To analyse the particular activities through which firms can gain a competitive benefit, it works to design the company as a chain of value developing activities. For this purpose, Porter identified a variety of interrelated generic activities common to a vast array of companies. The resulting model is understood as the worth chain.
According to Porter (1985 ),
” Competitive Advantage occurs out of the method firms arrange and set up discrete activities”.
Through using the Worth Chain, the activities carried out by a company competing in a particular market can be grouped into classifications as displayed in the model below:
Porter compares main activities and assistance activities.
Primary activities are straight worried about the production or shipment of a services or product. The goal of the main activities is to develop value that surpasses the expense of supplying the service or product and therefore creating an earnings margin.
g. order fulfilment
Each of these primary activities is linked to support activities, which help to improve their efficiency or effectiveness.
The corporate strategy adopted by the firm guides the performance of individual activities and organises its entire value chain.
It is important to remember that each activity is generic and may vary depending on the industry. In consumer goods advertising and marketing are crucial, whilst in manufacturing this is practically non-existent and it is the primary activities such as logistics that are used to add value.
A firm may create a cost advantage either by reducing the cost of individual value chain activities or by reconfiguring the value chain. A differentiation advantage can arise from any part of the value chain e.g. procurement of inputs that are unique to competitors. Ultimately, differentiation arises from uniqueness. A differentiation advantage may be gained by changing individual value chain activities to increase uniqueness in the final product or also by reconfiguring the value chain.
Frequently, firms gain competitive advantage by conceiving new ways to conduct activities, employing new procedures or utilising different inputs. Allied Irish Banks are currently using customer relationship marketing (CRM) as a way of gaining competitive advantage and adding value to their business.
The term ‘margin’ is used within the model and implies that organisations realise a profit margin that depends on their ability to manage the linkages between all activities in the value chain. In other words, the organisation is able to deliver a product / service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain.
As mentioned, gaining competitive advantage requires that a firm’s value chain be managed as a system rather than a collection of separate parts. Reconfiguring the value chain by relocation, reordering or even eliminating certain activities can often lead to a major improvement in competitive position.
A firm’s value chain links to the value chains of the upstream suppliers and downstream buyers. The result is a larger stream of activities known as the
value system. The development of a firm specific competitive advantage not only depends on the firms value chain but also on the value system of which the firm is a part. In most industries, it is rather unusual that a single company performs all activities from product design, production of components, and final assembly to delivery to the final user by itself. Most often, organisations are elements of a value system or supply chain. Hence, value chain analysis should cover the whole value system in which the organization operates.
Within the whole value system, there is only a certain value of profit margin available. This is the difference of the final price the customer pays and the sum of all costs incurred with the production and delivery of the product/service. It depends on the structure of the value system, how this margin spreads across the suppliers, producers, distributors, customers, and other elements of the value system. Each member of the system will use its market position and negotiating power to get a higher proportion of this margin. Nevertheless, members of a value system can cooperate to improve their efficiency and to reduce their costs in order to achieve a higher total margin to the benefit of all of them (e.g. by reducing stocks in a Just-In Time system).
Outsourcing is becoming a popular option for firms in streamlining their value chain. This is where they specialise in one or more of the value chain activities and outsource the remainder. The extent to which a firm performs its upstream and downstream activities is described by the degree of vertical integration. A thorough value chain analysis can illuminate the business system to facilitate outsourcing decisions. To decide which activities to outsource managers must understand the firm’s strengths and weaknesses in each activity, both in terms of cost and ability to differentiate. Managers may consider the following when deciding whether to outsource:
Bank of Ireland have recently outsourced their I.T department to Hewlett Packard as they realised they did not have a competitive advantage in this area and it would be undertaken more efficiently by another company.