What is Porter's value chain

In the framework of the modern model of economic development, the ability of each enterprise to effectively position and improve its advantages in the context of global competition is of particular importance.

For several years, Russia has been in a state of economic reform. During the transformation, new economic relations are developing comprehensively in all sectors. A flexible and adaptive management system is being formed, the conditions necessary for successful entrepreneurial activity are created.

Meanwhile, most of the Russian enterprises are not ready for an active struggle. This negatively affects their performance. Improving the situation is possible only through the release of competitive products focused on the needs of the buyer. For this, in turn, it is necessary to timely predict business development, to collect and analyze information about prospects and opportunities, the state of the market, and the position of competitors in it. Porter's value chain will help.

Strategic analysis

It is an essential element of enterprise success. The company's management should clearly understand the needs of the market, strive to meet them with greater benefit than competitors.

The success of an enterprise largely depends on knowledge of the market situation, achievement of competitiveness, and advantages that ensure the organization's stable position. Business management is a dynamic process. It requires constant monitoring of the enterprise.

Porter Theory

The modern and effective tool for assessing the competitiveness of both individual states and regional production is the theory of advantages. It can be applied to individual industrial sectors, and to the entire economy as a whole. One of the tools of this theory is the Porter model - a chain of values . It provides a deeper understanding of the processes taking place within the enterprise.

For the first time the value chain by M. Porter was described in 1985. It is a sequence of actions of an enterprise aimed at converting resources into a final service or product. In fact, Porter's value chain is a strategic planning tool that provides a detailed study of the company's operations.

Essence of the concept

It consists in the fact that the company in the course of its activities forms for consumers a certain set of values. Buyers, in turn, must need them and be prepared to pay for them.

In Michael Porter's value chain , the company 's activities were divided into primary and secondary. The former directly adds value to the final service or product. Supporting activities indirectly provide an efficient and rational implementation of the main tasks.

Structure

The main activity in the value chain M. Porter relates:

• Internal logistics. It involves stock control, distribution of primary components.
• Operations. In the course of them, the primary components are converted into the final product.
• External logistics. It includes distribution and storage of the product.
• Marketing, sales. As part of this activity, the main tool is advertising.

Supporting areas in the Porter value chain are:

• Logistics support. The company purchases the necessary materials and raw materials.
• The development of technology. Within this area, processes, stocks and the product itself are being developed.
• Human Resource Management. It involves the selection and training of employees, the introduction of a system of motivation and remuneration of staff.
• The infrastructure of the enterprise. Its formation is carried out in the framework of planning, financing, management.

M. Porter's Value Chain Analysis

Like any other theory, the concept has a number of advantages and disadvantages.

The advantage of Porter's value chain is the amount of information that can be obtained during the analysis. These data are used to verify the compliance of each type of activity with the maximum achievable indicators in a particular industry.

Porter's value chain allows you to plan activities more efficiently, to identify the most promising options for increasing the company's competitiveness in terms of costs. Accordingly, company management can choose the best way to minimize them.

There is only one drawback to the concept. The minus of the Porter value chain is the inaccessibility of information about the expenses of other enterprises, since they are confidential. In addition, cost comparisons can be made far from always in all cases, as firms tend to use different methods of accounting for them.

Porter's Value Chain: An Example

Consider how the concept works on the example of a company whose main activity is associated with the scrap processing industry. In the photo below you can see the factors that ensure the competitiveness of the company.

In the presented chain, the competitive advantages of the enterprise are clearly visible.

However, since the organization’s activities have their own specifics, certain points should be clarified:

• The term "margin" at the end of the scheme is the difference between the total cost of the product produced and the complex of expenses incurred in the implementation of all activities.
• Compliance with regulations means that each metallurgical plant has certain standards for the acceptance of scrap at its site for the purpose of subsequent use. The list of standards is set in GOST.
• The company is a reseller of scrap. First of all, the purchase and collection of raw materials from the collection points that belong to the company is carried out. After that, it is transported to the base, where it is sorted, cut and pressed for subsequent sale. Further delivery is carried out in accordance with the concluded contracts.
• For rail transport, which is the main way of moving raw materials, the final buyer will pay. However, scrap metal is not subject to VAT.

Explanations

An analysis of opportunities based on an assessment of the value chain allows you to determine the position of a business in an industry. Porter believed that an enterprise could have an advantage only within the framework of one of two possible typical strategies: leadership or differentiation in terms of costs.

The ability to compete in a specific way stems from a preliminary assessment of the competitive forces, an understanding of the potential based on chain analysis.

Assessment of the strengths and weaknesses of the enterprise

For convenience, the analysis of strengths and weaknesses in the business is presented in the table.

According to the results of the analysis, we can conclude that the company’s strategy is focused on achieving cost leadership, since its components are economies of scale, minimizing the costs of a public relations campaign, and covering significant market space.

Risk factors

Today, the concept of Porter is considered the most convenient and easiest to understand analysis tool. Many enterprises actively use it in their activities. However, it is worth saying that in the modern world, value chains have undergone significant changes. At the same time, risk factors are becoming increasingly important. These include:

• Limited resources, population growth, environmental degradation. These circumstances are united by the concept of "environmental risk factors."
• Extreme environmental conditions, problems of political and social instability, etc. They are called geopolitical risks.
• The threat of digital disintegration. Recently, the Internet has not always been recognized as a reliable means of doing business and communication.

Principles of Enhancing Sustainability

Given the risks, each company seeks to develop the most effective strategy for enhancing its advantages. Among the most effective principles for improving market sustainability are:

• Analysis and adaptation. The management of the organization, if necessary, changes and improves its strategy, tactics and capabilities, takes into account its previous experience and analyzes the activities of competitors.
• Contacts and relationships. Information about possible risks is distributed both within the enterprise and throughout the value chain.
• Threat forecast. A group of analysts is being formed at the enterprise who forecast probable problems and opportunities for their prevention.
• Quick response system. The presence of diversified assets and resources allows you to quickly adapt to a changing environment, as well as quickly implement measures to restore normal operation.

The choice of principles, methods, tools to increase the stability of the chain will depend on the size of the enterprise, the specific conditions of activity, as well as the volume of opportunities.