The concept of value chains - Marketing Management

Developed by Porter, value chain analysis is aimed at identifying potential competitive advantages. Porter suggested that the activities of a company can be broken down into nine ‘value activities’, five being primary and four secondary. These value activities collectively comprise those activities involved in designing, manufacturing, marketing and delivering the organization’s products and services.

The value chain

The value chain

Primary activities comprise activities associated with the input, throughput and output of goods and services in the organization, and include the following:

  1. inbound logistics: e.g. materials handling, stock control and delivery inwards;
  2. operations: e.g. packaging, assembly, equipment maintenance and testing;
  3. outbound logistics: e.g. finished goods warehousing, materials handling, order processing and delivery outwards;
  4. marketing and sales: e.g. advertising, promotion, sales force, pricing and channels;
  5. service: e.g. installations, repairs and parts supply.
  6. Support activities comprise those activities which facilitate primary activities in the physical creation of the product and its sales and transfer to buyer and including:

  7. procurement: refers to the function of purchasing inputs used in the organization’s value chain, and not to the purchased inputs themselves. Examples include purchasing procedures, techniques of vendor analysis and information systems. In addition, procurement activities may also include the procurement of more than simply raw materials and components. An organization also ‘procures’ market research or accountancy expertise; hence activities concerned with procuring these services would also be included.
  8. technology development: support activities that improve the product and the process. The areas of support activities here are those which are carried out in the research and development function, but they also include technology support activities, office automation, communicating with customers, measuring quality, etc.
  9. human resource management: includes recruitment, selection, training and development.
  10. firm infrastructure: support activities here include systems of quality control, financial systems and marketing planning.

Although the broad categories of value activities, both primary and secondary, are common to most organizations, individual components of value activities will tend to be company specific. The basic idea of the value chain concept is that each activity can be categorized and analysed with a view to securing competitive advantage. Specifically, a company should analyse all its activities with a view to determining how these contribute to the value the customer receives. They should also be analysed with respect to cost and competitor margins. the difference between total value and the cost of performing all the value activities. In simple terms by looking at both value activities and the cost of performing them compared to the competition, it is suggested that an organization can seek competitive advantage either by cutting the cost of performing the value activities while simultaneously maintaining the value, or by increasing the value of the activities to the customer. Two further points about value chain analysis are worthy of note.

  1. First, value chains extend outside the organization itself to include suppliers and distributors. For example, a supplier may, through its own quality control activities, enhance inbound logistics and operations activities of its customers, thereby adding value to its customers’ customers.
  2. Similarly, distributors can influence value. For example, a distributor may undertake to offer after-sales service for the manufacturers’ brands it supplies, thereby potentially adding value to these brands for the customer. Porter refers to these as ‘vertical linkages’.

  3. Second, it is important to recognize that the value chain is not a set of independent activities. Each of the primary and secondary activities is interdependent. These are what Porter calls ‘horizontal linkages’ and it is often these linkages which form the basis of competitive advantage. For example, improved quality management (a ‘firm infrastructure’ activity) can enhance both manufacturing (an ‘operations’ activity) and marketing and service activities. In other words, all the value activity areas must be looked at together to achieve optimization and co-ordination.

This is a brief introduction to the concept of value chains. In fact, the uses of value chain analyses are complex and multifaceted. Porter has developed the concept and techniques of value chain analysis to enable the company to look for ways of securing competitive advantage. In the context of assessing strengths and weaknesses, value chain analysis has four distinct benefits:

  1. It provides a framework for addressing an earlier problem of which attributes (or activities) to assess in strengths and weaknesses analyses.
  2. By using the concept of ‘value’ it forces the analysis of strengths and weaknesses to relate better both to how the customer views them and to competition. Johnson et al.17 have captured this use of the value chain:
  3. Value chain analysis describes the activities within and around an organization and relates them to an analysis of the competitive strengths of the organization or its ability to provide ‘value for money’ products or services.

    Analysis of value chain activities enables us to assess what are truly ‘strengths’ and what are truly ‘weaknesses’.

  4. The concept of horizontal linkages in value chain analysis reinforces the earlier point about the importance of looking at interrelationships between resources and the related concept of synergy and balance.
  5. Finally, the concept of vertical linkages in value chain analysis forces us to think more broadly of possible strengths and weaknesses that derive from linkages with suppliers and distributors and which, in turn, stem from their strengths and weaknesses in relation to ours.

From its highly successful American base, the US retailer Walmart then expanded into Europe. The company acquired the ASDA group of supermarkets in the UK and has overtaken Sainsbury’s to become the second most powerful retailer in the UK after Tesco. Walmart built its strategy for success around offering good value products with low prices, while maintaining good quality. This strategy is built upon effective value chain management and in particular the efficient use of vertical links with suppliers. Walmart has been able to reduce its costs throughout the supply chain, thereby being able to pass these cost savings onto its customers. To compete successfully against this, Walmart’s competitors have had to better secure and manage their own vertical links in the value chain as effectively and efficiently as Walmart have done.

Next, are our competitors stronger or weaker than ourselves? This consideration in evaluating strengths and weaknesses takes us back to the importance of competitor analysis. Once we have identified what are key strengths and weaknesses, and where our distinctive competences lie, we need also to assess the extent to which we have a competitive advantage with respect to these competences.

In the same way that we cannot evaluate what constitutes a ‘strength’ or a ‘weakness’ without assessing the extent to which customers value these competences, so too we should not proceed to develop marketing strategies and plans based on these without also assessing how strong or weak our competitors are in these areas. The perspective that needs to be taken is from the market to the company, and not from the company to the market, which is, after all, the essence of marketing orientation.

The importance of assessing strengths and weaknesses in relation to competition, as well as to needs of customers, stems from the fact that a key reason for assessment of strengths and weaknesses is, as we have seen, to help in the delineation and selection of competitive marketing strategies. For example, the company might have distinctive strengths in the areas of quality and after-sales service, and these might be strengths which the customer values, and hence are key factors for success in these areas. Stronger, weaker or equal; it simply does not make sense to evaluate our strengths and weaknesses without comparing ourselves to the competition.

We can see from our discussion that the issues which arise in the process of evaluating strengths and weaknesses are complex. It might be said that weaknesses are easier to understand than strengths. Essentially weaknesses are constraints, but as with strengths we need to assess them in the context of customer and market needs and of the competition. A weakness in terms of aftersales service would matter less if this factor were unimportant to business success and if our competitors were even weaker. Again, as with strengths, we also need to assess if our weaknesses are major or minor.
A useful approach to the evaluation of both strengths and weaknesses relative to the competition is the use of a strengths and weaknesses profile.

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