Use of Porter’s (1985) Value Chain FrameworkPorter’s model of value chain is one of the best known and widely applied models of a company’s value-creation processes (Sanchez and Heene, 2004). According to Porter:
“Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation” (Porter, 1985:33)
Porter (1985), Besanko et al. (1996), and McGuffog & Wadsley (1999) identify that a company’s profitability is a function not only of industry conditions, but also of the amount of value it creates relative to its competitors. A firm can achieve competitive advantage if it posses ‘capabilities’ that allow it to create not only positive value but as well additional total value than its competitors (Porter, 1985; Hooley et al, 2004). By understanding why a company can create value and whether it can continue to it in the future is a necessary first step in diagnosing a firm’s potential for achieving a competitive advantage in the marketplace (Hitt et al, 2007; Spanos and Lioukas, 2001). Therefore, a firm must understand how its products serves customer needs better than potential substitutes; the technology of production, distribution and sales; and the business’s costs (Porter, 1985).
According to Hill & Jones (2001, 5th ed.) maintain that the term “value chain” refers to the concept that a company is s chain of activities for transforming inputs into outputs with purpose to deliver value to the customers. Pearson (1999) states that a competitive strategy is focused on the top-level strategic objective of a company with purpose to gain competitive advantage. Hence, if a company wishes to achieve a competitive strategy must encompass every aspect of the business so that every manager and employee knows the objectives of this strategy is and as a result every decision and action is consistent with it and serves to put in practice (Pearson, 1999). The value chain is therefore a logical way of looking the overall business activities with purpose to mobilise these various strategic impacts (Porter, 1984).
Porter (1985) introduced the concept of value chain as the basic tool for examining the activities a company performs and their interactions with a view to identifying the sources of sustainable competitive advantage. It separates the activities of a firm into a sequential stream of activities and is used to analyse and establish the importance of the different activities in delivering the final product/service, thereby facilitating the identification of core and non-core activities.
A simplistic view of this activity organisation and operation is given to the following figure. These activities in the value chain are core (primary) and supplementary (secondary or support) activities. Companies, primarily have to identify the core activities that would give them sustainable competitive advantage and then identify the assets and competencies needed to achieve this advantage. According to Sanchez and Heene (2004), the value chain activities are systematically interrelated and represent value creation. Therefore, a business gains competitive advantage by performing these activities either more cheaply than its competitors (low cost strategy), or in a unique way that creates superior customer value and commands a price premium (differentiation).
