Value chain and competitive advantage

The business value chain, also value chain, is a theoretical model that allows describing the development of the activities of a business organization generating value to the final product, described and popularized by Michael Porter in his work, Competitive Advantage: Creating and Sustaining Superior Performance (1985).

Support activities

The primary activities are supported or assisted by the so-called secondary activities: and Michael Porter was the first to talk about these concepts.

  • Supply: storage and accumulation of merchandise items, supplies, materials, etc.
  • Infrastructure of the organization: activities that provide support to the entire company, such as planning, accounting and finance.
  • Direction of human resources: search, hiring and motivation of the personnel.
  • Development of technology, research and development: generators of costs and value.

Value chain

The value chain quickly came to the forefront of business management thinking as a powerful analytical tool for strategic planning. Its ultimate goal is to maximize value creation while minimizing costs. What is involved is to create value for the client, which translates into a margin between what is accepted to pay and the costs incurred to acquire the offer. However, the practice has shown that the reduction of monetary costs also has a technological limit, since sometimes it has also affected the quality of the offer and the value it generates. Therefore, systemic thinking in this aspect has evolved to develop value propositions, in which the offer is designed integrally to meet the demand in an optimal way…

The value chain helps to determine the activities, core business or distinctive competences that allow to generate a competitive advantage. To have a market advantage is to have a relative profitability superior to the rivals in the industrial sector in which it competes, which has to be sustainable over time. Profitability means a margin between revenues and costs. Each activity carried out by the company must generate the highest possible income. If not, it should cost as little as possible, in order to obtain a margin superior to that of the rivals. The activities of the value chain are multiple and also complementary (related). The set of value activities that a business unit decides to perform is what is called a competitive strategy or business strategy, different from corporate strategies or strategies in a functional area. The concept of subcontracting, outsourcing or outsourcing, also results from the analysis of the value chain.

The concept has been extended beyond individual organizations. It can also be applied to the study of the supply chain as well as to distribution networks. The provision of a set of products and services to the final consumer mobilizes different economic actors, each of which manages its value chain. The synchronized interactions of these local value chains create an extended value chain that can become global (so-called global value chains). Capturing the value generated along the chain is the new approach adopted by many management strategists. By exploiting the information that goes up and down the chain, companies can try to overcome intermediaries by creating new business models.

The value chain model highlights the specific business activities (core business) in which competitive strategies can best be applied and where information systems are more likely to have a strategic impact. The model considers the company as a series of primary and support activities that add value to the products and services of a company. The primary activities are more related to the production and distribution of the company's products and services that create value for the client. Primary activities include entry logistics, operations, exit logistics, sales and marketing and service. The support activities consist of the infrastructure (administration and management), human resources, technology and acquisitions of the organization. The use of the model of the value chain of a company considers the comparison of its business processes with those of its competitors or with other companies in related industries and to identify the best practices of the industry. Benchmarking involves comparing the efficiency and effectiveness of your business processes against strict standards and then measuring performance against those standards.

Equally the value chain is directly related to the development of the business model, this raised from the thought processes and logical structures of the tools that structure it, strengthening its core business.

The value chain of a company must be linked to the value chains of its suppliers, distributors and customers. A value network consists of information systems that improve competitiveness throughout the industry by promoting the use of standards and by giving companies the opportunity to work more efficiently with their value partners.

The value chain and competitive advantage

Through competitive advantages, it is possible for a company to acquire a favorable position in relation to the competition within the market. For this, there are certain strategies that promote the good positioning of the company which must be perfectly implemented. When talking about competitive advantage, reference is made to two fundamental concepts: Leadership in cost and differentiation; however it includes five forces competition from which it is possible to measure the degree involving which are:

  • Entry of new competitors
  • Threat of substitute products
  • Buying power of buyers
  • Bargaining power of suppliers
  • Rivalry among existing competitors

For a sector to generate profit, it is necessary that the needs of the buyers are covered; so the company must establish elements that generate a greater differentiation than the competition. There are three generic strategies to achieve this:

  • Leadership in costs: Achieve possession of the product with the lowest price in the sector.
  • Differentiation: The product offers added value over the rest.
  • Approach: Selection of the target market and emphasis on satisfying the sector.
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