Porter’s value chain
Primary activities work directly to
create or deliver a product or service,
while support activities help to improve
their efficiency. To apply the value
chain, a company has to identify each
activity and either lower its cost or
differentiate it from its competitors
to add value in the customer’s eye.
How it works
Harvard Business School professor Michael Porter first
introduced the concept of a value chain in his book
Competitive Advantage. Most organizations have
dozens—possibly hundreds—of activities along the
supply chain in the process of converting raw materials
(inputs) to products or services (outputs). These can
be classified generally as either primary or support
activities that all businesses must undertake. The idea
of the value chain is that how activities are organized
and carried out determines a company’s costs and
thus its margin (profit). Each link of the chain must
communicate to other departments clearly and
promptly. For example, marketing and sales must make
accurate sales forecasts and pass them on in time for
procurement to buy the correct type and quantity of
raw materials, who in turn must connect with inbound
logistics so they can organize receipt of goods.
Value chain
Rather than looking at the supply chain as merely a series of activities,
organizations are increasingly looking at how value is created by each
stage of the process. Lowering costs or raising performance are key.
Pizza Hut’s value chain
Pizza Hut’s greatest asset is breaking
down complex pizza-making into
simple steps unskilled chefs can do.
Inbound logistics Vast global
purchase orders for ingredients
Operations Target countries
with a liking for Italian food, on a
franchise model with local staff
Outbound logistics In-house
meals and home delivery service
Marketing Differentiate from
other pizza chains
Service Delicious, convenient
pizzas at a fair price
CASE STUDY
Inbound logistics
Involves relationships
with suppliers,
including all activities
to receive, store, and
allocate inputs
Operations
Activities required
to transform inputs
into outputs
SUPPORT ACTIVITIES
Although not directly involved in outputs,
these support primary activities, improving
their efficiency and successful function.
PRIMARY ACTIVITIES
Each department must cooperate and
provide necessary information between
value-chain activities to make a profit.
Company infrastructure
Human resource
management
Technology development
Procurement
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how operations and production work
Supply chain
$1.93
trillion
the internet value chain
revenue in the US, in 2008
ONLINE VALUE CHAIN
More than a quarter of the world’s population uses
the internet for everyday activities, from shopping
and banking to sharing photos and watching TV.
To handle this volume, a complex value chain
delivers internet services, made up of global and
local firms with assets as diverse as content rights,
communications and IT infrastructure, proprietary
software, and global brands.
Outbound logistics
Activities required to
collect, store, and
distribute the output
Marketing and sales
Activities that inform
buyers, encourage
purchase, and facilitate
transaction
PROFIT MARGIN
Profit equals the
customer’s willingness
to pay more than the
sum of all the activities
in the value chain.
Service
Activities to keep
product working
effectively for buyer
after it is received
Functions such as accounting, legal, finance, planning,
public affairs, and quality assurance
People activities: recruiting, hiring, training, developing,
compensating, and terminating
Equipment, hardware, software, procedures, and technical
knowledge used in transformation of inputs into outputs
Acquisition of inputs (raw materials) for the company
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