Creating an International Business Plan

2/1/21, 4:19 PMPorter's Value Chain

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Porter's Value Chain

Another method of diagnosing an organiza!on is to analyze its value chain. The term value chain was

introduced by Michael Porter to refer to the ac!vi!es that are performed within and surrounding the

organiza!on that add value to its products or services. Organiza!ons should perform these ac!vi!es

effec!vely for compe!!ve advantage.

Value chain analysis iden!fies five primary areas within the value chain, as shown in the figure Porter's Value

Chain:

inbound logis!cs

opera!ons

outbound logis!cs

marke!ng and sales

service

Addi!onally, four secondary areas are iden!fied as follows:

infrastructure

human resources management

technology development

procurement

Porter argued that an organiza!on should seek to provide unique value for its customers by finding what it

does best (which will result in compe!!ve success), rather than entering into too many markets, striving to

please everyone, or trying to provide the lowest cost. Organiza!ons will be successful when they focus on

crea!ng a unique value for the customer, determine who their customer base is, nego!ate the best

distribu!on channels, and manage their produc!on and pricing strategies. Organiza!ons will always face

challenges from changes in the environment. To remain effec!ve, organiza!ons will need to focus on

con!nual innova!on and on increasing their value to the customer.

The learning resource(s) listed below will help you learn about organiza!onal assessments and

organiza!onal diagnosis. You must click on each resource separately to access it. This informa!on will be

used to complete your deliverable for this project.

The value-added chain is the process by which technology is combined with material and labor inputs, and

then processed inputs are assembled, marketed, and distributed. The value chain shows the links, or chain,

of the dis!nct ac!vi!es and processes that a company performs to create, manufacture, market, sell, and

distribute its product or service. The focus is on the ac!vi!es that create value for customers.

Learning Topic

2/1/21, 4:19 PMPorter's Value Chain

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Value-chain ac!vi!es can be segregated to provide a detailed iden!fica!on of a company’s ac!vi!es and the

capabili!es that correspond to each ac!vity. The value-added chain is best defined in terms of each link's

contribu!on to total cost. By comparing the costs incurred by each link and against compe!tors, the

company can locate the cri!cal success factors that must be addressed.

The importance of value-chain analysis is that it helps portray the costs in a company’s opera!ons that

might be impacted by a change in one of the chain's processes. By comparing a company’s value chain to its

compe!tors’, you can iden!fy areas for improvement.

It is important to note that the value chain is influenced by the type of strategy the company and its

compe!tors follow. If the company is a high-value, high-quality market leader, its chain will be different from

the low-cost, high-volume compe!tor. These differences influence value-chain analysis. Companies must

make sure that their business strategy is in tune with their strategic objec!ves.

The airline industry represents a good example of differen!a!on. Many airlines operate under similar

circumstances and share similar cost structures and routes. Methods of differen!a!on can include lowest-

price or on-!me record, and areas such as boarding procedures, carry-on policies, airline miles, and social

media can drive customer loyalty. The example of Southwest Airlines illustrates how pu#ng people first

creates a solid marke!ng posi!on. It is important to iden!fy the opportuni!es that increase a product or

service's perceived value to the customer (Smartsheet, n.d.).

Another example is the American steel industry, which consists of large, ver!cally integrated carbon steel

makers. Some of the steel companies are integrated from ore mining to finished products. Their profitability

has been threatened by mini steel mills and imports. Steel producers must choose either to reduce crude

steel produc!on and focus on flat and specialty steel products, or cut costs. The value-added chain is useful

in iden!fying links that are not cost compe!!ve.

For strategies driven by product differen!a!on, the value-added chain is best defined in terms of the

contribu!on of each link to market value. This method helps iden!fy the product a$ributes preferred by

consumers and links them to the value-added ac!vi!es in the chain that generate this a$ribute.

However, assets that underlie the produc!on of these a$ributes cannot be easily redeployed along the

value-added chain. There is also the risk of product or process imita!on by compe!tors. Companies,

therefore, o%en pursue different strategies. Analysis of value chains shows that strategy is not just about

the selec!on of profitable product markets. It is also about inves!ng in the links that generate the product

a$ribute desired by consumers and which correspond to the firm's dis!nc!ve competence rela!ve to its

compe!tors.

Depending upon the customer preferences and compe!tors’ strengths, the company can decide to redeploy

its assets, pursue its tradi!onal business, withdraw from the business, or make an acquisi!on of the cri!cal

assets.

The value-chain concept is thus useful in isola!ng the cri!cal success factors of a strategy. For strategies in

compe!!ve industries, the chain isolates those links that are not currently viable rela!ve to compe!!on. For

strategies of product differen!a!on, the chain indicates those links that generate downstream economic

rents.

In the global context, the chain of compara!ve advantage for countries must be explored.

References

2/1/21, 4:19 PMPorter's Value Chain

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Smartsheet. (n.d.). The art of value chain analysis: From defining ac!vi!es to iden!fying areas for

improvement. Retrieved from h$ps://www.smartsheet.com/art-value-chain-analysis-defining-

ac!vi!es-iden!fying-areas-improvement

Porter, M. E. (1985). The compe!!ve advantage: Crea!ng and sustaining superior performance. NY: Free

Press.

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