This topic concern with the porter supply chain model. After
studying this chapter you are able to
understand that what are major forces of supply chain model and
how it affects the performance of the
Porter supply chain model
The Value Chain framework of Michael Porter is a model that
helps to analyze specific activities through
which firms can create value and competitive advantage.
The activities of the Value Chain
activities (line functions)
Logistics. Includes receiving,
storing, inventory control, transportation
Includes machining, packaging, assembly, equipment maintenance, testing
and all other value-creating activities that transform the
inputs into the final product.
Logistics. The activities required to
get the finished product at the customers:
warehousing, order fulfillment, transportation, distribution
o Marketing and
Sales. The activities associated with
getting buyers to purchase the
product, including: channel selection, advertising, promotion,
selling, pricing, retail
The activities that maintain and enhance the product's value, including:
support, repair services, installation, training, spare parts
management, upgrading, etc.
activities (Staff functions, overhead)
Procurement of raw materials, servicing, spare parts, buildings, machines,
Development. Includes technology
development to support the value chain
activities. Such as: Research and Development, Process
automation, design, redesign.
o Human Resource
Management. The activities associated
with recruiting, development
(education), retention and compensation of employees and
Infrastructure. Includes general
management, planning management, legal, finance,
accounting, public affairs, quality management, etc.
Creating a cost advantage based on the value chain
A firm may create a cost advantage:
• By reducing the cost of
individual value chain activities, or
• By reconfiguring the
Note that a cost advantage can be created by reducing the costs
of the primary activities, but also by
reducing the costs of the support activities. Recently there
have been many companies that achieved a cost
advantage by the clever use of Information Technology.
Once the value chain has been defined, a cost analysis can be
performed by assigning costs to the value
chain activities. Porter identified
10 cost drivers
related to value chain activities:
1. Economies of scale.
3. Capacity utilization.
4. Linkages among activities.
5. Interrelationships among business units.
6. Degree of vertical integration.
7. Timing of market entry.
8. Firm's policy of cost or differentiation.
9. Geographic location.
10. Institutional factors (regulation, union activity, taxes,
A firm develops a cost advantage by controlling these drivers
better than its competitors do. A cost
advantage also can be pursued by "Reconfiguring" the value
chain. "Reconfiguration" means structural
changes such as: a new production process, new distribution
channels, or a different sales approach.
Normally, the Value Chain of a company is connected to other
Value Chains and is part of a larger Value
Chain. Developing a competitive advantage also depends on how
efficiently you can analyze and manage
the entire Value Chain. This idea is called:
Supply Chain Management.
Some people argue that network
is actually a better word to describe the physical form of Value
Chains: Value Networks.