The value chain is a strategic tool used to analyze the activities of a company and thus identify its sources of competitive advantage. From a brief bibliographic review the concept and its usefulness will be expanded.
Origin of the concept
The value chain concept began to popularize around 1985 with the publication of the book The Competitive Advantage: Creating and Sustaining Superior Performance, by Professor Michael Porter, who was based on the idea of business systems, developed by the McKinsey firm. & Co. at the beginning of the same decade.
McKinsey's proposal considered the company as a series of functions, marketing, human resources, production, etc., that had to be analyzed in relation to the same functions of the competing firms, if what you wanted was to understand its strategy and know its position in the market.
Porter went beyond that concept of broad functional levels by breaking them down into their individual activities, further adding that the sources of competitive advantage, low-cost leadership, and differentiation, proposed in Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980), depended on such individual activities. Thus, through this disaggregation, the value chain provided the firm with the capabilities to understand its costs and to identify its existing or potential sources of differentiation.
The following graph shows the emergence and popularization of the term from the mid-1980s of the last century.
What is value
The value chain is based on the concept that the company must create value in the products and services it offers to its customers, so what is it about or what does that value refer to?
A fundamental concept of Porter's theory is that of margin. Margin is the value that the company's products and services have from the customer's point of view, less costs.
The value chain is a strategic analysis tool that helps to determine the fundamentals of a company's competitive advantage, through the orderly disaggregation of all the company's activities. (Garralda, p.1)
The value chain provides a model of general application that allows to represent, in a systematic way, the activities of any organization, be it isolated or part of a corporation. It is based on the concepts of cost, value and margin. The value chain is made up of a series of value-adding stages, of general application in production processes. The value chain provides a coherent scheme to diagnose the position of the company with respect to its competitors and a procedure to define the actions aimed at developing a sustainable competitive advantage. (Quintero and Sánchez, p.381)
The concept of the value chain consists of the fragmentation of the company's activities into a set of differentiated tasks, called value-adding activities. These activities can be divided into two large groups: primary activities and support activities. Primary activities are those that involve the physical creation of the product or service and its subsequent sale or transfer to the buyer. The support activities sustain the primary activities and support each other, providing purchased inputs, technology, and human resources. Each of the main activities is comprised of generic categories. (Troncoso, p.24)
Here is a video lesson through which you can learn more about what the value chain is (Professor Antonio Verdú, Miguel Hernández University of Elche).
How a generic value chain is constituted
A value chain is made up of nine generic categories of activities that are integrated in characteristic ways. The generic chain shows how a value chain can be built, reflecting the activities it carries out. Likewise, it shows the way in which the activities of which it consists are connected with each other and with those of the suppliers, channels and buyers, also indicating how these links affect competitive advantage. (Porter, p.52)
Explanatory diagram of Porter's generic value chain. Source: Porter (p.55)
Porter divides the basis of the organization's functioning into two types of activities: primary and support. The primary activities are internal logistics, operations, external logistics, marketing, and sales and service. These activities are primary because they add value directly, for example through a better quality product, lower production costs, or even after-sales services, inducing buyers to pay a higher price. Support activities include sourcing, technology development, human resource management, and company infrastructure. Unlike primary activities, support activities do not add value directly, but rather reinforce the ability of primary activities to add value. (Mintzberg, Quinn and Boyer, p.91)
McLeod (p.37) explains the "mechanism" of the value chain as follows:
Companies create value by performing activities, which Porter calls activities with value. Valuable activities fall into two main categories: primary and support. Primary value activities are those associated with producing and offering your customers greater value than your competitors. Value is produced by delivering goods and services to customers and by providing post-sale support. Manufacturing and sales activities are good examples. Supporting value activities provide the inputs and infrastructure that allow for primary activities. The company's shareholder relations department, the market research group, and the accounting department are examples of organizational units that perform such support activities.
The primary and supporting value activities are linked together to form a value chain, as illustrated in the figure. The chain is shaped like an arrow, with the margin at its tip. Primary activities appear in the lower layer and include inbound (internal) logistics, which obtains raw materials and supplies from suppliers; the company's operations, which transform raw materials into finished products; outbound logistics (external) that transports products to customers; marketing and sales operations that identify customer needs and obtain orders; and service activities that maintain good customer relationships after the sale.
Activities with supporting value appear in the upper layer where the infrastructure of the company is located: the organizational framework that influences all primary activities in a general way. Also. There are three activities that can influence the primary activities individually or in combination. Human resource management consists of all those activities related to the control of company personnel, including the functions that managers perform and the roles they perform. Technological development refers to all activities in which technology is involved, including the effective application of this same technology. The creation of computer-based information systems is one example. Procurement (sourcing) deals with obtaining resources such as material and equipment,and those that the primary activities use. Many of these procurement activities are carried out by the company's purchasing department.
Every valuable activity, whether primary or supportive, contains three essential ingredients: the tickets purchased. human resources and technology. Also, each activity uses and creates information. For example, information specialists in the information services unit combine purchased commercial databases, leased computer equipment, and custom written programs to produce decision support information for company executives.
Quoting Porter again (p.56):
All valuable activity uses acquired inputs, human resources (labor and administrators) and some kind of technology to fulfill its function. It also uses and generates information: customer data (order receipt), performance parameters (tests), and product failure statistics. It can also originate financial assets (such as inventory and accounts receivable) or liabilities (such as accounts payable).
Value activities are divided into two large groups: primary and support. The first ones, which appear in the lower part of the figure, are those that intervene in the physical creation of the product, in its sale and transfer to the customer, as well as in post-sale assistance. In a signature, they can be divided into the five generic categories in the figure. Support activities support the primaries and vice versa by offering inputs, technology, human resources and various global functions. Dotted lines indicate that procurement, technology development, and human resource management can be associated with certain primary activities while supporting the entire chain. The infrastructure is not related to any primary activity, it supports it.
Thus, activities of value are the discrete structures of competitive advantage. How they are performed, along with their economics, will determine whether a firm has high or low costs versus the competition. The differences governing competitive advantage are revealed when the value chains of rivals are compared.
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Finally, we want to share with you a video lesson in which the links in the value chain are explained (Professor Antonio Verdú, Miguel Hernández University of Elche).
Bibliography
- Garralda Ruiz de Velasco, Joaquín. The value chain. IE business publishing, 1999. McLeod, Raymond. Management Information Systems, Pearson Education, 2000. Mintzberg, Henry, Quinn, James B. and Voyer, John. The strategic process: concepts, contexts and cases. Pearson Education, 1997. Porter, Michel E. Competitive Advantage. Creation and sustenance of a superior performance. Continental Editorial Company, 1991.Quintero, Johana and Sánchez, José. The value chain: a tool for strategic thinking. In: TELOS. Vol. 8, No. 3, pp. 377-389, 2006.Troncoso Caro, Juan. Some theories and instruments for the analysis of competitiveness. IICA, 2000.
