Value Chain and Organisation

The forces must be strategically placed. They must be in accordance with that which is advantageous.
(Sun Tzu)

The design of the process of value creation in a business at the level of functional activities has the potential of setting up sustainable competitive edge over competitors. Porter’s value chain concept can be applied here as an instrument of strategy.

METHOD

In his approach to the value chain analysis, Porter distinguishes between primary and secondary activities. Primary activities are those directly aimed at the production and sale of a product or service. Secondary activities provide direction and support for primary activities.

PRIMARY ACTIVITIES

• ‘Procurement logistics’ comprises all activities that have an effect on the receipt, warehousing and provision of production facilities and materials.
• ‘Operations’ means all activities within the framework of production. These include materials processing, intermediate warehousing, quality control, packaging.
• ‘Marketing and sales’ are the activities arising from the operative implementation of product policies, price policies, distribution policies and communication policies.
• ‘Output logistics’ comprises physical distribution, delivery and set up of the products and services.
• ‘Service’ includes activities that are intrinsic in maintaining value and consistently acquiring customers. In recent years, this model of value creation steps has been expanded to include waste management and recycling.

SECONDARY ACTIVITIES

• ‘Management’ includes activities such as strategic planning, accounting, cash management, information and communication systems, and controlling systems.
• The ‘human resources management’ sector is responsible for hiring, personnel development and the placement of employees.
• Activities in ‘technology development’ are directed both at the product and at the process development. These include activities in the sector of research and development, process design and communication platforms.
• ‘Procurement’ organises the provision of necessary raw or pre-processed materials and the operating resources for all sections of the value chain.

The interfaces between the pre- and post-value chains from supplier to customers are of strategic importance alongside the concrete set up of the primary and secondary activities. This is of great importance because it is from these ‘border crossings’ that new structures and networking of the value creation arise. These are frequently advantageous to the strategic position.

Using the value chain approach, differentiated benchmarking between competitors in an industry is possible. The application of the value chain concept makes it possible to identify the interaction between strengths and weaknesses in these activities.

If a business is active in several strategic business fields, the value chain analysis can also be used to identify possible potentials for synergy effects – from the transfer of know-how to the joint use of value-creating activities.

The strategic aspects of the core competences are driving the value chain that can be applied to the decision of ‘make’ or ‘buy’. Strategically, the decision to produce the goods or services yourself has priority when trade secrets are involved and the core competences can be used to achieve competitive edge.

The value chain can be considered from the customer’s point of view. The interaction of the individual components in the value chain ultimately leads to a value-for-money relationship perceptible to the customer. Through comparison with competitors, allocating the absolute and relative cost variables in the activity areas of the value chain can help to optimise the strategic configuration of the design of processes.

Strategic Planning, by R Wittmann and M Reuter, is published by Kogan Page, www.koganpage.com, hardback, 188 pages, £14.99.