Added value chain
The concept of value added chain developed by Michael Porter presents a business as a string of related activities in a logical whole, taken at the time of manufacture of the product manufactured or service, leading to added value for company and customer. The author indicated two types of activities: primary activities and support activities.
Primary activities are directly related to the production of the final product or service and their sale. This is the basic process going through the whole enterprise, including physical production, sale, provision, and support for the product on the market.
Primary activities
According to the model primary activities consist of:
- Entry logistics (warehousing, sorting, inventory, quality control, and overall supply support),
- Operations (manufacturing of the product),
- Departure Logistics (warehousing, sorting, inventory, quality control, and support the sale of the products),
- Marketing and sales (market research, elements of the marketing mix and sales),
- After-sales service (support for the finished product, such as installation, repair of warranty).
In service company a string of activities will reflect how to perform a certain service for customers.
Support activities
Support activities and operations are similar in every type of business. Support activities consist of:
- Enterprise infrastructure management (maintaining the efficient operation of the company, including management, accounting, etc.),
- Human resource management,
- Changes in technology (development, finding new solutions),
- Purchase (purchase of raw materials and consumables, as well as measures to support purchases).
Management tasks
Goal of management is the effective use of knowledge flowing from the developed model, to make optimal decisions about costs of individual activities, which in turn affect the efficiency of the company, its total costs and profit margins. In addition, managers need to optimize and coordinate relations between the links of the chain in order to gain a competitive advantage. It is possible to achieve by using:
- Internal coordination of activities within the company, to improve elementary operations and reduce their costs,
- External coordination for improving the relationship between suppliers and customers.
Reporting value chain costs
Measurement and presentation in the financial statements of costs associated with the operations of the product contained in the chain is called the "Bill of the cost of the value chain". However, the identification and measurement of costs for each phase is often a very difficult task, for example: the costs of research and implementation of product and marketing are hard to measure. Therefore, it is vital to develop an efficient system for recording costs, which will ensure the assignment of the cost to a particular product or service. Analysis of the value chain is an important tool for assessing vulnerabilities and strengths of the company or make decisions about possible alliances and mergers.
Examples of Added value chain
- Manufacturing: Manufacturing is a primary activity within the value chain and is the process of transforming raw materials into finished goods. It involves all the steps from the acquisition of raw materials to the assembly and production of the finished product. An example of a manufacturing process is the production of automobiles, where raw materials such as steel and plastic are transformed into a finished car.
- Research and Development: Research and development is a support activity which helps to improve the efficiency and effectiveness of the manufacturing process. Research and development activities are focused on creating new products, or improving existing products and processes. An example of research and development is the development of new medications, where a company researches and develops new drugs for the treatment of disease.
- Distribution: Distribution is another support activity that is responsible for delivering the finished product to the customer. Distribution activities involve packaging, transportation, warehousing, and delivery of the product to the customer. An example of distribution is the delivery of medicines from a pharmaceutical company to a pharmacy or hospital.
- Marketing and Sales: Marketing and sales is a primary activity within the value chain which is responsible for creating awareness of the product and generating sales. Marketing and sales activities involve advertising, promotion, and pricing of the product. An example of marketing and sales is the promotion of a new car, where the company uses advertising and promotional activities to create awareness and generate sales.
Advantages of Added value chain
The advantages of value added chain include:
- Improved profitability and competitiveness: The value added chain allows companies to identify and analyze all activities involved in their operations, allowing them to identify and eliminate activities that are not adding value. By doing so, companies can reduce costs, improve productivity and become more profitable.
- Improved customer satisfaction: By identifying the activities that add value to the customer experience, companies can focus on providing better service and customer satisfaction.
- Greater efficiency: By streamlining activities and eliminating any that are unnecessary or inefficient, companies can operate more efficiently and effectively.
- Better decision making: By analyzing the value added chain, companies can identify opportunities and make better decisions.
- Improved innovation: By understanding the activities involved in the value added chain, companies can identify areas for improvement and focus their efforts on developing innovative products and services.
Limitations of Added value chain
The concept of value added chain developed by Michael Porter presents a business as a string of related activities in a logical whole, taken at the time of manufacture of the product manufactured or service, leading to added value for company and customer. However, there are several limitations to this model:
- The added value chain does not consider external factors such as the economy, political environment, and competitive landscape.
- The model does not take into account the cost of investments required for each activity, which can be a major factor in determining overall profitability.
- It does not allow for the possibility that some activities may be more or less beneficial than others, as there is no mechanism to measure the impact of each activity.
- It does not consider the impact of customer feedback and satisfaction, which can significantly affect the success of the business.
- The model does not take into account the possibility of innovation or strategic changes, which could benefit the organization.
- The concept of value added chain developed by Michael Porter presents a business as a string of related activities in a logical whole, taken at the time of manufacture of the product manufactured or service, leading to added value for company and customer. Other approaches related to the Added Value Chain include:
- Activity-Based Costing (ABC) which looks into the cost of producing a product and the activities that are necessary to produce it. It focuses on identifying the cost of each activity, and how it contributes to the overall cost of the product.
- Value Stream Mapping (VSM) which is a tool used to identify and analyze the flow of materials and information required to bring a product or service from supplier to customer. VSM can help identify and eliminate waste, reduce lead times and improve the flow of value added activities.
- Total Quality Management (TQM) which is an approach to managing a business that focuses on continuous improvement and customer satisfaction. The goal of TQM is to reduce the cost of production, increase customer satisfaction, and improve the quality of products and services.
- Business Process Reengineering (BPR) which is a process of redesigning a business process to increase efficiency, reduce costs, and improve the quality of the product or service.
These approaches all have the same aim of providing value added services to customers and improving the efficiency of the business. By understanding the activities involved in producing a product or service and their associated costs, companies can identify areas for improvement, reduce waste and ultimately improve their bottom line. Summary: The concept of value added chain developed by Michael Porter presents a business as a string of related activities, taken at the time of manufacture of the product or service, leading to added value for company and customer. Other approaches related to the Added Value Chain include Activity-Based Costing, Value Stream Mapping, Total Quality Management and Business Process Reengineering. These approaches all have the same aim of providing value added services to customers and improving the efficiency of the business.
| Added value chain — recommended articles |
| Strategic cost management — Value added statement — Target cost — Activity-based management — Product cost — Non value added activity — Fit gap analysis — Value stream mapping — Structural productivity — Inventory shrinkage |
References
- McPhee, W., & Wheeler, D. (2006). Making the case for the added-value chain. Strategy & Leadership, 34(4), 39-46.
