5.1 THE STRATEGIST IN YOU: Understanding How Value is Created Within Organizations

(SHORT NOTES FROM STRATEGY TOOLS:

Strategic Prioritization at http://www.mindtools.com)

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Porter's Value Chain

Understanding how your company creates value, and looking for ways to add more value, are critical elements in developing a competitive strategy.  A value chain is a set of activities that an organization carries out to create value for its customers.  The way in which value chain activities are performed determines costs and affects profits.

Porter's Value Chain focuses on systems, and how inputs are changed into the outputs.

Primary activities relate directly to the physical creation, sale, maintenance and support of a product or service. They consist of the following:

·        Inbound logistics

o   the processes related to receiving, storing, and distributing inputs internally

·        Operations

o   the transformation activities that change inputs into outputs that are sold to customers.

·        Outbound logistics

o   the activities deliver product or service to your customer

o   things like collection, storage, and distribution systems, and they may be internal or external to your organization

·        Marketing and sales

o   the processes to persuade clients to purchase from you instead of your competitors

o   the benefits you offer, and how well you communicate them, are sources of value here.

·        Service

o   the activities related to maintaining the value of the product or service to your customers, once it's been purchased.

Support activities support the primary functions above.  For example, procurement supports operations with certain activities, but it also supports marketing and sales with other activities.

·        Procurement (purchasing)

o   includes finding vendors and negotiating best prices.

·        Human resource management

o   how well a company recruits, hires, trains, motivates, rewards, and retains its workers.

·        Technological development

o   relate to managing and processing information, as well as protecting a company's knowledge base.

·        Infrastructure

o   a company's support systems, and the functions that allow it to maintain daily operations.

o   Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage.

Steps to identify and understand your company's value chain
Step 1 Identify subactivities for each primary activity	Direct activities create value by themselves. Indirect activities allow direct activities to run smoothly. Quality assurance activities ensure that direct and indirect activities meet the necessary standards.
Step 2 Identify subactivities for each support activity	determine the subactivities that create value within each primary activity identify the various value-creating subactivities in your company's infrastructure look for direct, indirect, and quality assurance activities
Step 3 Identify links	Find the connections between all of the value activities the links are key to increasing competitive advantage from the value chain framework
Step 4 Look for opportunities to increase value	Review each of the subactivities and links think about how you can change or enhance it to maximize the value