Value Chain Analysis
Value Chain Analysis
Value chains are all the activities that products and services in a company undergo from the time of conception to completion. In light of this, value chain analysis evaluates the value that each process adds to the finished product. Michael Porter value chain analysis views the organization as a set of activities that jointly interact to produce the commodity that the customers want (Kaplinsky & Morris, 2000). Consequently, Porter argues that the ability of each department to carry out the specific activities and that of the entire organization to link these activities is the source of competitive advantage for the company.
In addition, Porter distinguishes between primary and support activities in the value chain process. All primary activities are linked to the support activities in order to improve their effectiveness and efficiency. Primary activities can be grouped into five main categories, namely inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities are composed of procurement, technological developments, human resource management, and infrastructures such as finance, planning, and quality control. Margins refer to the profit margins that organizations make due to their ability to link all activities in the value chain process.
Porter Value Chain Model
|Human Resource Development|
|Primary Activities||Inbound Logistics||Operations||Outbound Logistics||Marketing and Sales||Service||Margin|
Source: Kumar & Rajeev, 2016.
Inbound logistics refers to the procurement process of goods and services from suppliers. Operations refer to all the processes involved in converting the raw materials into finished products. Outbound logistics are all the processes involved in the movement of the finished product to end users. Marketing and sales refer to communicating, delivering, and advertising the finished products. Service refers to activities carried after the product has been delivered to the customer. Basically, they include confirming if the activity is working effectively and customers’ satisfaction. An example of a value chain analysis in the manufacture of mobile phones is as follows:
- Procurement of necessary hardware from local suppliers
- Assembling and testing of the phone in the company’s factory and packaging them for distribution
- Distributing the manufactured phone to local and international wholesalers for subsequent sale to retailers and customers
- Marketing the phone in the local and international market in order to increase its demand
- Providing customer care and support services such as warrant and guarantee
Global value chain analysis is a value chain analysis on inter-firm networks that operate on a global scale. In essence, this entails the focusing on the tangible and intangible value adding activities in these networks. Notably, the global value chain analysis is based on four dimensions which are the input-output structure, geographical consideration, governance structure, and institutional context (Gereffi & Fernandez-Stark, 2011). An example of a global value chain analysis is where companies decide to outsource their manufacturing processes in countries where these costs are relatively low such as in China, India, and Mexico. Alternatively, companies may consider both the costs and the geographical locations. For example, global companies may decide to locate their production processes near potential markets. In this case, companies in the US may at times find subcontracting to companies in Canada or Mexico more convenient than to countries that are in far locations such as India or China. Consequently, value chain analysis is an important aspect in business decision making process, and all companies must critically analyze their business strategic decisions to find whether they add the highest value to them.
Gereffi, G., & Fernandex-Stark, K. (2011). Global value chain analysis: A primer. Retrieved from http://www.cggc.duke.edu/pdfs/2011-05-31_GVC_analysis_a_primer.pdf
Kaplinsky, R., & Morris, M. (2000). A handbook for value chain research. Retrieved from https://www.ids.ac.uk/ids/global/pdfs/VchNov01.pdf
Kumar, D., & Rajeev, P., V. (2016). Value chain: A conceptual framework. International Journal of Engineering and Management Sciences, 7(1), 74-77. Retrieved from http://scienceandnature.org/IJEMS-Vol7(1)-Jan2016/IJEMS%20Vol7(1)-12.pdf