Value chain michael porter pdf

Operations - are all the activities required to transform inputs into outputs products and services. Outbound Logistics - include all the activities required to collect, store, and distribute the output.

Marketing and Sales - activities inform buyers about products and services, induce buyers to purchase them, and facilitate their purchase. Service - includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered. Secondary activities are: Procurement - is the acquisition of inputs, or resources, for the firm.

Human Resource 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 - serves the company's needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.

Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found unrigorous and ad hoc. An Interview with Michael Porter Porter's five forces is based on the Structure- Conduct-Performance paradigm in industrial organizational economics.

Other Porter strategic frameworks include the value chain and the generic strategies. Competition and Crisis in Mortgage Securitization Threat of new entrants Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. Unless the entry of new firms can be blocked by incumbents which in business refers to the largest company in a certain industry, for instance, in telecommunications, the traditional phone company, typically called the "incumbent operator" , the abnormal profit rate will trend towards zero perfect competition.

The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily. For example, tap water might be considered a substitute for Coke, whereas Pepsi is a competitor's similar product. Increased marketing for drinking tap water might "shrink the pie" for both Coke and Pepsi, whereas increased Pepsi advertising would likely "grow the pie" increase consumption of all soft drinks , albeit while giving Pepsi a larger slice at Coke's expense.

Another example is the substitute of traditional phone with VoIP phone. Firms can take measures to reduce buyer power, such as implementing a loyalty program. The buyer power is high if the buyer has many alternatives. Suppliers of raw materials, components, labor, and services such as expertise to the firm can be a source of power over the firm when there are few substitutes.

If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from them.

Suppliers may refuse to work with the firm or charge excessively high prices for unique resources. Intensity of competitive rivalry For most industries the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. Using game theory, they added the concept of complementors also called "the 6th force" , helping to explain the reasoning behind strategic alliances.

According to most references, the sixth force is government or the public. Martyn Richard Jones, whilst consulting at Groupe Bull, developed an augmented 5 forces model in Scotland in It is based on Porter's model and includes Government national and regional as well as Pressure Groups as the notional 6th force.

If suppliers are in concentrated numbers compared to the industry to which it sells. If switching costs associated with a move to another supplier are high. If suppliers are having ability to integrate forward or can start producing the product themselves.

If suppliers are having specific expertise or technology required to manufacture goods. If the product supplied is highly differentiated 6. If no substitutes are available for the products supplied 7. If many buyers are present but none of them make up significant portion of sales 8.

If end users are strong enough to exert power over the organization in favor of the supplier. This can happen in the case of labor situations In all of these cases, the bargaining power of supplier is high, Supplier can set their own timelines or demand premium prices, Bargaining Power of Buyers:- Buyers have bargaining power whenever they are strong enough to exert collective pressure on the companies producing a product or a service.

The presence of powerful buyers reduces the profit potential in an industry. Types of Buyers:- Companies need to understand the different types of buyers before trying to create strategies to handle different types of buyers. Different types of buyers need to be treated in consideration of their unique behavior. Inside each market segment, there are following five different group of buyers: Innovators:- Smallest group of early purchasers is called Innovators.

They stay updated on the current, upcoming trends and newest technologies present in the industry. They have high degree of self-confidence and always look forward to experiment with new things. If a new product turns them on, they will use it and influence other possible innovators to use the product as well.

However, the usage and acceptance of a product by innovators may not lead to a widespread trend. Adopters:- The next type of buyers are the early adopters.

These people set an example for others by their decision and are true opinion leaders of a particular market segment. Being an agents of change, they will understand the benefits of the product and seek reference from other satisfied users before they adopt it and this leads credibility to their references. Early Majority:- The next group of buyers is called early majority.

The early majority group is relatively slower in adopting or trying a new product offering. They will usually embrace a new product only after it is accepted by their peers and strong references are received from them. This is a more practical group of people who are less technology driven and are not necessarily excited by the new or innovative. Late Majority:- Next group is late majority group. Their motivation is to wait for prices to fall and the product to become established in the market with proof of reliability and longevity.

Excessive Traditionalists:- This is the last buyer group to come onboard regarding the product. This group wait till the price of product have reached their lowest point, competitors have entered the market and established themselves and the product has become an absolute need. The product may have become close to obsolete by this time. They represent only five percent of any market.

Each of the mentioned buyer groups has a different potential power over the producer and need to be managed accordingly. Power of Buyer Group:- There are several different types of market conditions that will determine whether the buyers will have power or not.

The sales revenue of the producer will be completely dependent on those few customers and they will not be able to ignore any demands. Conversely, if the buyers are large in number and widespread, then producer can easily ignore the demand. Percentage of Sales:- Another bargaining chip for a buyer or buyer group is the amount of business they provide to a producer. Undifferentiated products: - If the producer sells undifferentiated or standard product, then they will have the potential threat of a buyer switching producers.

If there are more than one producers supplying the similar type of product, a buyer will have the option of exploring possibilities. Switching Cost:- If switching costs are low for a buyer i. Threat of Integration:- Sometimes buyers pose a threat of backward integration.

This means that they may engage in tapered integration by producing some components in-house and purchasing the rest from other suppliers. Information:- If buyers have full information regarding the producers operations, demand, market prices and supplier costs then they will be able to demand better prices from the producer.

Price Sensitivity:- If the buyers are sensitive to changes in price of product and may stop purchase, the producer will not be able to ignore their demands. Available Substitutes:- If substitutes or alternatives are easily available in the market, then the buyers will have options to switch and shop around, making their power over the producers substantial.

Value chain is difficult to be identified in other industries. Any Company who wish to find ways to optimize processes while also creating an advantage in the marketplace must study the value chain first. The value chain can be used to find potential competitive advantages. The goal of this strategy is to first identify the most valuable activities for the company and then take action on the activities that can be improved to add competitive advantage.

Differentiation and Cost are two advantages within the value chain. Cost advantage demonstrate that the company is performing business activities at a lower cost which leads to greater profit. Differentiation Advantage demonstrates that a company is performing the business activities better than its competitor companies.

There is a direct relationship between the competitive advantage and sales of a product or service. Higher the competitive advantage, the more likely people are going to purchase the product or service. Within these two categories there are additional processes that helps to narrow down the specific areas that add values to a company. Primary Activities within Value Chain:- The primary value activities are directly linked with the creation, sale, support and maintenance of the product or service.

These primary activities are going to vary depending on the industry or business. Primary value activities add value directly to the production process but they are not necessarily more important than the support activities. Inbound Logistics:- The Inbound Logistics component focuses on all methods which are used to bring raw materials, or company inputs, into the business.

This can include arranging the inbound movement of material from suppliers to assembly plants, warehouses, distributing material internally. This is the stage of value chain that produces a product for customers. Outbound Logistics:- Once the product development has been completed, the process of moving it from the end of the production line to the consumers is called Outbound Logistics.

Collecting, storage and distributing products, as well as preparing the company for additional growth is part of this stage. Value can be found by the addition of benefits and the success of communicating those benefits to customers, clients and partners. Support activities are the behind the scenes aspect of a company that indirectly add value to products or services. There are four major components within support activities. Firm Infrastructure: - This includes the control systems and the overall structure of the organization.

Firm Infrastructure consists of the activities such as legal, finance, public relations, quality assurance, accounting and general management. Human Resource Management:- Concerned with the human element of the company, this section of the value chain accounts for employee interactions.

It encompasses recruiting, hiring, developing, training, compensating and laying off personnel and is one of the largest components in the value chain. Technology Development:- An important feature of the value chain, the technology development component pertains to the hardware, software, equipment, technology costs, managing information and maintaining current technology standards.

Procurement:- This component studies how the company acquires the needed resources like goods, services or works from outside external source to operate. It also includes vendor and supplier negotiations. Using the Value Chain Strategy:- If value chain strategy is not followed by analysis and planning of action steps, then it is a worthless exercise.