Abstract
The value chain model is a business concept that explains how businesses can create a strategic positioning in the industry. The model argues that organizations gain competitive advantage through unique value propositions to customers. The porter’s model offers a straight forward approach to businesses to assess the forces that affect the business environment from inside and outside. The Porters’ forces are essential in today’s business environment as they enable firms to utilize their resources effectively to gain competitive advantages. Importantly, the value chain analysis enables businesses to identify high-value business opportunities and strengthen relationships with customers by clarifying the strategic needs in the market. The value chain analysis can help businesses to choose the best growth strategic model that leads to optimal use of resources. This paper seeks to explore the values tenets of the value chain model, as proposed by Porter.
Keywords: Value chains, competitive advantage, Supply chains, Value propositions
Introduction
Globalization and competition in the business environment have ushered in new dynamics in the supply chain. In spite of the new dynamics in the business environment that are expected to revolutionize the supply chain, old forces will still influence the structure of the supply chains. According to Bamber, Brun, Frederick, and Gereffi (2017 p. 4), the modern supply chains revolve around the ecosystems of the company’s suppliers, customers, stakeholders, and the business environment. Whereas the supply chain entails the flow of goods, services, and information, value chains determine who gets value in the supply chains. Value chains, therefore, determine the sources of value and the transfer of value to the final consumers. Accordingly, value chains help the business to become more sustainable through effective production techniques that communicate best values to customers (Block, Kohn, Miller, and Ullrich (2015, p. 38). Understanding the value chains offers insights on the various methods businesses can use to alter the competitive landscape. This paper seeks to explore the various issues in value chain models to create competitive advantages in business. This study will help managers reconcile the competing objectives of resilience and efficiency that have hampered the efficiency of value chains in the past.
Components of value chain analysis
The value chain analysis is a strategy identification tool that allows a business to strengthen its primary and support activities that add value to the final products and services (Herrera, 2015 p. 1469; Linton, G. and Kask, 2017 p. 169). Business uses the value chain analysis model to reduce production costs or improve differentiation strategy to gain strategic competitive advantage. The value chain comprises all the activities carried out by a firm to transform raw materials into goods and services. According to Bustinza, Bigdeli, Baines, and Elliot (2015 p. 36), the importance of value chain in the contemporary business environment cannot be overemphasized; firms have to identify the most valuable activities in the stiff-necked competition in the industry.
The main components of the value chain model are the internal business activities that help create value for end-users. The primary activities include inbound logistics, outbound logistics, operations, services, and marketing and sales (Gereffi and Fernandez-Stark, 2011, p. 7; Hernandez and Pedersen, 2017, p. 138). The support activities comprise of the technology used in a firm, human resources, procurement, and firm infrastructure. Both differentiation strategies and the cost leadership strategies enable a firm to compete favorably and increase its operating profits. Importantly, the various components in the value chain approach add value to a firm either directly or indirectly. The primary activities add value to products and services through their direct interactions with the products or services, while the support services facilitate the production and distribution process (Mi, 2015 p. 2). The chart below summarizes the value chain model.
Primary Activities
Support Services
Primary Activities
The primary activities in the value chain add value to the final product by interacting directly with the product offering. However, the mere fact that primary activities add value directly does not necessarily mean that they are more critical to the support services Porter and Kramer, 2019 p. 324; Ramirez and Rainbird, 2010, p. 700). As is the case today, many organizations derive competitive advantages from technology, a support service, according to the value of a chain model. Technologies have enabled many firms to create value propositions through the improvement of business models or processes. Firms need to identify their line of business in choosing the most appropriate support services to prioritize (Semuel, Siagian, and Octavia, 2017, p. 1154). For instance, firms using differentiation strategy may identify such activities as information technology, research and development, and employee management as the most critical source of competitive advantage. Conversely, firms using a cost leadership strategy may seek to gain competitive advantage by altering the primary activities to minimize the total costs.
One major consideration in the value chain approach is that a firm’s value chain is a subset of the larger industry value chain. A company’s vertical integration is explained by the number of activities in the value chain (Simatupang, Piboonrungroj, and Williams, 2017, p. 42). More vertically integrated firms have a wide range of activities compared to less vertically integrated firms. The Industrial value chain comprises of the raw materials, marketing and sales, intermediate goods, the manufacturing processes, and the after-sales services in the industry.
Value chain and competitive Advantage
Cost leadership strategy
Organizations achieve competitive advantage through cost leadership or differentiation strategy. Firms choose cost advantage models to compete on costs by examining the internal processes to identify the sources of costs in the process. As such, forms identify the primary source of cost advantage or disadvantage and then choose the most appropriate method that minimizes costs (Tian, Dietzenbacher, and Jong-A-Pin, 2019 p. 23). Attaining competitive advantage through cost advantage entails identifying the primary sources of costs and the importance of those primary activities on the total operational costs. Secondly, firms ought to identify the drivers of the various primary activities and then outlining the various opportunities for reducing costs. Organizations need to identify the sources of cost advantages in such processes as the storage of materials, the marketing process, and the sales process. Establishing the importance of the cost drivers in the cost advantage approach entails breaking down the costs. The cost advantage mechanism requires that firms have sufficient knowledge of their operations because the activities in the value chain may not follow the order of the products and services.
The other step in the cost advantage model is identifying the importance of the various primary activities in a firm. As such, firms may employ activity-based costing to compare the costs of the various activities. Firms may then decide to benchmark the costs with that of the competitors in the market to ascertain competitiveness. Thirdly, firms need to identify the factors that lead to cost advantages or disadvantages and then identify the various options to reduce such costs. Such factors may include work hours, work speed, high wage rates, or overtime. Next, forms need to understand the connections between the various primary activities and the support activities in a firm. According to Zamora (2016 p. 117), firms need to take caution when reducing costs as a reduction of costs in one cost drive may increase costs in another activity. Understanding the connections between the costs in the various activities elucidates the perceived benefits of improving one component of the value chain. Lastly, firms ought to understand the various opportunities for reducing costs and plan to improve the opportunities continually. Such opportunities may arise from reducing wage rates, increasing production speed, or outsourcing labor.
Differentiation strategy
Firms seeking to gain competitive advantages through differentiation strategy pursue different value chains as compared to that of competitors. Competitive strategy using differentiation models entails the creation of superior products or service offering that is hard to imitate by competitors. Firms differentiate products through features, or packaging to meet the varying customer needs (Zehir, Can and Karaboga, 2015 p. 360). Creating a competitive advantage through differentia entails creating value propositions through activities with the greatest appeal to customers. These activities may include great product design, marketing strategies, or advertising media used. Secondly, firms improve customer value propositions by continuously monitoring the responsiveness of customers to services, which then leads to better complementary services through continuous improvement. Lastly, firms identify the best set of differentiation activities that offer the most superior differentiation outcome. As such, firms may have to use more than one differentiation technique.
Conclusion
Businesses use the value chain model to position themselves strategically in the market and gain competitive advantages. The value chain model argues that business activities are classified into primary activities and support activities. The primary activities are involved in the production of goods and services, while the support services help firms offer goods and services to their clients. The essence of using the value chain analysis model is to identify the sources of competitive advantages and disadvantages that may help propel a firm to a better position in the industry. As such, firms using differentiation strategy may think of offering better and unique activities that are hard to imitate by competitors. Conversely, firms that compete through cost leadership strategies may consider pursuing more efficient methods that reduce the overall operations costs. The strategy used by a firm to create a competitive advantage depends on long term growth goals of a firm.
