According to Porter (1985), competitive advantage can only be understood by looking at the firm as a whole. Cost advantages and successful differentiation are found by considering the chain of activities a firm performs to deliver value to its customers.
The value chain model divides the generic value-adding activities of an organization into primary and secondary activities. An advantage or disadvantage can occur within any of the five primary or four secondary activities. Together, these activities constitute the value chain of any firm.
The model can be used to examine the development of competitive advantage. By identifying the potential value to the company of separate activities, a firm can gain insight into how to maximize value creation while minimising costs, and hence create a competitive advantage.
The value chain is also useful for outsourcing and off-shoring decisions. A better understanding of the links between activities can lead to better make-or-buy decisions that can result in either a cost or a differentiation advantage. In order to analyse the competitive advantage (or lack of one), Porter suggests using the value chain to separate the company’s activities in the value chain into detailed discrete activities. The relative performance of the company can be determined once the firm’s activities have been broken down to a sufficient level of detail.
Porter has identified a set of generic activities. The primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and services. The support activities include procurement, technology development, human resource management and the firm’s infrastructure. Each activity should be analysed for its added value. Also the total combined value of all these activities when considered in relation to the costs of providing the product or service has to be analaysed, since this will dictate the level (or lack) of profit margin. Inbound logistics – activities...
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