Topic 2: Porters Value Chain

Free source image from https://unsplash.com/s/photos/chain
Grants value chain https://strategicmanagementinsight.com/tools/value-chain-analysis/ Porter’s Value Chain (Source: Porter, 1985)

Value Chain Explained

The value chain is used to look at the activities within your business.

The model looks at what your business will add in value at each link in the chain.

There are 9 main activites which create value within your business and as such lead to the company creating profit ( known as the products margin I,e, the extra margin the company is able to create from its value chain.

Put a different way the vaue chain consists of all the activites that take an input ( raw material ) right through to its output ( finsihed product or service).

The 10th section ( the furtherest right of the diagram) of the value chain represents the additional value your business has been able to create through the value chain.

The 9 main activities that form the value chain are brocked down into 2 catagories

Category 1 Support Activites – These are cross functional and as such help t integrate the primary activites

Category 2 Primary Activities – These are the main activites and are directly involved in making the product

Value Chain Primary Activities

      1.Inbound logistics

  • Raw materials / Receiving Goods / Storage

      2.Operations

  • Transforming raw materials into products

      3.Outbound Logistics

  • Order processing / packaging / shipping

      4.Marketing & Sales

  • Infromation / Training / Communcating

      5.Service

  • Customer training / Advice / Servicing / After care

Value Chain Support Activities

     1.Procurement

  • Function of purchasing / routies / procedures / methods

      2.Technology Development

  • IT Systems / CRM / ERP Systems / Stock systems

     3.HR Management

  • Managing the right resource recruitment

     4.Firm Infrastructure

  • Supports all activities, general management / finance

 In order to make a profit the final value of the product has to be greater than the sum of the 9 activities that we have discussed. The difference between the total value of the final product minus the cost of all the 9 activities gives you your profit i.e. the 10th box highlighted as Margin.

If the combined cost of your 9 activities is greater than the final value of the product or service i.e. the sales value, then you will be making a loss.

We constantly have to review each of the 9 activities to ensure that they add value to the production process of the final product or services / or if they are essential to its production. If they do not add value to the final product then we should review them or consider not using them.

Ultimately it is essential that the final value of the product or services is greater than the 9 activities involved in its creation.

Addiitonal resources to help understand the value chain are :

https://www.youtube.com/watch?v=a9LWp9y2fMw – 13 min Explainer video on value chain

https://strategicmanagementinsight.com/tools/value-chain-analysis/Value Chain 10 minute read

  • Activity: Create your own value Chain

-Draw out your own value chain ensuring that you consider all 9 activities

-Calculate the cost “per unit of sale” for each of the activities

-Add the cost of all 9 activities ( ensuring you are realistic about the cost of support activities)