Michael Porter Value Chain Model | Primary & Support Value Chain Activities
Porters Value Chain Analysis
Michael S. Porter developed the Value Chain model in 1985 in the book Competitive Advantage. Porter’s Value Chain Model is a strategic management tool for analyzing a company’s value chain activities.
Value chain analysis model is used to analyze the flow of value-adding activities from the raw material supplier to the end customer. The model looks at what value the company adds to each link and thereby uncovers the company’s competitiveness.
What is the Concept of Value Chain Analysis?
Value chain analysis (VCA) is a process of identifying the primary and support activities within an organization that value its final product and then analyze their activities to reduce production costs or increase differentiation.
The value chain consists of nine value activities that create added value on the company’s margin.
Margin in many places, also called profit, is actually the value chains 10th field here, there is no activity the field size is dependent on the previous nine areas.
The profit/Margin is equal to the difference between the value chains and total value, which is the product’s value to the customer. That is the price the customer is willing to pay for the product and the total cost of producing the product, which is the total cost in the value chains nine activities.
Porter’s Value Chain Model has nine activities that are divided into two categories namely.
- Primary Value Chain Activities
- Secondary Value Chain Activities
Primary Value Chain Activities And Secondary Value Chain Activities
Primary Value Chain Activities
Primary value chain activities include the main activities. According to Michael Porter, primary value chain activities involve five activities that are directly involved in the production and selling of the actual product.
The primary activities consist of the five activities at the bottom of the model these are;
- Value Chain Inbound Logistics
- Value Chain Analysis Operation Activities
- Value Chain Outbound Logistics,
- Value Chain Marketing and Sales
- Value Chain Analysis Service Activities
Each of these activities may be described as follows.
Value Chain Inbound Logistics
Inbound Logistics Meaning
Inbound logistics in the Value Chain Model can consist of receiving goods or raw materials, inspection, storage, receiving returned goods.
Value Chain Operations Activities
Value Chain Analysis Operation Activities include activities associated with transforming raw materials and components into new products.
Value Chain Analysis Outbound Logistics
Outbound logistics in Value Chain Analysis are activities associated with order processing, packaging, and shipping, which deal with distributing the finished product to buyers.
Value Chain Marketing and Sales
Marketing and sales activities in the value chain model are associated with providing the customer with information about the product’s excellence, which should lead to a sale.
Marketing and sales are involved in determining the products distribution channel, pricing, promotion, personal selling, etcetera,
Value Chain Analysis Service Activities
Value Chain Analysis Service Activities include activities that ensure that the purchased product enhances or preserves value for the customer. The service could include advice in person or online repairs, customer training, ongoing maintenance, and so on.
Support/Secondary Value Chain Activities
Support Value Chain Activities includes activities that go across the major activities and coordinate their functions as best as possible. Support activities in the value chain consist of four activities, and they are in the upper part of the model. They include;
- Procurement Activiteis
- Technology Development Activities
- Human Resource Management Activities
- Firm Infrastructure Activities
Procurement Activities in the Value Chain
Procurements in the value chain are activities that refer to the function of purchasing, not the physical input. Procurement supports all the primary activities.
- It may include the establishment of procurement routines for the purchase of raw materials for inbound logistics.
- There must also be negotiations about purchasing energy and service to the machines in operations.
- Buying new cars for delivery of goods as part of outbound logistics, and there must be a procedure within marketing and sales to purchase advertising materials.
- New cars for service technicians represent service in the model. Effective procurement routines can greatly influence purchase costs on thereby contributing to higher profits.
Technology Development Activities
The support activity technology development must be understood broadly. It is the overall systems that provide an overview of the entire organization.
The sales department have the opportunity to see whether the products the customer demand are out of stock, how far they are advanced in production and when they could be accurately delivered.
It may involve ERP enterprise resource planning systems that bind the entire organization’s information together to support activity.
Human Resource Management Activities
It is often the HRs department’s responsibility that the right skills are available at the right time in various departments.
A simple example is that before marketing and sales contact, the first potential customer in the Japan HR department helps with hiring a person who understands the Japanese language on their culture.
Firm infrastructure Activities
Support activity Firm infrastructure is a kind of superstructure, or umbrella, which covers all the other activities. It supports both the primary activities and support activities.
It includes the organization of the company, management, planning, quality management, finance, etcetera.
Value Chain Example Model
If the manufacturer of a product is going to make a profit and survive, the total value of the product for the customer has to be greater than the cost of creating the product.
Therefore, you should regularly review the nine activities and analyze if the individual activities carried out are providing more value to the customer than the costs they accumulate.
If you find areas or points where you cannot answer yes, then you should modify or discontinue these activities. You thereby continuously improve your company’s competitiveness.
Example of Value chain with a manufacturer of blades for wind turbines.
- A manufacturer receives inbound logistics raw materials to be included in the blade later.
- The raw materials shall hereafter be part of the primary activity operations in which the blade will be produced.
- When the finish turbine blade is transported by truck, it is part of the primary activity outbound logistics.
- It is probably due to quality durability, etcetera that we have convinced the buyer about our blades’ value. This is part of the primary activity, marketing, and sales.
- The maintenance of the blade is part of the primary activity.
- It supports the primary activities throughout the process.
- Support activity procurement has probably been helpful in preparing contracts for the purchase of raw materials in primary activity inbound logistics.
- Agreement with the trucking company on transportation of the blade in primary activity, outbound logistics as well as established procedures for the purchase of flights and hotels to maintenance staff in primary activity service
- Support activity technology development has probably been helpful by calculating the need for raw materials in the blade in operations.
- Plans for when the individual blades are delivered in outbound logistics and when the surface has to be maintained in service, technology development supports them.
- Support activity human resources have hopefully had a share in all other activities placed below them. A simple example would be the blades that are delivered offshore. They must make sure that the people have the right training in relation to the rules of working at sea.
- Support activity firm infrastructure is, as said, before an umbrella over all other activities. It supports the other eight activities.
Analysis of All Activities
- If the blade manufacturer is to remain in the market, all nine activities must be analyzed on an ongoing basis.
- It must be determined whether the activities provide more value to the customer than it costs to implement them.
- Customers’ priorities may well change over time; new technologies may increase productivity in the chain.
- Therefore, there should be a continuous evaluation that should seek to make improvements in all activities.
Value Chain Framework Example
Disadvantages /Criticisms of Porter’s Value Chain Model
- The model was created on the basis of the 1980 major American companies that produced to stock. Today, many large companies are manufacturing to order. Therefore, it may be better to place the primary activity, marketing, and sales further ahead in the chain.
- Many companies will only start production when the goods have been sold in advance.
- Based on this knowledge, the model’s linear structure seems very rigid.
- The model has a built-in tendency to place the company in a defensive position at the expense of the company’s creativity and readiness for change. They are always looking for small improvements in relation to the existing product, a form of incremental innovation.
- The model does not include the option to switch to something else. It is very static.
Importance of Value Chain Analysis
The good thing about the model is that it continuously forces you to look for improvements that provide greater value to your customer.