in these areas

The Value Network Key

Questions (2)
Make or buy?
Outsourcing
Develop competence in influencing performance of other
organisations

Who are the best partners?

What kind of relationships are required?

The Difference between Traditional Cost Accounting and

Activity Based Cost Accounting: The Case of Purchasing
Traditional Cost Accounting
Categories in purchasing Department
Budget

Cost of Performing Specific

Purchasing Department Activities
Using Activity - Based Cost accounting

Wages and Salaries

Evaluate supplier
capabilities

340,000

Employee benefits

95,000

Supplies

21,500

100,300
82,100

Process purchase orders

Travel
Depreciation
Other fixed charges (office
space, utilities)
Miscellaneous operating
expenses

Collaboration with suppliers

on just-in-time deliveries

140,200

Data sharing activities with

suppliers

59,500

Check quality of items

purchased

94,100

Check incoming deliveries

against purchase orders

48,450

12,400
19,000

112,000

15,250
40,250

Dispute resolution
100,200
Internal administration

640,150

640,150