be excellent bankers, but they may have little knowledge of running an office, or payroll and itsystems. They may decide to outsource these non-core activities and concentrate on doing what they are most competent at: the business of investment banking.
If a business’s core activity is closely aligned with its core competencies, these become a factor that enables it to achieve competitive advantage. In contrast, non-core activities cannot leverage core competencies.
The value chain identifies five primary and four support activities (see Chart 6.5).
The five primary activities are the sequential logistics, production and marketing processes.
The primary activities can also be thought of as the main vertical functions of a business:
Inbound logistics is the activity of receiving goods or services from suppliers and moving them on to the operations activity.
Operations is where the production of the product or service takes place. Production may be broken down into further steps, for example producing intermediate goods from raw materials and then turning intermediate goods into the final product. Make or buy decisions can be made at every stage.
Outbound logistics covers order fulfilment; that is, the warehousing of finished goods and the distribution of the products or service to the customer. This is often
outsourced.
Marketing and sales includes pricing, packaging and advertising as well as market research.
Service refers mainly to after-sales service.
Support activities are horizontal; that is, they contribute to the different primary activities.
For example, the human resources department will handle staffing for all functions. The value chain has four support activities:
Firm infrastructure includes activities such as accounting, facilities, planning and control, and general administration.
Human resources management covers recruitment, training, labour relations and salaries.
Technology development includes the development of new products or services or enhancement of existing products and services. In some companies, research and development is a primary activity, for example in the pharmaceuticals industry.
Procurement includes the purchasing of raw materials or intermediate goods as well as vehicles, office supplies and electricity. Again, because of its impact on input costs this activity may be considered primary.
Source: Porter, M.E., Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985
Chart 6.5 The value chain
F i r m i n f r a s t r u c t u r e H u m a n r e s o u r c e m a n a g e m e n t
T e c h n o l o g y d e v e l o p m e n t P r o c u r e m e n t
Inbound logistics
Operations Outbound
logistics
Marketing and sales
Service
MARGI N MA
RG I N
Primary activitiesSupport activities
Configuration of resources 47
A principal use of value chain analysis is to identify a strategy mismatch between different elements of the value chain. If a company competes on the basis of low costs, then every part of the value chain should be geared towards low cost. For example, low-cost airlines have looked at every aspect of the value chain and taken out costs at all stages. Bookings are taken only via the internet rather than through travel agents; seats cannot be reserved;
there are no paper tickets, free meals and drinks, or lounges; and flights depart from secondary airports with lower landing fees.
An important aspect of the value chain is the linkage between the elements. For example, if stocks are to be kept to a minimum in order to respond quickly to changing consumer tastes, the business has to move towards just-in-time manufacturing, invest in logistics and pay particular attention to procurement.
The value chain is useful to identify activities where value is added as opposed to those where value is lost. For example, a vertical activity, such as logistics, may be outsourced;
some major retailers have decided that specialist logistics companies transport goods to stores more efficiently. The value chain can be used to examine whether a product should be made or bought in. In a particular strategic business unit the strength may be in marketing and sales and not in production.
The value chain as described by Porter has its limitations and should not be used slavishly.
Your business may have a different value chain. For example, a trading business may just buy and sell and never handle any physical goods. Porter’s value chain provides a framework for analysis that can be adapted to your particular business.
Charles Hofer and Dan Schendel4proposed a different value chain, which adds the dimension of value added (see Chart 6.6). The approach makes the value added by each element of the value chain explicit. The original model was geared towards a traditional manufacturing company. Again, the steps can be adapted to meet the needs of your business. The height of each function (r&d, inbound logistics, and so on) indicates the proportion of total value added.
Source: Hofer, C. W. and Schendel, D., Strategy Formulation: Analytical Concepts, 1978
Chart 6.6 Value chain based on Hofer and Schendel
R&D
Purchasing
Inbound logistics
Production
Sales and marketing
Outbound logistics
Customer care
Value added
100%
Value system
The value system extends the value chain beyond the boundaries of the business and recognises that a business is dependent on relationships with suppliers and buyers.
Competitors may have organised their value chain differently, for example they may have a lower degree of vertical integration, which could give them a cost advantage or make them more vulnerable.
Analysis of the value system may reveal that a source of competitive advantage for your business could be a better selection of suppliers, for example suppliers that have a labour cost advantage. Make or buy decisions are also affected by a downstream analysis of the value system, and the distribution strategy can be optimised by understanding the distribution value chain. For example, some manufacturers have their own retail outlets but also supply competing retailers. The question is whether or not such an arrangement produces competitive advantage.