Competition and profitability are part of the challenges faced by manufacturing and service companies. Coupled with profitability is the desire for sustainability. The Porter’s model is a management tool that organizations apply to carry out an assessment of its value chain. Service and manufacturing companies have processes that contribute to the overall production cost. The breakdown of these processes into different units allows managers to evaluate area that is strategic in driving cost and offering differentiation so as to have a competitive advantage. According to Ensign (2001) “Competitive advantage is based on how value is created or arrived at in carrying out a competitive strategy.”(p.20); the value chain is a customer trickle-down effect, to minimize cost and maximize profit.
The Porter’s model considers companies systems. It identifies the manner in which departmental inputs culminates in a product bought by a customer. The transformation of input to output that leads to a satisfied customer is critical to profit margins. Porter's model describes two core set of activities that are common to all manufacturing and service companies. These are the primary and supporting activities in a value chain; primary activities refer to inbound logistics, operations, outbound logistics, marketing and sales, and service. Inbound logistics are internal processes of receiving raw materials, storing, and distribution to units. The value chain creation begins with a good supplier relationship. Operations are where the transformation of inputs received transitions into outputs; the internal systems in place will impact production. Outbound logistics involve the distribution value chain which may be internal and external. Marketing and sales require the organizational competencies of persuasion. Service is the level of after sales relationship that the company has with the customer, carrying out servicing activities to keep the client satisfied.
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Support activities of the value chain fundamentally support the primary activities; these activities are interlinked and can support each or any of the processes. The support activities are procurement, human resource management, firm infrastructure, and technological development. Procurement is how resources are sourced, while human resource management is about hiring and training. Business infrastructure is the activities that allow the company to function such as administrative, accounting, and general management.
Ensign, P.C. (2001). Value Chain Analysis and Competitive Advantage: Assessing Strategic Linkages and Interrelationships. Journal of General Management. 27 (1): 18–42.