One of the key management ideas, and especially in business strategy over the last 30 years, is value chain management and analysis by Michael Porter.
What is The Value Chain?
The value chain is a way to look at your business in detail and how it creates value for customers and profit for the owner.
The value chain has also been widened to include the value activity chain or value chain constellation to show how the entire supply chain creates value and cost for the end consumer.
Michael Porter has been criticised for the stylsed diagram of the value chain which is based on manufacturing but personally I find it useful and it should be customised.
Who Is Michael Porter?
Michael Porter is probably the world's most famous strategy guru, responsible for popularising:
- The five forces model of industry analysis
- The generic competitive strategies
- The value chain
The two classic test books, which should be compulsory reading for anyone who wants a detailed uinderstanding of strategy are:
Competitive Strategy Michael Porter
Competitive Advantage Michael Porter
It is the second book, Competitive Advantage which covers the value chain.
The Purpose Of Value Chain Management
The purpose of the value chain analysis and management is to move from a theortical understanding of Michael Porter's generic competitive strategies:
- Competitive advantage from cost leadership
- Competitive advantage from differentiation
into a practical system which can be used to understand and implement.
That system is the value chain and it underpins much of the subsequent thinking from supply chains, total quality management, customer value management and activity based cost management.
A Business Is A Value Chain of Activities
Michael Porter views a business as a set of linked activities which have been put together to create value for the customer and which incur costs.
Each acitivity therefore has an opportunity to definitely impact on the cost position of the business relative to competitors and potentially to provide a chance to differentiate the business to create customer preference.
As well as being blindingly obvious common sense (but only after it's been developed), the value chain is a powerful idea for implementing strategic chance.
It's the bridge between "what changes do we want to make" and "what changes do we need to make".
Strategy can be such a big, broad topic that it is easy to come up with grand ideas and fancy schemes.
But the value chain keeps strategy grounded because it links back to what the business does, day in, day out.
You want to be a low cost operator - then how can you change each major process and each activity within each process to work on low cost principles?
You want to differentiate the business, say by differentiating through speed of delivery, then which value chain activities are causing delays and how can they be speeded up.
Can you see the focus that value chain analysis and management gives you.
Value chain analysis helps you to plot your competitive strategy and how you will build competitive advantage.
Value chain management helps you to implement your strategy and to delivery the cost or differentiation you've discussed.
More information on the Value Chain
You can't do better than Michael Porter's book Competitive Advantage which is an astonishing book which goes into great detail on the value chain and how it can be used to create competitive advantage.
I just have two caveats:
- Competitive Analysis is a heavy read - if you're new to strategy then you almost need a "value chain made simple" primer book to give you the main concepts and an overview.
- It was written in 1985 so the examples are old and it misses important developments like the Internet.
I have written a couple of articles about the value chain on my business strategy blog Differentiate Your Business
Value Chain Analysis For Competitive Advantage
Advantages & Disadvantages of The Value Chain
What Do You Think About Michael Porter And The Value Chain?
I'm interested to know what you think about the value chain, in practice or theory so please leave a comment.
Great post! I haven't read Competive Advantage yet. I read Getting Booked Solid! It was pretty good but I was looking for more meat. It seemed like it was really writen for beginers. But still a really good book. I'll have to check out Competitive Advantage!
Ted Peterson
http://TapPowerhouseMarketing.com
Posted by: Ted Peterson | 12 September 2011 at 07:22 PM