7.4: The Value Chain
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The Value Chain
In his book, Porter describes exactly how a company can create value (and therefore profit). Value is built through the value chain: a series of activities undertaken by the company to produce a product or service. Each step in the value chain contributes to the overall value of a product or service. While the value chain may not be a perfect model for every type of company, it does provide a way to analyze just how a company is producing value. The value chain is made up of two sets of activities: primary activities and support activities. We will briefly examine these activities and discuss how information technology can play a role in creating value by contributing to cost advantage or differentiation advantage, or both.
The primary activities are the functions that directly impact the creation of a product or service. The goal of the primary activities is to add more value than they cost. The primary activities are:
- Inbound logistics: These are the functions performed to bring in raw materials and other needed inputs. Information technology can be used here to make these processes more efficient, such as with supply-chain management systems, which allow the suppliers to manage their own inventory.
- Operations: Any part of a business that is involved in converting the raw materials into the final products or services is part of operations. From manufacturing to business process management (covered in chapter 8), information technology can be used to provide more efficient processes and increase innovation through flows of information.
- Outbound logistics: These are the functions required to get the product out to the customer. As with inbound logistics, IT can be used here to improve processes, such as allowing for real-time inventory checks. IT can also be a delivery mechanism itself.
- Sales/Marketing: The functions that will entice buyers to purchase the products are part of sales and marketing. Information technology is used in almost all aspects of this activity. From online advertising to online surveys, IT can be used to innovate product design and reach customers like never before. The company website can be a sales channel itself.
- Service: The functions a business performs after the product has been purchased to maintain and enhance the product’s value are part of the service activity. Service can be enhanced via technology as well, including support services through websites and knowledge bases.
The support activities are the functions in an organization that support, and cut across, all of the primary activities. The support activities are:
- Firm infrastructure: This includes organizational functions such as finance, accounting, and quality control, all of which depend on information technology; the use of ERP systems (to be covered in chapter 9) is a good example of the impact that IT can have on these functions.
- Human resource management: This activity consists of recruiting, hiring, and other services needed to attract and retain employees. Using the Internet, HR departments can increase their reach when looking for candidates. There is also the possibility of allowing employees to use technology for a more flexible work environment.
- Technology development: Here we have the technological advances and innovations that support the primary activities. These advances are then integrated across the firm or within one of the primary activities to add value. Information technology would fall specifically under this activity.
- Procurement: The activities involved in acquiring the raw materials used in the creation of products and services are called procurement. Business-to-business e-commerce can be used to improve the acquisition of materials.
This analysis of the value chain provides some insight into how information technology can lead to competitive advantage. Let’s now look at another tool that Porter developed – the “five forces” model.