Porter’s Value Chain: Primary & Support/Secondary Activities
What is Michael Porter’s Value Chain?
Value chain analysis is a business concept that describes all activities essential to deliver products or services from start to end. This concept encompasses steps from raw material sourcing, production to distribution, including sales and after-sales activities. In addition to these activities, the value chain concept also describes various supporting activities, including strategic planning, quality management, finances, recruitment, technology, and procurement.
Primary Activities of Michael Porter’s Value Chain
1. Inbound Logistics
Resources are gained through inbound logistics. Production-oriented companies rely on inbound logistics for raw materials. The reception, storage, and distribution of raw materials are included in this activity.
Examples: track raw material input, storage, control inventory, transport schedules, and return damaged goods to suppliers.
This activity transforms raw materials into brand-new final products. Various streams of value are added to the product at this stage as it moves through the production line.
Examples: production belts, production process, packaging, machinery maintenance, quality assurance, defects testing, printing, and all operations of the factory.
3. Outbound Logistics
Outbound logistics is the process of delivering the finished product to their customer. For a manufacturing company, their immediate customer would be the wholesaler. The end customer may receive the product through the distribution channels of wholesalers and retailers. The distribution of finished goods from the manufacturer to their immediate customer is considered outbound logistics.
Examples: finished goods distribution, vehicle schedule handling, delivery order handling, sales order processing, and process the sales returns.
4. Marketing and Sales
Every product has a target market of potential consumers. This is determined by how well the company presented and sold the product to the target market. The job of the sales professionals in the company is to ensure the target audience is aware of the product. A mix of marketing strategies can be used to fulfill this activity.
Examples: brand building, marketing, promotion, salesforce, tenders, quotations, target market selection, customer relationships, and product pricing.
After-sales support is crucial for the long term survival of the business. Negative customer comments can easily damage the reputation of a product. The company should focus on the right processes to take care of the customer inquiries which raise after the sale. Solid after-sales services are essential to enhance or maintain the value of the product after it has been sold and delivered.
Examples: repair, periodic scheduled maintenance services, warranty, guarantee, training, and after-sale services.
Support Activities of Michael Porter’s Value Chain
Procurement refers to the entire purchasing-related process of the company. This is not only the purchasing inputs or not only related to the raw materials. Procurement activity covers raw materials, equipment for technology development, equipment related to periodic maintenance, administrative consumables, and fixed assets such as machinery and buildings. The objective of this activity is to find quality supplies that meet the criteria of procurement.
Examples: Tendering processes, advertising, procurement criteria definition, offer the contract/purchase order, and budget management.
2. Technology Development
This activity is related to the capacity for innovation in the company. Technology helps to streamline the entire value chain. This will increase the efficiency of activities, which will lead to a competitive advantage. These activities are related to the effort that the company is making to improve its products and processes.
Examples: enterprise resource planning (ERP) solutions, product research for enhancements, research for new products, and improving the technology used in existing activities/processes.
3. Human Resource Management
To survive in the market, the company needs talented, skilled employees. Recruitment, training, and development of the right people for the right job roles are part of this activity. Staff satisfaction should be measured regularly to reduce turnover. Also, staff should be motivated based on fringe benefits and other facilities. The company finds and retains the highest level of talent at the firm. Technological and consulting companies depend heavily on their talented employees.
Examples: recruitment, onboarding, development, training, retention programs, and off-boarding.
4. Firm Infrastructure
Firm infrastructure relates to the organizational structure, internal control systems, and culture of the company. This is also related to activities such as accounting, finance, legal, control, audit, quality management, and general (strategic) management. This is the place where business decisions are made. The effectiveness of these decisions is based on the capacity of the activities of the firm infrastructure. These are the most powerful source of competitive advantage for the company.
Examples: strategic management, finance, legal, customer relationships, public relations, and quality control.
Understanding How Value is Created with Porter’s Value Chain
A value chain analysis is an internal assessment aimed at gaining a competitive advantage. The idea is to determine the internal links between activities in the company and to increase efficiency in each activity. Customer satisfaction is determined based on the value of the products or services. Successful companies produce products or services that have greater value for their customers than what it cost for production.
How to Derive the Profit Margin using Value Chain Analysis
The margins or profit of a firm are determined by its “effectiveness” in performing the above primary and support activities. The difference between the price the customer is willing to pay for the products and the cost of the activities in the value chain is the profit margin of the company. Hence, the profit margin can be increased in the following ways,
- Reduce the cost of the activities (streamline the primary and support activities)
- Increase the value of the product through technology development
It would be easy for a company to eventually achieve economies of scale by optimizing the entire value chain.
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