Value Chain and Value Chain Analysis

Operations Management: Processes and Value Chains, 8th editionThis now the unit has dealt with competitive strategy by emphasizing customers and their ultimate role in determining competitiveness by collectively choosing to buy the products or services of one firm over competing alternatives. In this section the focus shifts to firms and what firms do to achieve competitive advantage in implementing their competitive strategies. To address this set of issues, the value chain analysis, a tool developed by Michael E. Porter is utilized. According to Porter, the value chain is “a systematic way of examining all the activities a firm performs and how they interact for analyzing the sources of competitive advantage.

The value chain can be used to organize all the activities of a firm into categories of primary and support activities. value chain Activities are processes or things that are done in a firm. In order to be identified and categorized, they must be distinct; they must have a beginning and an end, which distinguishes them from other activities or operations.

Primary activities constitute the processes by which firms receive inputs (inbound logistics), convert those inputs into outputs (operations), get those outputs to customers (outbound logistics), persuade customers to buy the outputs (marketing and sales), and support customers in using the outputs (service). Support activities are processes which provide support to the primary activities and to each other in terms of purchasing inputs (procurement); improving existing products or developing new products (research and development); dealing with personnel (human resource management); and general management, accounting, finance, and other activities which support the entire organization rather than individual activities (firm’s infrastructure).

Using the value chain and focusing on categories, of activities enables one to see the firm as a collection of activities rather than as an organization chart and administrative units such as the purchasing department, the R&D, the manufacturing division, and the personnel department. This is important because the value chain activities be analysed much more effectively by using the value-chain analysis, firms can then create competitive advantage in the following three ways:

  1. By placing greater or lesser emphasis (allocation of resources, management time and attention) on specific activities than competitors do.
  2. By performing specific activities better (better management, more highly trained people, better-maintained equipment) or differently (using an alternative-presumably new or improved-technology) than competitors do.
  3. By managing linkages among activities better than competitors do.

R&D and Competitive Advantage

On the basis of the previous discussion, the choice of which value chain activity should a firm focus on should be governed by the competitive advantage(s) that the firm is pursuing in implementing its competitive strategy. In other words, if low cost-low price is the strategy, then low-cost technologies should be used, consistent with maintaining acceptable levels of quality, availability, attractiveness, and so forth. (obviously, technology choice interacts with other strategic variables.

For example, low unit costs are often achieved through economies of scale which in the past have depended on mass-production technologies and large customer markets demanding standardized products and services.)

Similarly, if differentiation is the strategy, then activities such as R&D which maximize the specific competitive advantage in terms of providing products capable of higher performance, innovative products, etc, should be used, consistent with the price premium customers are willing to pay for the uniqueness.