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Understanding Porter's Value Chain

Sep 14, 2024

Notes on Porter's Value Chain

Introduction

  • Porter's Value Chain is a concept introduced by Michael Porter in his book Competitive Advantage (1985).
  • It describes the chain of activities that a business performs to produce valuable products or services.
  • The value chain helps businesses gain a competitive advantage and potentially higher profits.

Key Concepts

  • Value Chain: A chain of activities executed by a business in a specific industry to create value.
    • Also known as Porter's Value Chain Analysis.
    • Composed of primary and support activities.

Diagram Overview

  • Primary Activities:
    • Inbound Logistics
    • Operations
    • Outbound Logistics
    • Marketing and Sales
    • Service
  • Support Activities:
    • Firm Infrastructure
    • Human Resource Management
    • Technology Development
    • Procurement
  • Together, primary and support activities lead to higher margins.

Primary Activities

  1. Inbound Logistics
    • Organizes inbound movement of parts, materials, and inventory from suppliers.
    • Example: Tyre manufacturers in Thailand; Starbucks' partnerships with farmers.
  2. Operations
    • Manages the process of turning inputs into outputs (goods/services).
    • Example: Tesla manufacturing electric cars; Apple's iPhone assembly in India/China.
  3. Outbound Logistics
    • Stores and moves final products to customers.
    • Example: Amazon's delivery options; Amazon Prime Air drone delivery.
  4. Marketing and Sales
    • Involves processes for selling products and communicating offerings.
    • Example: Burger King's marketing against McDonald's; GoPro's user-generated content; Red Bull's promotion of extreme sports.
  5. Service
    • Processes after the product sale to ensure customer satisfaction.
    • Example: Tesla's owned showrooms for a seamless customer experience.

Support Activities

  • Enhance efficiency of primary activities and overall productivity.
  1. Firm Infrastructure
    • Includes quality assurance, public relations, finance, legal, and strategic management.
  2. Technology Development
    • Encompasses equipment, software, and technical knowledge used to produce outputs.
    • Example: Tesla's in-house battery development; Amazon Go cashier-less stores.
  3. Human Resource Management
    • Focuses on employee compensation, training, and recruitment.
    • Example: Ritz-Carlton empowering staff; Apple offering employee perks.
  4. Procurement
    • Involves acquiring goods/services from external sources.
    • Example: McDonald's procurement from McLean; Tesla's battery procurement from Panasonic.

Conclusion

  • Porter's Value Chain highlights the importance of both primary and support activities in creating value and competitive advantage.
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