Value Chain of Michael Porter

Michael Porter of Harvard proposed the value chain as a tool for identifying ways to create more customer value. Every firm is a synthesis of activities the are performed to design, produce, market, deliver, and support its product. The value chain identifies nine strategically relevant activities that create value and cost in a specific business. These nine value creating activities consist of five primary activities and four support activities.The primary activities represent the sequence of bringing materials into the business ( inbound logistics), converting them into final products ( operations), shipping out final products (outbound logistics), marketing them ( marketing and sales), and servicing them (service). The support activities – procurement, technology development, human resource management, and firm infrastructure – are handled in certain specialized departments, but not only there. For example, several departments may do some procurement and hiring of people. The firm’s infrastructure covers the costs of general management, planning, finance, accounting, legal, and government affairs that are borne by all the primary and support activities. The firm’s task is to examine its costs and performance in each value-creating activity and to look for ways to improve it. Firm should estimate its competitors’ costs and performances as benchmarks against which to compare its own costs and performances It should go further and study the “best of class” practices of the world’s best companies. The firm’s success depends not only on how well each department performs its work, but also on how well the various departmental activities are coordinated. Too often, company departments act to maximize their interests. A credit department may Meanwhile, the customer waits and the salesperson is frustrated. A traffic department chooses to ship the goods by rail to save money and again the customer waits. Each department has erected walls that slow down the delivery of quality customer service. The solution to this problem is to place more emphasis on the smooth management of core business processes. The core business processes include The market sensing process: All the activities involved in gathering marketing intelligence, disseminating it within the organization, and acting on the information. The new offering realization process: All the activities involved in researching, developing, and launching new high-quality offerings quickly and within budget. The customer acquisition process: All the activities involved in building deeper understanding, relationships, and offerings to individual customers. The fulfillment management process: All the activities involved in building deeper understanding, relationships, and offerings to individual customers. The fulfillment management process: All the activities involved in receiving and approving orders, shipping the goods on time, and collecting payment. Strong companies develop superior capabilities in managing their core processes. For example, Wal-Mart has superior strength in its stock replenishment process. As Wal-Mart stores sell their goods, sales information flows via computer not only to WalMart’s headquarters, but also to Wal-Mart’s suppliers, who ship replacement merchandise to the stores almost at the rate it moves off the shelf. The idea is not to manage stocks of goods, but flows of goods, and Wal-Mart has turned over this responsibility to its leading vendors in a system known as vendor-managed inventories (VMI).