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Value chain by porter Essay

According to Michael Porter value is the chain of activities for a company that operates in a specific industry. For gaining the competitive advantages, Porter suggested that going through the chain of organization activities will add more value to the product and services than the sum of added cost of these activities. And thus, the company will gain marginal value for that product or service. If these activities run efficiently the company gains competitive advantage on the product or service. For this case the customers should transact the product or services willingly and provide return on value to the organization. The value chain framework can be used as powerful analysis tool for the strategic planning and to build the organizational model ensuring an effective leadership model. The value chain concept can be applied also in the individual business unit and can be extended to the whole supply chains and distribution networks. To form a successful product for an organization it is important to add value in each activity that the product goes through during the life cycle. The best possible value can be achieved in the product development process by adding value in each stage. For that it needs all, or a combination of, value chain activities and a proper synchronization among all the related activities.

A proper organization is required that contains all the required functional departments to perform these activities and a proper communication approach is required to synchronize the activities of these functional units efficiently. The value chain framework can be used as powerful analysis tool for the strategic planning and to build the organizational model ensuring an effective leadership model. The value chain concept can be applied also in the individual business unit and can be extended to the whole supply chains and distribution networks. To form a successful product for an organization it is important to add value in each activity that the product goes through during the life cycle. The best possible value can be achieved in the product development process by adding value in each stage. For that it needs all, or a combination of, value chain activities and a proper synchronization among all the related activities. A proper organization is required that contains all the required functional departments to perform these activities and a proper communication approach is required to synchronize the activities of these functional units efficiently.

Problem

How to map the porter’s value chain activities into business functional activities?
To solve this problem, first we have to classify the value chain activities into functional activities:
Classification of Porter’s value chain activities:
Porter classified the generic value added activities into two classes which are presented in Figure-1. These activities are: primary activities which are classified as product and market related activities and support activities that are related to infrastructure, technology, procurement, and human resource management.
Primary activities can be classified into product related and market related activities which are described below:

Product related activities: The activities that the organization performs to add value to the products and services itself. The activities are classified as:
1. Inbound logistics: For the production and development activities, organizations need inputs as goods which are received from the suppliers. Inbound logistics refer to all the activities related to receive goods from the suppliers, decision about the transportation scheduling, storing the goods as inventory, managing the inventory, and make the inputs ready to use for the production of end products. 2. Operations: These include the production process, development activities, testing, packaging, maintenance, and all other activities that transform the inputs into finished product.

3. Services: Organization offers the services after the products and/or services have been sold. These service activities enhance the product’s value in the form of after sales guarantees, warranties, spare parts management, repair services, installation, updating, trainings, etc. Market related activities: The activities that the organization performs to transfer the finished products or services to the customers. The activities are classified as:

1. Outbound Logistics: The finished products are developed using the product related activities. Now activities are required to transfer the finished products to the customers via warehousing, order fulfillment, transportation, and distribution management. 2. Marketing and Sales: These activities include the advertising, channel selection, product promotion, selling, product pricing, retail management, etc. The activities are performed to make sure that the products are transferred to the targeted customer groups. Marketing mix can be an instrument to take the competitive advantage to the target customers.

Support activities: The activities that the organization performs to assist the primary activities to gain the competitive advantage. The activities are classified as:

1. Procurement: This is the purchasing activity of the inputs to transform these into finished products or services. Procurement adds value by the acquisition of appropriate goods or services at the best price, at the right time, and in the desired place with the desired quality and quantity.

2. Technology Management: This is very important in today’s technological driven environment. Technology can be used in production to reduce cost, to develop new products, increase customer service facility, build up cost effective process, etc. It supports the value chain activities such as research and development, process automation, process design, etc.

3. Human Resource Management: The key roles of HR are to support the attainment of the overall strategic business plan and the objectives. As a strategic business partner HR designs the work positions by hiring, recognition, reward, appraisal systems, carrier planning, and employee development. They act as an advocate of the employees to motivate them and create a happy working environment. For the organizational changing situation, HR executes the strategic needs of the organization with minimum employee dissatisfaction and resistance to change.

4. Infrastructure: This includes the planning management, legal framework, financing, accounting, public affairs, quality management, general management, etc. These are required to perform the value added activities efficiently to drive the organization forward to meet the strategic plan and the objectives.

To form a successful product for an organization it is important to add value in each activity that the product goes through during the life cycle. The best possible value can be achieved in the product development process by adding value in each stage. For that it needs all, or a combination of, value chain activities and a proper synchronization among all the related activities. A proper organization is required that contains all the required functional departments to perform these activities and a proper communication approach is required to synchronize the activities of these functional units efficiently. In the solution section, porter’s value chain activities are mapped into the related business functions.

Solution

Mapping of porter’s value chain activities into business functionalities: The product related activities can be divided among functional units: production performs operational activities, partly inbound logistics, and services activities. Software production includes the activities as product development, testing, packaging, maintenance, installation, updating, trainings, etc. Sales performs part of service activities (e.g. guarantees, warranties). Inbound logistics activities can be shared between logistic department and the production function as inventory management activity. In SMEs logistic department can be merged with marketing & sales unit. Production process and production value means profitability analysis is decided by production management functionality. In brief, the function of the production management is to manage the production activities to meet the strategic goals.

Market related activities can be classified as function of marketing and sales. In many organizations marketing and sales are two independent departments that work in collaboration. But in SMEs both departments can be merged into one department to perform all the relative activities. The decision process of marketing and sales depends on the revenue and cost element of all the marketing and sales activities. This decision making functionalities can be defined as marketing and sales management to manage the marketing and sales activities and more importantly they take the decision whether the marketing and sales add value to the products, or services, and the organization. The Technology Management activities can be presented as research and development (R&D) function which increases the stock of knowledge for the organization.

Infrastructure related activities can be divided into key business functions of general management, finance and accounting, quality management, and general management.
For SMEs procurement activities may belong to the marketing and sales department in collaboration with production operation for scaling the need of quality and quantity.
The Technology Management activities can be presented as research and development (R&D) function which increases the stock of knowledge for the organization.
Infrastructure related activities can be divided into key business functions of general management, finance and accounting, quality management, and general management.
Depending on the size of organization, procurement activities may belong to the marketing and sales department in collaboration with production operation for scaling the need of quality and quantity. Human resource management activities can be performed by the human resource (HR) department.

Practical Impact
After mapping the porter’s value chain activities to the required business functionality we can summarize the value chain business functions into following categories:
Primary Business Functions: The functions perform product and market related activities. These are production, quality management, marketing and sales, production management, and marketing and sales Management.

Supportive Business Functions: The functions that perform these processes that are necessary for the execution of value added primary activities effectively and efficiently. These are research and development, accounting and finance, human resource management, and general management.

As a summary, the porter value chain model framework can be generally defined as nine major functions of business. These business functions are in brief:
Production (P): This is the process to produce a good or service from the inputs collected from the supplier using the resources that carry a cost determined by production factors.
2. Production Management (PM): This is the decision process about the profitability of the production activity to produce a good or service. The profitability measurement can be done by assessing the revenue and cost of the production factors. The outcomes are the management of the all the production functions as well as heartbeat (day-by-day operations) and integration of operations to achieve the desired strategic outcome.

1. Production (P): This is the process to produce a good or service from the inputs collected from the supplier using the resources that carry a cost determined by production factors.

2. Production Management (PM): This is the decision process about the profitability of the production activity to produce a good or service. The profitability measurement can be done by assessing the revenue and cost of the production factors. The outcomes are the management of the all the production functions as well as heartbeat (day-by-day operations) and integration of operations to achieve the desired strategic outcome.

3. Quality Management (QM): The quality of a product is the integral part of product itself. But maintaining the quality in all level of corporate grows the confidence that the quality requirements of the product or service will be met. To some extent, to assure the quality of the product is the part of production management functionality but in globally the quality management provides the process of quality assurance by fulfilling the requirement of quality management system like ISO 9000 for achieving the desired quality of the products, services, and the entire corporate activities.

4. Marketing and Sales (M&S): Marketing is the social process by which individuals and groups obtain what they need through creating and exchanging products and value with others. In brief, according to the chartered institute of marketing (CIM), marketing is the process that identifies, anticipates, and satisfies the customer requirements profitability. Sales perform all the exchange process of goods or services to the customers in return of money or its equivalent.

5. General Management (GM): GM has overall responsibility for the organization. He has profit and loss responsibility of the company. In general, GM oversees all the firms’ functions as well as day-to-day operations to sustain the company’s integrity and growth. 6. Marketing & Sales (M&S) Management: This is the decision process about the profit and loss elements related to marketing and sales activities. It also oversees the production functions including day-to-day operations to synchronize the marketing and sales activities with the production activities.

7. Accounting and Finance (A&F): Finance creates value from the company’s capital budgeting, financing, and net working capital activities. Accounting is the process for analyzing, summarizing the financial activities as well as interpret, and communicate the financial results to internal and external stakeholders].

8. Research and Development (R&D): This comprises the creative activity in a systematic way for the creation of new business, to improve the knowledge for the efficient usage of the existing resources, and in general to diversify the applications of the stock of knowledge. 9. Human Resource (HR) Management: This is the workforce management process of the organization to build up the desirable working environment and the competence to achieve the strategic goals of the company. The success of a company is measured by its profitability, which is closely connected to the efficiency of the performed activities. All the activities in an organization have cost and generate a return.

If rate of return is greater than the cost the activities add value to the organization. For achieving the premium rate of return, businesses need to perform economic activities efficiently. According to Porter the efficiency of the activities depends on the finalization processes in the interrelated areas of the organization, strategy, and tactics [36]. The platform of performing activities is the business organization. The pre condition to accomplish the value added activities is the efficient organization. The efficient organization must have all the value added functions of business for the proper interrelations of value added activities.

Individually all the single business function also produce the result and perform value creation activities. For achieving Porter’s value added efficiency it is important to include all nine major functions as sub-functions in each major business function.


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