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'Value chain' refers to the application of these various activities and how an organization works to gain its competitive edge. This term was coined in 1985 by Michael Porter in his book "Competitive Advantage: Creating and Sustaining superior Performance". According to him if all the value adding processes are identified and measured against its costs in the best way, a firm can generate profit margin for itself. The competitive edge for the company lies only if it manages the activities in the value chain better than its competitors. According to Porter (1985) the value chain frame work is 'an interdependent system or network of activities, connected by linkages' (p. 41).
For this a good value chain analysis is required through which a firm assesses how much value a particular activity adds to a product and understands its own capabilities in this regard. For the analysis, Porter divides the activities in to 2 broad categories on the basis of activities they perform. The group called 'Primary activity' consists of all those which are directly involved in the formation and delivery of the product. For instance product development, sales, marketing are all included in this category. The second group is called 'Support activities' and consists of those which increase the effectiveness of the primary activities like research and development, human resource management and more.
Under Porter's model, the primary value chain activities are sub divided as follows:
o Inbound Logistics: This includes the process of acquiring the basic raw materials, storing them and delivering them to the production house as and when required.
o Operations: This includes the whole process of transforming these raw materials to finished goods.
o Outbound Logistics: This includes the storing of the final goods and its distribution to the markets.
o Marketing and Sales: All activities of marketing like demand identification, packaging, promotion and final sales come under this category.
o Service: This includes the warranty and after sale services offered to the consumer after the products have been sold.
The support activities according to him are:
o Firm's infrastructure: This includes a company's own controlling structure, business environment, organization and so on.
o Human Resource management: This includes the whole process of recruiting, training and compensating the right person for the right job.
o Technology development: This includes all the technology used to make the process fast and effective.
o Procurement: This process includes activities in relation to finding and choosing all inputs like the best raw material, efficient machineries and supplies.
It is the best possible mixture of these activities in such a way that the cost incurred by company remains low but the finished product turns out so well and has great value in the eyes of the customer that they are willing to pay a price through which the company is sure to make a gain. It is important also to note that the value added by each activity is more than the costs it brings along, than only is that service valuable. If the proportion is not appropriate the company needs to take effective measures. In such cases it is advised to the company's to take note and re-structure its activities Porter identified ten main cost drivers, which if controlled well can generate advantages for the company. Also it is important to control them better than other market competitors. These drivers include:
o Capacity utilization
o Economies of scale
o Geographical factors
o Degree of vertical integration
o Market entry timings
o Company's cost or differentiation policy
o Interrelationships between business units
o Linkages among activities.
o Institutional factors.
Apart from these, Porter also suggested that technological changes can also have a great impact on the value added by each process. Both primary value activities and support activities make use of various technologies like transportation, communication, information systems, maintenance etc. and changes in either of them can have a considerable values effect. He also suggested that since all these activities are inter-related changes in any will surely affect the other process.
A thorough analysis of value chain also allows a company to check if it is better for it to perform a certain activity itself or outsource it. If a company notices that the packaging cost it incurs is more in each product due to old machinery and less trained employees, it can always decide outsource that certain process. Outsourcing is very much encouraged if the abilities of company in performing a certain activity is less and more costly than the other out-sourcing company. Porter explained how a firms profit are not only determined by its own value chain but affected by the linked value chains as well.
However when it comes to service value chain, the elements differ from those on Porter's model. So being because his model majorly focuses on the 'goods' or 'production' based firm.
So the elements of the Service Value chain are:
o Identifying Customer opportunities: This can be done through various sales channels like direct sales, alliances, self-services, outbound calls and repeated business needs.
o Capturing service demand needs: this is achieved by having a trained person taking phone calls, empathizing with the customers, understanding their needs and requirements.
o Dispatch and Logistics: here arrangements are made to deliver the required services on time. What marks a company's edge is sending the right person for the required job at the required time.
o Service Sales: here is the part where the problem or job is identified, costing is done and approvals are taken. A lot of factors contribute towards the success at this stage including quality, price, timing, appearance and so on.
o Job Preparation: in this part of the process all arrangements are made which are required to the fulfillment of a specific job. This may include arrangements of tools, permits, appointments and more.
o Follow-up: for many businesses a service is complete when provided and payment received but the ones who want to lead the market know how important follow ups are. This includes re services, warranty services and satisfaction surveys.
Hence for businesses dealing in service industry their value chain is little different from the model shown by Porter. However, the main concept remains same. To identify the main value adding activities in your business so that they can be controlled in a way that the value they yield is more than the costs they bring.