Introduction to Porter Value Chain
EMBA Pro Porter Value Chain Solution for Scrap It case study
This is part of the subset of Ivey cases and technical notes written for Introductory-Level courses.The vice-president of operations at Lighting Group Corporation (LGC) was looking over some financial statements at the end of the workday. For the first time he could remember, there were no sales recorded on the daily sales statement. It appeared that the efforts of employees were diverted into a project related to the scrap metal that was a by-product of the manufacturing process. To complicate matters, the son of the company's president and chief executive officer was the one directing the scrap metal project.
Case Authors : James A. Erskine, Michael Wiener
Topic : Leadership & Managing People
Related Areas : Government, Human resource management, Project management
EMBA Pro Porter Value Chain Analysis Approach for Scrap It
At EMBA PRO, we provide corporate level professional Marketing Mix and Marketing Strategy solutions. Scrap It case study is a Harvard Business School (HBR) case study written by James A. Erskine, Michael Wiener. The Scrap It (referred as “Scrap Metal” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Marketing Mix, Product, Price, Place, Promotion, 4P, Government, Human resource management, Project management.
Our immersive learning methodology from – case study discussions to simulations tools help MBA and EMBA professionals to - gain new insight, deepen their knowledge of the Leadership & Managing People field, competitive advantage, steps to value chain analysis,industry analysis,primary activities, support activities, inbound outbound logitics,marketing & services, and more.
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Porter Value Chain Framework
Value Chain is developed by management guru Michael E. Porter and it was a major breakthrough in business world for analyzing a firm’s relative cost and value. Value Chain was first introduced in 1985 in Harvard Business Review article and Porter’s book “Competitive Advantage”. Value Chain is also known as “Porter’s Value Chain Framework” and it is extensively used to analyze relevant activities of a firm to shed light on the sources of competitive advantage. According to Michael Porter – Competitive Advantage is a relative term and has to be understood in the context of rivalry within an industry.
Porter Five Forces & Porter Value Chain
Porter started with the quintessential question – “Why are some companies more profitable than others?” He answered the question in two parts – How companies benefit or limited by the structure of their industry, and second a firm’s relative position within that industry.
To conduct industry structure analysis Porter developed Five Forces Model, and to understand the sources of competitive advantage of the firm in relation to competitors in that industry Porter developed Value Chain Analysis Method.
The strengths of the Porter’s Value Chain Analysis are - how it disaggregates various activities within the firm and how it put value to value creating activities in an industry wide context.
|Industry Structure||Relative Position|
|Porter's Framework||Five Forces||Value Chain|
|The Analysis focuses on||Drivers of Industry Profitability||Differences in activities|
|The Analysis explains||Industry average price and cost||Relative Price and Cost|
What is Competitive Advantage?
According to Michael Porter – “If a strategy is to have real meaning then it should reflect directly into a company’s financial performance”. If Scrap Metal have a real competitive advantage, it means that compared to its rivals Scrap Metal is - operating at lower costs, commanding a premium price, or doing both. Competitive advantage is about superior performance and it is a relative term. When all rivals in the Scrap Metal’s industry try to compete on the same dimension, no one firm gains a competitive advantage.
Key Steps in Porter's Value Chain Analysis
Step 1 - Start by laying out the industry value chain
What are the key value-creating activities at each step in the chain?
Compare the value chains of rivals in an industry to understand differences in prices and costs
How far upstream or downstream do the industry’s activities extend?
Step 2 - Compare firm in Scrap It case study value chain to the industry’s value chain
Present vs Alternative Value Chain - You should design an alternative value chain and map out areas where improvements can be made. Comparing two or more alternative value chains can provide a good insight into bottlenecks within the industry.
Step 3 - Zero in on price drivers, those activities that have a high current or potential impact on differentiation
Align price drivers in the value chain. Often price drivers are customer expectations that customers are willing to pay more for. For example customers are willing to pay more for flawless uniform experience in Apple products even though Apple products are not the cutting edge products.
Step 4 - Zero in on cost drivers, paying special attention to activities that represent a large or growing percentage of costs
If the strategy dictates cutting cost to be profitable then Scrap Metal should focus on areas that are not adding value to customers' expectations, and costs that are there because of operational inefficiencies.
Value Chain Analysis of Scrap It Case Study
Value Chain and Value System
Scrap Metal value chain is part of a larger value system of the industry that includes companies either upstream (suppliers) or downstream (distribution channels), or both. Manager at Scrap It needs to see each activity as part of that value system and how adding each activity or reducing each activity impact the Scrap It value chain. The decision is regarding where to sit in the value system.
Value Chain Activities – Primary Activities & Support Activities
As per the Value Chain model there are broadly two generic categories of activities – Primary Activities and Supporting Activities.
What are Primary Activities in Porter’s Value Chain?
As illustrated in the Value Chain diagram, Scrap Metal has five generic categories of primary activities –
These activities of Scrap Metal are associated with receiving, storing and disseminating the inputs of the products. It can include warehousing of physical products, material handling, as well as architecture to receive and store customer information for digital media company. Scrap Metal at present has outsourced most of its inbound logistics activities.
Activities that help the organization to transform raw material into finished products. For the purpose of this article the definition is broad – it can mean moulding plastic to make products, using customer data to serve advertisements based on usage behavior to clients etc.
Scrap Metal under takes these activities to distribute the finished products to channel partners and final buyers. Outbound logistics activities include – scheduling, wholesalers and retailers order fulfillment, processing, distribution network, and warehousing.
Marketing and Sales
These activities are undertaken by Scrap Metal to create means through which the buyer can buy a firm’s products. These activities include – marketing, pricing, advertising and promotion, channel selection, sales force management etc.
Scrap Metal needs to provide after sales services and maintenance for successful usage of the product. Service activities of Scrap Metal can include – training, installation services, post sales maintenance, part supply, and product forward and backend alignment of software.
What are Support Activities in Scrap Metal Value Chain?
As the name explains, Support Activities of Scrap Metal are the one that supports the firm’s Primary Activities. Porter divided the Support Activities into four broad categories and each category of support activities is divisible into a number of distinct value activities that are specific to the industry in which Scrap Metal operates. The four generic support activities are –
Firm infrastructure support activities at Scrap Metal consists activities such as – general management, quality management, planning, legal services and finance and accounting.
Firm infrastructure activities at Scrap Metal supports entire value chain though the scope varies given that Scrap Metal is a diversified company even within the industry. For example the finance and planning at Scrap Metal are managed at corporate level while quality management, accounting and legal issues are managed at business unit level.
Human Resources Management
In an environment where each organization is striving to become a learning organization, Human Resources Management is key to the success of any organization. HRM support activities include – Recruiting, Selection, Skill Assessment, People Planning, Hiring, Training & Development and Compensation at both business unit level and corporate level.
Human resource management affects competitive advantage in any firm, but in some industries it is defining factor. For example in the consulting companies HR is the main source of competitive advantage.
Technology supports almost all activities in modern day organization. In the technology industry, technology development has become a source of competitive advantage. Technology development at Scrap Metal may include activities such as - technology selection, feature design, component design, process engineering, and field-testing.
Procurement Activities at Scrap Metal
Procurement activities at Scrap Metal include activities that are undertaken to purchase inputs that are used by Scrap Metal’s value chain. It doesn’t include purchase inputs themselves. Purchased inputs may include - raw materials, supplies, machinery, laboratory equipment, office equipment, and buildings.
Like all other value chain activities procurement also employs technology for things such as – procedures, vendor management, information system, and supply chain partner qualification rules and ongoing performance evaluation.
Metrics and KPIs to Avoid while Analyzing Scrap It Value Chain
Growth or market share is also not a very reliable goal as often firms end up pursuing market share at the cost of profitability.
Shareholder value, measured by stock price, is not a good barometer to analyze value chain. It is preferred by top management but it is only useful in long run rather than competitive strategy in short to medium terms.
Growth in sales is not a good goal for value chain analysis as every managers know that boosting sales is easy to do by reducing the prices dramatically.
5C Marketing Analysis of Scrap It
4P Marketing Analysis of Scrap It
Porter Five Forces Analysis and Solution of Scrap It
Porter Value Chain Analysis and Solution of Scrap It
Blue Ocean Analysis and Solution of Scrap It
Marketing Strategy and Analysis Scrap It
PESTEL / STEP / PEST Analysis of Scrap It
Case Study Solution of Scrap It
SWOT Analysis and Solution of Scrap It
References & Further Readings
M. E. Porter, Competitive Strategy(New York: Free Press, 1980)
James A. Erskine, Michael Wiener (2018), "Scrap It Harvard Business Review Case Study. Published by HBR Publications.
O. E. Williamson, Markets and Hierarchies(New York: Free Press, 1975)
Kotler & Armstrong (2017) "Principles of Marketing Management Management", Published by Pearson Publications.
- Step 1: identify sub activities for each primary activity. ...
- Step 2: identify sub activities for each support activity. ...
- Step 3: identify links. ...
- Step 4: look for opportunities/ solutions to optimize and create value.
A value chain includes the activities that take place within a company in order to deliver a valuable product or service to their market. Each stage of the value chain adds more value. The value chain provides a tool to visualize a firm's productivity by identifying the thousands of discrete activities involved.
The value chain framework is made up of five primary activities -- inbound operations, operations, outbound logistics, marketing and sales, service -- and four secondary activities -- procurement and purchasing, human resource management, technological development and company infrastructure.
Completing a value chain analysis allows businesses to examine their activities and find competitive opportunities. For example, McDonald's mission is to provide customers with low-priced food items.
Porter's Value Chain Explained - YouTube
The activities associated with this part of the value chain are providing service to enhance or maintain the value of the product after it has been sold and delivered. Examples: installation, repair, training, parts supply and product adjustment.
According to Porter's value chain analysis, companies can increase their profits by using value chain analysis in two different ways: Cost leadership: Cutting production costs and streamlining processes in order to increase profitability.
Value Chain Analysis is a three-step process: Activity Analysis: First, you identify the activities you undertake to deliver your product or service. Value Analysis: Second, for each activity, you think through what you would do to add the greatest value for your customer.
Margin. The term Margin refers to the profit margin the company makes out of the activities of its value chain. The margin is correlated with the company's ability to articulate properly all the activities of the value chain.
Components of a Value Chain
According to Porter's definition, all of the activities that make up a firm's value chain can be split into two categories that contribute to its margin: primary activities and support activities.
According to Porter, competitive advantages come from the processes a company has, such as marketing. The five key (primary) activities that generate higher profits include inbound logistics, operations, outbound logistics, marketing and sales, and services.
Value chain increases the efficiency of the business so that customers can receive the product with the most value-added at the lowest possible cost. The end goal of value chain management (VCM) is to create a competitive advantage for the company by increasing the overall margin.
Value chain analysis identifies the separate activities and business processes that are performed from the designing of a product to supporting it. Value chain analysis is viewed as a means of evaluating a firm's strengths and weaknesses. It assumes that a firm's basic economic purpose is to create value.
Key takeaway: Value chain management is the process of organizing all of a company's activities in order to analyze them. The goal is to establish communication between the leaders of each stage to ensure the product is placed in the customers' hands as seamlessly as possible.
The primary activities of Michael Porter's value chain are inbound logistics, operations, outbound logistics, marketing and sales, and service. The goal of the five sets of activities is to create value that exceeds the cost of conducting that activity, therefore generating a higher profit.
Porter's value chain is a framework for developing an analytic structure that follows interdependent activities from raw material acquisition or idea through production and finally, into the hands of a customer.
How do the value chain and value web models help businesses identify opportunities for strategic information system applications? The value chain model highlights specific activities in the business where competitive strategies and information systems will have the greatest impact.
With value chain analysis, you can easily identify those activities where you can quickly reduce cost, optimize effort, eliminate waste, and increase profitability. Analyzing activities also gives insights into elements that bring greater value to the end user.