Value Chain analysis

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Value chain

One of the most discussed and most misunderstood ideas in the whole of the management arena
Nov 19th 2009
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The value chain was first developed as a business idea in the second chapter of “Competitive Advantage: Creating and Sustaining Superior Performance” by Michael Porter, first published in 1985. In it he wrote: A systematic way of examining all the activities a firm performs and how they interact is necessary for analysing the sources of competitive advantage. In this chapter, I introduce the value chain as the basic tool for doing so. In the decade after the book was published, the idea became one of the most discussed and most misunderstood in the whole of the management arena. Each link in a value chain consists of a bundle of activities (value activities), and these bundles are performed by a firm to “design, produce, market, deliver and support its product”. “Value activities are the discrete building blocks of competitive advantage,” wrote Porter. Rival firms may have similar chains, but they may also have very different ones. Porter quoted the example of People Express, one of the earliest of the low-cost airlines, and United Airlines, a more traditional firm. They were both in the same business, but there were significant differences in the way that, for example, they ran their boarding-gate operations, their aircraft operations and their crews. Differences such as these, claimed Porter, are a principal source of competitive advantage. Related items
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Idea: Unique selling propositionNov 18th 2009 Guru: Michael PorterAug 1st 2008

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Michael Porter

Critics of the idea focused on the difficulty in identifying the discrete building blocks. Without defining them carefully it is not possible to compare and contrast them with those of rivals and thereby to seek ways of gaining competitive advantage. Porter tried to help. He said:

[Every value activity] employs purchased inputs, human resources (labour and management), and some form of technology to perform its function. Each value activity also uses and creates information … the appropriate degree of disaggregation depends on the economics of the activities and the purposes for which the value chain is being analysed. He also said a bit about what value chains were not. For instance: “Value activities and accounting classifications are rarely the same,” he explained. But still, most firms found it hard to spot a value activity when it hit their factory floor. Non-manufacturing businesses found it even harder. Since the idea of the value chain was first introduced, it has been taken in a number of different directions. One has attempted to extend it beyond the straightfo

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