The idea of the value chain is based on the process view of organisations, the idea of seeing a manufacturing (or service) organisation as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources - money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits.
Most organisations engage in hundreds, even thousands, of activities in the process of converting inputs to outputs. These activities can be classified generally as either primary or support activities that all businesses must undertake in some form.
According to Porter (1985), the primary activities are:
- Inbound Logistics- involve relationships with suppliers and include all the activities required to receive, store, and disseminate inputs.
- Operations- are all the activities required to transform inputs into outputs (products and services).
- Outbound Logistics- include all the activities required to collect, store, and distribute the output.
- Marketing and Sales- activities inform buyers about products and services, induce buyers to purchase them, and facilitate their purchase.
- Service- includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered.
Secondary activities are:
- Procurement- is the acquisition of inputs, or resources, for the firm.
- Human Resource management- consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel.
- Technological Development- pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm's transformation of inputs into outputs.
- Infrastructure- serves the company's needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.
FAQs
The basic model of Porters Value Chain is as follows: The term ‚Margin' implies that organizations realize a profit margin that depends on their ability to manage the linkages between all activities in the value chain.
What is Porter's value chain broken up into? ›
Furthermore, Michael Porter splits the value chain analysis into two types of activities: primary and supporting activities. Primary activities create value that exceeds the cost of its creation, therefore generating higher profit margins.
What is an example of a value chain analysis? ›
An example of a value chain is the production process of coffee beans from the farm to the factories for processing, through different roasting grades, and finally to the coffee consumer as various coffee beverages. The whole process aims at providing value for the coffee consumer.
What is Porter's value chain example? ›
Examples of Porter's value chain
Inbound logistics: In this stage, the company purchases raw materials to create the different components in their product. Production directors might create value in this stage by negotiating lower prices with suppliers or by acquiring companies that source the raw materials.
How do you fill value chain analysis? ›
How to Conduct a Value Chain Analysis
- Identify Value Chain Activities. The first step in conducting a value chain analysis is to understand all of the primary and secondary activities that go into your product or service's creation. ...
- Determine Activities' Values and Costs. ...
- Identify Competitive Advantage Opportunities.
An 80% margin means that 80% of the selling price represents profit, while only 20% of the selling price covers the cost of the goods or services sold.
Is 15% a good margin? ›
The average operating profit margin is about 10%. A good operating profit margin to aim for is 15% and above. To calculate your company's operating profit margin, first calculate operating profit. Then, divide operating profit by revenue and multiply that number by 100.
What is a good margin to have? ›
As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin. But a one-size-fits-all approach isn't the best way to set goals for your business profitability. First, some companies are inherently high-margin or low-margin ventures.
What is the value chain breakdown? ›
A value chain is a series of consecutive steps that go into the creation of a finished product, from its initial design to its arrival at a customer's door. The chain identifies each step in the process at which value is added, including the sourcing, manufacturing, and marketing stages of its production.
What is the Porter's original value chain? ›
Michael Porter (1985) coined the term ―value chain‖ as the set of linked activities performed by an organization that impact its competitiveness. As seen in Figure 2, the value chain consists of five primary and four support activities.
Coca cola value chain analysis is an analytical tool to plan and visualize business activities that creates a competitive business advantage for the company and adds value to the final product.
What is Apple's value chain? ›
The Apple value chain analysis is a business strategy to evaluate and describe the activities the company performs for product development and to identify areas for improvement to increase production efficiency. We use values chain analysis to reduce costs for production and deliver the most value.
How do you write a value chain? ›
Five steps to perform value chain analysis
- Step 1: Identify all value chain activities. ...
- Step 2: Calculate the cost of each value chain activity. ...
- Step 3: Look at what your customers perceive as value. ...
- Step 4: Review your competitors' value chains. ...
- Step 5: Decide on a competitive advantage.
Procurement activities within a value chain analysis example pertain to sourcing goods that are cheap, efficiently accessible, and high-quality. An excellent example of this is the Walmart chain, which is large enough to be able to negotiate effectively to receive goods at low prices for customers.
What is an example of a value network analysis? ›
Value network analysis helps identify company strengths as well as risks for a business. For example, if a network member has a large influence, the loss of that member could devastate the entire group. This is known as intrinsic value analysis because there is value, but it is hard to put on a price tag.
