Michael Porters Concept of Value Chain - Essay Example

Writer’s name] [Course number] [Professor’s name] [Date] Michael Porter’s Concept of Value Chain Analysis The Concept of Value Chain was introduced by Michael Porter in the 1980s. This concept helps the firm become more competitive by adding value to the product, thus making a profit by selling at a profit. This essay will discus the concept of the value chain analysis, its wider implications, and the affect IS/IT will have on this concept. Value chain helps the firms to gain a competitive advantage by adding to the product at each value. Therefore, Michael Porter introduced a set of generic activities. This provides a guideline to firms to become competitive. Porter outlined two ways in which value of the product could be increased. These are lowering the cost and/or creating a differentiated product (Michael E. Porter, On Competition). If a firm lowers the cost of the product, or differentiates it by, for example, providing a Unique Selling Point (USP), it would make a profit. However, many Japanese companies use both the concepts together, which make them extremely competitive in the world market. This suggests, and raises questions, that Porter’s approach may be out dated. The concept of generic value chain as defined by Porter comprises of three elements. These are primary activities, support activities and the margin a single firm makes. Primary activities are related to the production, selling the products and providing an after-sales service. Lean production, a concept introduced in Japan, would be a classic example of minimizing the costs of the production of primary activities. Reducing the costs of wastage in the form of time, raw materials and labor reduces the over all cost of producing the product. For example Toyota, a car manufacturing company, has designed its production in a way which encourages the usage of cost reducing mechanisms such as Just in Time. That is, delivery of the raw material, semi-finished and final products arrives just when the previous stocks finishes. It consequently reduces costs associated with warehousing, such as no waste of products breaking or getting obsolete, and rental costs of warehousing them are also reduced. Further more, selling the product in a way which increases its value, such as chocolates sold in shopping malls are generally more expensive as selling in malls displays better quality. Support activities support those activities which take place at a primary level. These activities include departments such as Human Resource, Procurement, Firm Infrastructure and Technology development. For example, by building a motivating and therefore productive work force will reduce the costs associated with time and mistakes. Additionally, technology such as computer-aided design helps produce products one of a kind, thus creating demand and adding value. Firm infrastructure, however, aids the entire value chain. The chart below briefly outlines how to identify the value activities. “-Inbound Logistics includes warehousing, material handling and inventory control. -Operations are the activities that transform inputs into finished products (example machining, testing, packaging, equipment maintenance. -Outbound Logistics includes the activities that store and distribute products to buyers. (example would be warehousing, delivery vehicle operations, order processing) -Marketing and sales are the activities that provide the means for the buyer to purchase. (Examples for these would be Advertising, sales force operations, selection and management of distribution channels). -Service includes activities which enhance or maintain the value such as installation, repair and parts supply. -Procurement specifically refers to the function of purchasing not to purchase inputs themselves. -Technology development, as defined by Porter, is wider than Research and Development itself. Technology Development includes engineering and process development. -Human Resource Management includes the recruitment, hiring, training, development and compensation of all personnel. -Firm Infrastructure broadly encompasses general management activities, as well as finance, accounting, legal, corporate affairs and quality management.” (Porter M.E. Competitive Advantage) Value chain of a particular company involves linkages. That is, an action taken in one department or a single activity in firm affects another department or activity in terms of cost and performance. This enables the firm to reduce chances of losing sales. For example, if a firm expensive raw materials and appropriately packages the final product, the cost would increase but costs associated with after sales service falls. Further more, it develops a clientage of satisfied individuals. Thus, it will increase its competitiveness in the market. Therefore, it is immensely important for these linkages among various activities to be coordinated. If a firm, for example, produces an expensive fashion product aimed at the upper class and higher-middle class and the sales team is not trained to deal with such customers, it may lose on competitiveness. Anita Roddick, it can be said, links the activities of The Body Shop in the most appropriate manner. The outlets are easily accessible, staff is friendly and advertisements of female products are made in, for example, women magazines. Thus, The Body Shop is very successful and highly competitive. Value System is the linkage of value chain activities of the company with others in the industry/market. Value chains of suppliers are included in value systems as they provide an input in the manufactures value chain. These inputs are in the form of raw-materials and services which have been purchased such as outsourcing. Value chains of particular companies also provide inputs in the value chains of its customers/buyers. For example, a firm making tractors helps farming businesses. It adds value to their production by reducing the time it takes to plough with hand or smalls tools. As shown in the figure above, value chains assist the suppliers and customers’ value chains too. By linking its activities to those of the industry or of others in the markets, a firm can gain a better competitive advantage. For example, a shoe manufacturer can request its suppliers to deliver raw materials when the previous stock finishes. This is known as Just in Time. This would save the supplier ware house costs, thus making him more competitive. These linkages bring advantages for suppliers, buyers and the firm itself. Suppliers and buyers will gain by creating better and therefore long term contact with the firm. Porter, in his book ‘On Competition’, stated that value chains have two functions. First being the cost and second differentiation. A firm needs to reduce its costs while maintaining the productivity and efficiency in order to achieve a competitive advantage over rivals. For example, if a firm purchases machinery in order to produce standardized products, it must train the work force. If the work force does not know how to use it, it will result in costs such as whole batches of products being wrongly produced or the worker harming himself. This may also affect company’s image, negatively affecting its competitiveness. On the other hand, differentiation satisfies customer needs. Differentiation is achieved by many activities and not just the physical features of a good. For example, a responsive after sales service is acknowledged and liked by the buyer. Thus, the needs of the buyer do not on rely on the product it self, but also other value chain activities of the firm. Initially, the concept of value chain was introduced by Michael Porter in 1985. The original concept promoted the generic value associated with primary activities and support activities of a firm. However, this theory now has wider implications and is now applicable to the supplier and buyer chains by providing an input. These value chains are so inter connected that all markets across the globe are affected by actions and activities of one market. These inter connected value chains are called value systems, comprising of buyer, manufacturer and supplier value chains. This value system is greatly affected by the information system and technology, which was not initially considered by Porter. Where the information system considers how the technology can be used by people, information technology is concerned with creating them. Furthermore, information system networks the technologies and the information technology collects and processes the data. As shown in the second figure, information system and technology reduces the barriers and encourages the flow of upstream and downstream information at all parts of the value chain and the whole value system, thus improving the entire value system. The information system, or technology development as used in the first figure, is one of the four important activities of the support system. This activity has an impact on the production, equipment and other areas. Whether the existing information systems are efficient and helpful and if the technology is having a positive impact can be measured by, according to Professor Michael Bird; “1) Effective research and development activities for processes and product or service initiatives, 2) Positive collaboration between research and development with other departments within the organization, 3) Organizational culture to enhance creativity and innovation, 4) Top IT professional qualifications, and 5) The ability to meet deadlines and quality on the delivery of software and technical development projects” If a firm introduces information systems, it can benefit from better efficiency and can be more effective, resulting in a competitive advantage. Currently, many firms are using these systems separately and linkages do not exist in many cases. Procurement, production and sales are the only activities where information system is currently utilized. Thus, difficulty arises to form a linkage between the various activities. However, if firms adopt information system and use it to integrate the supplier’s and buyer’s value chain, better efficiency levels could be reached. An example would be the current ware house system. A lot of space is taken up to ensure enough supplies. This result is great losses. That is, products can break, expire, become out dated and takes up space which could be used for productive means. Hence, due to the current system, it is important to keep large stocks in order to deliver, or produce on time. However, if a company adopts information system and creates a database of shared supply chain, it can greatly reduce these costs. The company would thus be able to recognize the stock needed, lessen the space taken and reduce the chances of breakage and stock getting obsolete by increasing the turnover of the stocks. Further more, as so much space will not be required anymore, firms can use it for productive measures. If the information system is used appropriately, it can benefit companies by leading to highly productive work force, competitive quality, elimination or reduction of warehouse costs and enabling firms to be flexible with production. Additionally, if a company establishes a stable and trusted procurement with the suppliers and buyers, it can achieve economies of scale. That is, reduction in unit cost as the scale of operation expands. Therefore, it can be said that the information system and technology supports value chain activities and the value system by, for example, reducing time and cost of delivering products. Company gains competition advantage over rivals and builds a platform for further growth. In conclusion, it can be said that information system and technology does have a great impact on value chains and value systems. Although the concept was originally introduced by Michael Porter in 1985, it has changed as the market conditions have altered and the world markets today are interlinked, leading to a value chain interconnecting all markets in the world economy. As the world now has a global economy, every individual market gets affected by an action taken by one market in the world. Thus, Porter’s model had altered a bit, but the basics remain extremely helpful for firms to stay competitive. This concept helps firms achieve a competitive advantage, as discussed in this paper. It is immensely important for firms to understand and adopt value chain functions of costs and differentiation either separately or both together as Japanese firms do as this would enable them to gain a competitive advantage and higher profits. After all, according to Porter, value added is profit earned. Reference Anon. (N.d) The Value Chain: The Original Breakthrough Available at http://www1.ximb.ac.in/users/fac/dpdash/dpdash.nsf/pages/BP_Value_Chain Michael E. Porter, 1998. On Competition, part 1 Dr. Kedar Karki (N.d). The Concept of Value Chain Approach. Anon. (N.d). Information Systems and Technology. Available at http://www.gd.com/overview/ist/Default.htm Anon. (N.d). Strategic Management. Available at http://www.quickmba.com/strategy/value-chain/ Professor Michael Bird, Value Chain Analysis and it’s Role in The Supporting Activities. Available at http://professormbird.com/id20.html Narasimhan, Ram, Kim, Soo Wook, 2001. Journal of Business Logistics. Information system utilization strategy for supply chain integration Anon, (N.d). Strategy- Value Chain Analysis. Available at http://tutor2u.net/business/strategy/value_chain_analysis.htm Read More