50MINUTES - Michael Porters Value Chain: Increase Value and Beat the Competition (Management & Marketing)

• Names: value chain, Michael Porters value chain.
• Uses: improving competitiveness, reducing costs, increasing value creation.
• Why is it successful? It can be adapted to all types of business, drastically boosts performance and comprises a series of clear, well-defined steps.
• Key words: competitive advantage, value creation, analytical tool, subdivision of activities.

The Harvard Business School professor Michael E. Porter (born in 1947) is known for his work on competitive strategy, competitiveness and the economic development of nations, states and regions.

In the 1980s, he began looking into the concept of competitive advantage and developed a number of strategic theories in the book Competitive Advantage: Creating and Sustaining Superior Performance (1985). Many of these theories were quickly adopted by businesses looking to improve their results.

According to him, companies achieve superiority through their mastery of competitive forces, known as Porters five forces. This is a key concept in modern management, and was explored by Porter in Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980; republished with a new introduction in 1998).

A value chain is a series of actions which are carried out in order to deliver a valuable product or service to the market.

Any company, association or organisation that creates value and wants to improve its competitiveness can use the value chain to achieve its goals. The model allows businesses to analyse each of their activities in order to improve each step as much as possible, in this way maximising their competitive advantage. The value chain is a valuable tool in strategic management, as it works on the positioning of a product or service on the market.

The value chain has three main objectives:

• improve services
• reduce costs
• create value.

Before they can develop a competitive advantage, companies must understand the concept of value creation. This is an analytical system designed to break down the different functions of a company and examine their costs, with the goal of distributing resources throughout the chain as effectively as possible. This enables products to be strategically positioned on the market based on their cost or differentiation.

Costs can be reduced by:

• optimising the manufacturing process;
• purchasing raw materials at a lower cost;
• innovating;
• working on the functionality of a product for greater differentiation;
• increasing manufacturing quality;
• improving customer service;
• reducing delivery times through good logistical organisation.

An effective analysis of the companys different functions can boost productivity and lead to sustainable and profitable growth.

Porters model comprises nine major value-generating functions, which are divided into two categories:

• There are five primary activities that directly affect the added value of the final product. This category comprises the activities related to inbound logistics (1), operations (2), outbound logistics (3), marketing and sales (4) and services (5).
• There are four support activities which are indirectly involved in creating the final added value. These are the activities related to the companys infrastructure (1), human resources (2), technological development (3) and procurement (4).

The selection of value-generating activities

The selection of value-generating activities is based on three criteria:

• Do they rely on different economic mechanisms?
• Do they constitute a considerable fraction of the costs?
• Do they directly affect the competitive advantage?