In today’s competition, there are some companies, such as Dell Computer Corporation and Wal-Mart, have successfully become the market leaders by offering lower-price products, fast response time, and excellent customer supports. How do these companies deliver those features? What is the key factor in their success? The secret is in how those firms manage their value chain. This paper will discuss briefly the concept of value chain and how it could impact a firm’s performance.

The concept of value chain is developed by Michael Porter in his book Competitive Advantage (1985). According to Porter, a firm’s competitive advantage could not be understood by merely looking at a company as a whole; to understand it, we must disaggregate that firm into its relevant activities so we would understand the behavior of cost and the current/potential differentiation. A firm’s competitive advantage is not the result of an individual activity (for example by only having a great operation process) but it is the result of how that firm manages all those activities into a synergy and seamless flow from the suppliers until the final customers. Therefore, he introduced the concept of value chain as a basic tool to analyze all strategically relevant activities in a firm and use it to create and sustain a firm’s competitive advantage.

Value chain is defined as “an integrated set of activities that are organized and managed to support an organization’s vision, mission, strategy, objectives with ultimate purpose of providing maximum value to customers.” A generic value chain model is shown in Figure 1.The main principle in disaggregating the activities is by isolating the activities that have different economics, or have a high potential impact of differentiation or represent a significant cost. Porter’s value chain model defines there are two types of activities in the value chain: primary activities (inbound logistics, operations, outbound logistics, marketing & sales, and service) and supporting activities (firm infrastructure, human resources management, technology development, procurement). We might think that the model does not really represent the situation in today’s market, for instance, the model puts procurement as only part of supporting activities; however, to understand the concept of value chain this model is still a good tool for us. Once we have understood the concept, we could customize the model to be more fit with our company’s need or to be more suitable with today’s business situation.

Figure 1: The Generic Value Chain

In addition to primary and supporting activities, managing linkages is one other important part in value chain concept. Linkages are “the relationships between the way one value activity is performed and the cost or performance of another.” By managing the linkages well, a firm can optimize and coordinate all activities within its value chain. There are two linkages in a value chain: horizontal linkages, which is the linkage within a firm’s value chain (such as between procurement and operations and marketing), and vertical linkages, linkages between a firm’s chain and the value chains of suppliers and channels.
The main point in value chain, clearly explained by its definition, is to provide maximum value to customer. Value is a function of performance and cost; it could be created by lowering cost or raising the performance (and the combination of both). The key is that we have to eliminate activities that do not add value to customers. Furthermore, value chain will highly depend on a firm’s strategy; different strategies will create different value chain.

Effective implementation of this value chain concept would enable a firm differentiate itself from the competition and could use it as a competitive advantage to win the market. For instance, Dell Computer Corporation has been using its effective value chain to be the market leader in computer market. It could differentiate itself by cost leadership and fast response time and also by using flexibility in its operation to allow customers order the kind of computer that they want (also known as customization).
Providing great value to customers will lead to great financial performance; an efficient value chain will create high return on investment (ROI) or return on invested capital (ROIC) and high economic value added (EVA). Having lower cost in producing a product/service with high customer satisfaction would make a firm competitive in today’s market. Furthermore, differentiation also allows a company implements a premium-price strategy that will increase its profit margin.

In conclusion, the concept of value chain is an excellent tool to analyze a firm competitive advantage and, more important, to create and sustain its competitive advantage. Value chain also could be used to design an organization structure in order to meet the company vision and mission in fulfilling customers’ value. Successful value chain management will allow a company to produce products/services in lower cost and differentiate itself by fast response time to customers. A good understanding of value chain concept combined with an effective implementation on the concept will create a very successful organization.

References

Porter, Michael. “The Value Chain and Competitive Advantage.” Understanding the Value Chain GRBUS-510 Supplemental Readings. Summer 2004.

“The Value Chain Concept.” Class Outline GRBUS 510-Understanding the Value Chain. Summer 2004.