Summary of Porter's Value Chain Explained

Summary of Porter's value chain Explained

Main Ideas:

• Porter's value chain is a strategic tool used to map out internal business activities that add value to customers.
• The concept is illustrated through a simple analogy of a chef cooking a meal, highlighting the difference between the cost of raw ingredients and the selling price of the prepared meal.
• The goal of the value chain is to maximize the margin, which is the difference between the value created and the cost incurred in creating that value.
• Understanding the value chain allows businesses to identify activities that create value and eliminate those that do not, thereby improving Competitive Advantage and increasing margins.

Key Concepts:

1. value chain Definition: A set of activities performed by an organization to create value or margin for customers.
2. Primary Activities: Directly involved in creating a product or service:
   • Inbound Logistics: Receiving and storing inputs.
   • Operations: Transforming inputs into outputs.
   • Outbound Logistics: Delivering products to customers.
   • Marketing and Sales: Promoting products and facilitating sales.
   • Service: Activities post-sale to maintain product value.
3. Support Activities: Facilitate primary activities:
   • Procurement: Purchasing inputs.
   • Human Resource Management: Hiring and retaining employees.
   • Technology Development: Supporting technology for operations.
   • Firm Infrastructure: General management and support functions.
4. Mapping Your value chain: Steps to create a value chain:
   • Map Sub Activities: Identify all processes that create value.
   • Analyze Sub Activities: Evaluate if activities add more value than they cost.
   • Examine Linkages: Understand interdependencies between activities and optimize them.
5. Applications of value chain:
   • Creating a target operating model for future value addition.
   • Ensuring coverage in major change initiatives.
   • Assessing acquisition fit by comparing value chains of organizations.
6. Example: Amazon's value chain illustrates how existing competencies can lead to new business opportunities, like AWS (Amazon Web Services).

Advantages and Disadvantages:

• Advantages:
  • Increases margin by clarifying cost and differentiation advantages.
  • Creates a shared understanding of value creation within an organization.
  • Versatile applications for strategic planning.
• Disadvantages:
  • Requires regular updates to stay relevant.
  • Focuses on internal factors, potentially overlooking external influences.
  • Risk of losing sight of broader strategic goals due to detailed focus.

Speakers/Sources Featured:

The video is presented by an unnamed speaker who explains the concepts of Porter's value chain, referencing Michael Porter, a Harvard Business School professor and author of "Competitive Advantage."

Notable Quotes

— 07:18 — « Support activities are just as important as primary activities; they just provide a different type of advantage. »

— 10:00 — « The value chain is a powerful strategic tool and you can use it for more than just creating an understanding of how your organization generates value. »

— 13:54 — « The key advantage of porter's value chain is that it allows you to increase your margin and it does this by clarifying how you create cost advantage and separately differentiation advantage. »

Category

Educational

Video