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The Value Chain Model

In his book titled Competitive Advantage, Michael Porter has introduced the concept of Value Chain. According to him, this includes all activities that take place in an organization, which add value to the product or the service delivered by the organization. He further goes on to state that for an organization to gain an edge over its competitors, it is important that all activities run at their optimum level and that their output value is more than their input cost. In other words, according to Porter, value of services rendered should be more than the costs of creating them.

In order to simplify this concept, Michael Porter has divided the common activities occurring in any organization as primary and support activities. These are interrelated generic activities that are common to most industries. The model resulting from the interrelation of all such activities is called the Value Chain Model.

Primary Activities of the Value Chain Model

Primary activities are those activities that are vital to any value chain and include activities like Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales and Service. It is pertinent to note that all or most of these activities are important for enabling a company to gain an edge over its competitors. Inbound logistics includes the receipt of materials, warehousing as well as inventory control of the materials required as raw materials for creating the final product.

Operations mean and include activities that transform the raw materials into the final product while outbound logistics is nothing but the activities that allow you to send your finished product to the consumer. Marketing and Sales includes the allied activities that are extremely essential for ensuring that your target audience purchases your product or service. Finally, Service means and includes all activities that will enable consumers to maintain faith in your offerings and trust your company.

It is important to note that while these are the main generic activities, each has its own list of precise activities, which are industry specific.

Support Activities

If you truly want to gain that competitive edge, it is important to supplement the above primary activities with support activities, which include procurement, technology development, human resources management and firm infrastructure. Most activities involved in support activities are industry specific. However, if one were to describe them in general, procurement would mean and include purchase of raw material that is required for certain activities. Similarly, technology development would include research and development required to support certain primary activities and so forth.

Coordinating and optimizing these activities will actually enhance the competitive advantage of a particular company over another. In order to derive such advantage, it is important to map the processes and isolate those that add value and those that do not. Value chain basically addresses the entire organization and includes optimal use of primary and support activities, which ultimately give a competitive edge to the company.

Comments Listing
Posted: 16/01/2012 02:09:17

Value chain is important for knowing the cost of the product .

It should circulated to the production department, SCM , HR ,IT,Logistics departments to konw their cost and it give feed back to the concerned departments to reduce the actual cost if it is more .

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