Page 126 -

Q3-4 How Does Competitive Strategy Determine Value Chain Structure?

2TKOCT[ #EVKXKV[ &GUETKRVKQP 125
4GEGKXKPI UVQTKPI CPF FKUUGOKPCVKPI KPRWVU VQ
+PDQWPF .QIKUVKEU
VJG RTQFWEVU
1RGTCVKQPU /CPWHCEVWTKPI 6TCPUHQTOKPI KPRWVU KPVQ VJG ƂPCN RTQFWEVU
Figure 3-7 %QNNGEVKPI UVQTKPI CPF RJ[UKECNN[ FKUVTKDWVKPI VJG
Task Descriptions for Primary 1WVDQWPF .QIKUVKEU RTQFWEVU VQ DW[GTU
Activities of the Value Chain
Source: Based on Michael E. Porter, +PFWEKPI DW[GTU VQ RWTEJCUG VJG RTQFWEVU CPF RTQXKFKPI
Competitive Advantage: Creating 5CNGU CPF /CTMGVKPI C OGCPU HQT VJGO VQ FQ UQ
and Sustaining Superior Performance
(The Free Press, a Division of Simon #UUKUVKPI EWUVQOGTUo WUG QH VJG RTQFWEVU CPF VJWU
& Schuster Adult Publishing Group). %WUVQOGT 5GTXKEG
Copyright © 1985, 1998 by Michael OCKPVCKPKPI CPF GPJCPEKPI VJG RTQFWEVUo XCNWG
E. Porter.

drone is worth more than an empty space on a shelf. The value is not only the parts themselves, but
also the time required to contact vendors for those parts, to maintain business relationships with
those vendors, to order the parts, to receive the shipment, and so forth.
In the operations activity, the drone maker transforms raw materials into a finished drone,
a process that adds more value. Next, the company uses the outbound logistics activity to deliver
the finished drone to a customer. Of course, there is no customer to send the drone to without the
marketing and sales value activity. Finally, the service activity provides customer support to the
drone users.
Each stage of this generic chain accumulates costs and adds value to the product. The net re-
sult is the total margin of the chain, which is the difference between the total value added and the
total costs incurred. Figure 3-7 summarizes the primary activities of the value chain.

Support Activities in the Value Chain

The support activities in the generic value chain contribute indirectly to the production, sale, and ser-
vice of the product. They include procurement, which consists of the processes of finding vendors, set-
ting up contractual arrangements, and negotiating prices. (This differs from inbound logistics, which
is concerned with ordering and receiving in accordance with agreements set up by procurement.)
Porter defined technology broadly. It includes research and development, but it also includes
other activities within the firm for developing new techniques, methods, and procedures. He
defined human resources as recruiting, compensation, evaluation, and training of full-time and
part-time employees. Finally, firm infrastructure includes general management, finance, account-
ing, legal, and government affairs.
Supporting functions add value, albeit indirectly, and they also have costs. Hence, as shown
in Figure 3-6, supporting activities contribute to a margin. In the case of supporting activities, it
would be difficult to calculate the margin because the specific value added of, say, the manufac-
turer’s lobbyists in Washington, D.C., is difficult to know. But there is a value added, there are costs,
and there is a margin—even if it is only in concept.

Value Chain Linkages

Porter’s model of business activities includes linkages, which are interactions across value activi-
ties. For example, manufacturing systems use linkages to reduce inventory costs. Such a system
uses sales forecasts to plan production; it then uses the production plan to determine raw material
needs and then uses the material needs to schedule purchases. The end result is just-in-time inven-
tory, which reduces inventory sizes and costs.
By describing value chains and their linkages, Porter recognized a movement to create in-
tegrated, cross-departmental business systems. Over time, Porter’s work led to the creation of a
new discipline called business process design. The central idea is that organizations should not
automate or improve existing functional systems. Rather, they should create new, more efficient