Michael Porter's Value Chain
The appropriate level for constructing a value chain is the business unit,not division or corporate level. Products pass through a chain of activities in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities.
The activity of a diamond cutter can illustrate the difference between cost and the value chain. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. Typically, the described value chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of the business, e.g. ISO 9001.
A firm's value chain forms a part of a larger stream of activities, which Porter calls a value system. A value system, or an industry value chain, includes the suppliers that provide the inputs necessary to the firm along with their value chains. After the firm creates products, these products pass through the value chains of distributors (which also have their own value chains), all the way to the customers. All parts of these chains are included in the value system. To achieve and sustain a competitive advantage, and to support that advantage with information technologies, a firm must understand every component of this value system.
- Inbound Logistics: arranging the inbound movement of materials, parts, and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses, or retail stores
- Operations: concerned with managing the process that converts inputs (in the forms of raw materials, labor, and energy) into outputs (in the form of goods and/or services).
- Outbound Logistics: is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user
- Marketing and Sales: selling a product or service and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.
- Service: includes all the activities required to keep the product/service working effectively for the buyer after it is sold and delivered.
- Procurement: the acquisition of goods, services or works from an outside external source
- Human Resources Management: consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel.
- Technological Development: pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm's transformation of inputs into outputs.
- Infrastructure: consists of activities such as accounting, legal, finance, control, public relations, quality assurance and general (strategic) management.