Porter’s Value Chain Model: Meaning | 7 Advantages | Disadvantages

Under Porter’s value chain approach or resource analysis, the physical resources are transform into money units. Also, this process is helpful to determine the number of resources utilized to support economic goals and results from various possible actions. It is the job of the expert in resource analysis to economic impact and ensures the resources. In addition, a resource analysis is helpful to assess a business’s strengths and weaknesses. It aids the company in creating strategies to enhance its strengths and overcome shortcomings.

Meaning of Porter’s Value Chain Approach

Every business activity involves integrating various related activities, starting at the beginning of a new product idea to sales and services related to the offering. Each stage of the chain of operations added a benefit to the product or service. It gives more value than the prior stage. The chain of operations is the ‘value chain’. It is a collection of actions that generate or enhance the business’s value. The basic idea behind a company’s worth chain includes two principal activities referred to as primary and requisite support activities. The main activities focus on generating value for customers. The necessary support activities support and enhance the effectiveness of prior actions.

The primary goal of any business is to make money. It is creating value for its clients over the original cost for the item. The company can earn a profit since the expense of the business’s activities related to creating value is a part of the total price the purchaser pays. Separating the company’s activities into two main activities: principal and secondary, allows the company to identify the main components of its cost structure. Each of the activities that are an element of porter’s value chain adds expense, including assets for each task. All of this gives an estimate of total costs and capital requirements.

Porter created the idea that value chain analysis is a method of research. It is a technique that examines the strengths and resources of a company and determines its strengths and weak points. Porter’s Value chain analysis also determines the aspects that add value to the product or service. A product’s or service’s worth can easily calculate the revenue. If the product’s total price is known, the profit margin is in calculation by summing the difference between the revenue and the product’s cost.

If a company is looking to increase the value given by its customers, they are consumers at the end of the line or channel partners of the business. Understanding how much weight each of these activities adds and how you can improve it further by redesigning the entire value chain is a must. It is known as “Porter’s value chain.”

For instance, a value chain for a supplier, which relates to upstream value, impacts the company’s performance. The same goes for the offerings of an organisation. The value generation is helpful for the system of supply chains is contingent on how an organisation maintains a relationship with other stakeholder companies if it is effectively managed to be profitable for all the stakeholders within the supply chain and the business to gain an advantage in the long run.

A Porter’s value chain assessment is the analysis of the processes and activities employed by the company. It proves that it is dependable in meeting the needs and requirements of its customers, as well as areas in which the company could have an advantage over its competitors. So, you can conclude internal elements essential to the strategic success are in connection with porter’s value chain’s activities thoroughly and are potential sources of the firm’s strengths and weaknesses.

Identifying Porter’s Value Chain Activity

There are generally two kinds of value chain operations.

1. Principal Activities

Based on technological orientation and strategic distinction, primary activities are classified into five categories that are:

a.) Inbound Logistics

The processes connected with the purchase and storage of production inputs, such as the handling of materials, warehouses in inventory control, transportation, and so on.

b.) Operation

The processes transform inputs into finished products, including cutting techniques. Packaging, assembly maintenance of equipment, facility operation and testing, as well as facility operation.

c.) Outbound Logistics

These operations involve moving finished products from the manufacturing point to final customers. These tasks include collecting and storing goods, order processing, delivery, etc.

d.) Sales and Marketing

Any activities related to marketing and public relations, managing sales forces, and distribution channel management pricing of products are sales and marketing.

e.) Services

These tasks focus on supporting the upkeep of the product, such as repair, installation, and supply of parts and accessories, product adjustments, and others.

2. Secondary Activities

These supporting activities provide the infrastructure for the efficient operation of primary functions. These activities are helpful to their strategic and technological distinctiveness. The four types of secondary activities are discuss in the following paragraphs:

a.) Procurement

All the activities associated with purchasing materials or service inputs, machines, equipment, etc. All fall under the umbrella of procurement.

b.) Technology Development

Technological upgrading is always needed since it is in execution in the design of products and manufacturing. The activities that help develop technology must be carry out for increase your value chain.

c.) Human Resource Management

Human resource management includes recruiting, training, and building manpower. All these actions form a unique system of support that is a part of this Porter’s value chain.

d.) Immutable Infrastructure

These tasks differ from secondary and primary support functions but are needed to create the entire organization’s fundamental structure. They include strategic planning, legal affairs, general management, finance, etc.

Advantages of Porter’s Value Chain Analysis

The benefits of Value Chain Analysis are mentioned below:

1.) Produces Profit

Porter’s value chain comprises primary and secondary functions connected to product sales and distribution as well as service and support. All the sub-activities are included in the primary and secondary functions. These activities help manage cost control throughout the value chain. In that case, the value delivered to the client is maximized automatically, allowing the company to make profits.

2.) Cooperation

In a value system, the company’s value chain might need to cooperate with other intermediaries, such as retailers, suppliers, etc. It is why cooperation is crucial to building stronger relations with customers. A well-coordinated approach creates an advantageous situation for all companies operating in the same market and the client. They could establish a distinct market position for their services and products. The relationships with other companies focus on maximizing the value of their products and services for customers. It helps to increase their business margins by being unique.

3.) Return on Investment

As a component within the value chain, return on investment is crucial for every business. In the beginning, achieving break-even and the expected return on investment could be challenging. In this regard, practical cooperation and communication between the partners are crucial to be successful. More partners must participate in the value chain and have new concepts to increase profits.

4.) Enhances Competitiveness

The value chain is an essential concept in strategic planning that evolved from a theory based on firm competition. Since it’s becoming increasingly difficult for companies to keep up with the ever-increasing competition in today’s world, businesses shift their focus away from traditional approaches to more innovative ways of becoming more effective. It is accomplished by focusing on sub-activities in an organisation’s value chain and developing strategies to remain at a competitive advantage over the long term.

5.) Multi-benefits

Lean manufacturing, six-sigma 5S, and TOM are various methods for continuous improvements. These have concentrated on improving the efficiency of operations and the supply chain for several decades. Also, industry experts shift their focus away from a myopic vision of operational excellence and growing competitive advantage over other companies. Creating a competitive advantage by utilising value-added activities such as the development of products requires a shift in focus away from supply chains to value chains.

6.) Better Customer Services

Better customer service increases trust in the business over the long term. It’s a significant benefit for companies using a value-chain perspective since they can better meet customer demands. It improves processes and helps them collaborate across the entire value chain to enhance customer satisfaction.

7.) Cost Savings and Lesser Delivery Times

If a value chain is well-managed, the value chain can save money and reduce turnaround time for delivery. These two advantages are most often by businesses that Profit from value management. Thus, continually improving the value chain and eliminating redundant tasks can help companies cut costs and reduce delivery time.

Disadvantages of Porter’s Value Chain Analysis

The following are the drawbacks of analysing porter’s value chain:

1.) It isn’t flexible enough. It is not adaptable to every business situation because it’s a drawback. Also, it can easily customize and cannot copy for each business.

2.) Its structure can easily modify by the manufacturing industry. However, it’s not suitable for other types of industries.

3.) It is a vast range of applications that require a lot of time to complete porter’s value chain analysis of the company and the other value chain partners to determine the main drivers and differences.

4.) This concept is beneficial in business but applies to those who are experts with the idea.

5.) Operational and supply chain executives typically use porter’s value chain.

6.) Business information systems aren’t proper structure, which prevents the company from receiving information necessary to analyse porter’s value chains.