TOPIC 4: VALUE CHAIN ANALYSIS

What is Value?

The benefit that customers believe they receive from a product or service. A business can only survive if it provides this value while remaining profitable.

Value-Added Activities

Activities that increase the usefulness or desirability of a product or service to the customer.

Examples include designing an attractive product, assembly, on-time delivery, and warranty support.

Nonvalue-Added Activities

Activities that do not increase customer value, even if they occur in operations. Examples include long-term inventory storage, reworking defects, unnecessary inspections, waiting time, and purposeless material movement.

Value Chain

The series of activities performed by a company to create, produce, market, deliver, and support a product or service. It shows how value is added from the start of operations until the customer receives the product.

Supply Chain

The flow of goods, materials, and services from the original supplier to the final customer. Unlike the value chain, it usually involves multiple companies working together.

Porter’s Primary Activities

These five activities are directly involved in the production and selling of the actual product.

Inbound Logistics

Activities associated with receiving, storing, and disseminating inputs (raw materials) to the product. Includes material handling, warehousing, and inventory control.

Operations

The phase where inputs are transformed into the final product form. Includes machining, assembly, packaging, and equipment maintenance.

Outbound Logistics

Activities associated with collecting, storing, and physically distributing the finished product to buyers. Includes finished goods warehousing, order processing, and delivery operations.

Marketing & Sales

Providing a means by which buyers can purchase the product and inducing them to do so. Includes advertising, promotion, pricing, and channel selection.

Service

Activities provided to enhance or maintain the value of the product after it has been sold and delivered. Includes installation, repair, training, and parts supply.

Porter’s Support Activities

These activities coordinate and support primary functions by providing inputs, human resources, and firm-wide management.

Procurement

The function of purchasing inputs (raw materials, supplies, machinery, buildings) used in the firm's value chain. It assists multiple activities, not just inbound logistics.

Technology Development (R&D)

Activities grouped into efforts to improve the product and the process. Includes know-how, procedures, and equipment technology like accounting automation or product design research.

Human Resource Management (HRM)

Activities involved in recruiting, hiring, training, development, and compensation of all personnel. It determines employee skills, motivation, and associated costs.

Firm Infrastructure

Activities that support the entire value chain rather than individual activities. Includes general management, planning, finance, accounting, legal, and quality management.

Margin

The added value (profit) created when a product has a greater value to customers than the original cost of creating it.

Value Chain Analysis

The process of examining each activity to determine where value is created, where costs arise, and how to gain a competitive advantage.

Competitive Advantage

Gained by performing strategically important activities more cheaply or better than competitors. This is achieved through lowering costs or differentiating the product.

Value Chain Linkages

The relationships between activities where a decision in one (e.g., Procurement quality) affects the costs or performance of another (e.g., Operations or Service)