Another method of diagnosing an organization

Learning Topic
Porter’s Value Chain
Another method of diagnosing an organization is to analyze its value
chain. The term value chain was introduced by Michael Porter to
refer to the activities that are performed within and surrounding the
organization that add value to its products or services. Organizations
should perform these activities effectively for competitive advantage.
Value chain analysis identifies five primary areas within the value
chain, as shown in the figure Porter’s Value Chain:
• inbound logistics
• operations
• outbound logistics
• marketing and sales
• service
Additionally, four secondary areas are identified as follows:
• infrastructure
• human resources management
• technology development
• procurement
Porter argued that an organization should seek to provide unique
value for its customers by finding what it does best (which will result
in competitive success), rather than entering into too many markets,
striving to please everyone, or trying to provide the lowest cost.
Organizations will be successful when they focus on creating a
unique value for the customer, determine who their customer base is,
negotiate the best distribution channels, and manage their
production and pricing strategies. Organizations will always face
challenges from changes in the environment. To remain effective,
organizations will need to focus on continual innovation and on
increasing their value to the customer.
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The value‐added chain is the process by which technology is
combined with material and labor inputs, and then processed inputs
are assembled, marketed, and distributed. The value chain shows the
links, or chain, of the distinct activities and processes that a company
performs to create, manufacture, market, sell, and distribute its
product or service. The focus is on the activities that create value for
customers.
Value‐chain activities can be segregated to provide a detailed
identification of a company’s activities and the capabilities that
correspond to each activity. The value‐added chain is best defined in
terms of each link’s contribution to total cost. By comparing the costs
incurred by each link and against competitors, the company can
locate the critical success factors that must be addressed.
The importance of value‐chain analysis is that it helps portray the
costs in a company’s operations that might be impacted by a change
in one of the chain’s processes. By comparing a company’s value
chain to its competitors’, you can identify areas for improvement.
It is important to note that the value chain is influenced by the type
of strategy the company and its competitors follow. If the company is
a high‐value, high‐quality market leader, its chain will be different
from the low‐cost, high‐volume competitor. These differences
influence value‐chain analysis. Companies must make sure that their
business strategy is in tune with their strategic objectives.
The airline industry represents a good example of differentiation.
Many airlines operate under similar circumstances and share similar
cost structures and routes. Methods of differentiation can include
lowest‐price or on‐time record, and areas such as boarding
procedures, carry‐on policies, airline miles, and social media can drive
customer loyalty. The example of Southwest Airlines illustrates how
putting people first creates a solid marketing position. It is important
to identify the opportunities that increase a product or service’s
perceived value to the customer (Smartsheet, n.d.).
Another example is the American steel industry, which consists of
large, vertically integrated carbon steel makers. Some of the steel
companies are integrated from ore mining to finished products. Their
profitability has been threatened by mini steel mills and imports.
Steel producers must choose either to reduce crude steel production
and focus on flat and specialty steel products, or cut costs. The
value‐added chain is useful in identifying links that are not cost
competitive.
For strategies driven by product differentiation, the value‐added
chain is best defined in terms of the contribution of each link to
market value. This method helps identify the product attributes
preferred by consumers and links them to the value‐added activities
in the chain that generate this attribute.
However, assets that underlie the production of these attributes
cannot be easily redeployed along the value‐added chain. There is
also the risk of product or process imitation by competitors.
Companies, therefore, often pursue different strategies. Analysis of
value chains shows that strategy is not just about the selection of
profitable product markets. It is also about investing in the links that
generate the product attribute desired by consumers and which
correspond to the firm’s distinctive competence relative to its
competitors.
Depending upon the customer preferences and competitors’
strengths, the company can decide to redeploy its assets, pursue its
traditional business, withdraw from the business, or make an
acquisition of the critical assets.
The value‐chain concept is thus useful in isolating the critical success
factors of a strategy. For strategies in competitive industries, the
chain isolates those links that are not currently viable relative to
competition. For strategies of product differentiation, the chain
indicates those links that generate downstream economic rents.
In the global context, the chain of comparative advantage for
countries must be explored.
References
Smartsheet. (n.d.). The art of value chain analysis: From defining
activities to identifying areas for improvement. Retrieved
from https://www.smartsheet.com/art‐value‐chain‐analysis‐
defining‐activities‐identifying‐areas‐improvement
Porter, M. E. (1985). The competitive advantage: Creating and
sustaining superior performance. NY: Free Press.
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