PORTER SUPPLY CHAIN MODEL:The activities of the Value Chain, Support activities

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Strategic Management MGT603

Lesson 41

PORTER SUPPLY CHAIN MODEL

Learning Objective

This topic concern with the porter supply chain model. After studying this chapter you are able to

understand that what are major forces of supply chain model and how it affects the performance of the

organization.

Porter supply chain model

The Value Chain framework of Michael Porter is a model that helps to analyze specific activities through

which firms can create value and competitive advantage.

The activities of the Value Chain

Primary activities (line functions)

o Inbound Logistics. Includes receiving, storing, inventory control, transportation

planning.

o Operations. Includes machining, packaging, assembly, equipment maintenance, testing

and all other value-creating activities that transform the inputs into the final product.

o Outbound Logistics. The activities required to get the finished product at the customers:

warehousing, order fulfillment, transportation, distribution management.

o Marketing and Sales. The activities associated with getting buyers to purchase the

product, including: channel selection, advertising, promotion, selling, pricing, retail

management, etc.

o Service. The activities that maintain and enhance the product's value, including: customer

support, repair services, installation, training, spare parts management, upgrading, etc.

Support activities (Staff functions, overhead)

o Procurement. Procurement of raw materials, servicing, spare parts, buildings, machines,

etc.

o Technology Development. Includes technology development to support the value chain

activities. Such as: Research and Development, Process automation, design, redesign.

o Human Resource Management. The activities associated with recruiting, development

(education), retention and compensation of employees and managers.

o Firm Infrastructure. Includes general management, planning management, legal, finance,

accounting, public affairs, quality management, etc.

Creating a cost advantage based on the value chain

A firm may create a cost advantage:

· By reducing the cost of individual value chain activities, or

· By reconfiguring the value chain.

Note that a cost advantage can be created by reducing the costs of the primary activities, but also by

reducing the costs of the support activities. Recently there have been many companies that achieved a cost

advantage by the clever use of Information Technology.

Once the value chain has been defined, a cost analysis can be performed by assigning costs to the value

chain activities. Porter identified 10 cost drivers related to value chain activities:

1. Economies of scale.

2. Learning.

3. Capacity utilization.

4. Linkages among activities.

5. Interrelationships among business units.

6. Degree of vertical integration.

7. Timing of market entry.

8. Firm's policy of cost or differentiation.

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Strategic Management MGT603

9. Geographic location.

10. Institutional factors (regulation, union activity, taxes, etc.).

A firm develops a cost advantage by controlling these drivers better than its competitors do. A cost

advantage also can be pursued by "Reconfiguring" the value chain. "Reconfiguration" means structural

changes such as: a new production process, new distribution channels, or a different sales approach.

Normally, the Value Chain of a company is connected to other Value Chains and is part of a larger Value

Chain. Developing a competitive advantage also depends on how efficiently you can analyze and manage

the entire Value Chain. This idea is called: Supply Chain Management. Some people argue that network

is actually a better word to describe the physical form of Value Chains: Value Networks.

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