MGT451_VideoTranscript_Mod03_P4 Porter's Value Chain

Hello I'm Scott Moore. In this video I'm going to talk about Michael Porter's value chain. This concept came out back in his 1985 book and it was really a landmark in strategy. It, for the first time, really got managers, executives, and what not to focus on the internal activities of a firm and how they contribute to the overall strategic success of a company. In this video what I'm going to talk about is talk is the purpose of the analysis, which I just sort of hinted at, the details of a firm's value chain, and implications of doing this type of analysis. So again the concept here is that before executives used to think about 'what does our company do well, what do we not do well?' that level of analysis and they left all sorts of opportunities on the table for thinking about: what's important to our firm? What activities really matter to us? And should we, how can we do those well? How do we do those poorly? Which ones do we not care about? Should we outsource some? Should we just generally throw as little money at them as possible? So those kinds of questions. And this value chain analysis is really a nice way to structure those kinds of analysis. So here is the sort of typical prototypical value chain; the one that he uses in his book and the one that's most usually discussed. It's for a manufacturing firm so there are two basic sections here, there's the primary activities here at the bottom. And the support activities here at the top. I guess you could also say that there's a third, that's highlighting the margin that's left for the company. So the idea here is these are the activities that the company is most - that the customer cares about the most. These support activities, guess what, support the these primary activities, and employees, and the process of serving the customer. Now think of this, this is drawn as an arrow, because the idea is there's value chain: other companies there, where their outbound comes in to our inbound, and then there are other companies (possibly) that take our output and it's their input. So we're part of one long value chain. So we have primary activities - inbound logistics, getting all our supplies et cetera, all the input materials, into the company, so that we can use them. Doing something with those materials, turning it into a product. Outbound logistics just getting those goods out to our customers. Marketing and sales, yeah, get someone to buy those goods either directly, where you think about sales or people go out to others, or marketing, where you get out some sort of marketing message that's more global. And then service, after you've sold the good then how do you service it if something goes wrong? Alright, support activities; now the idea here is with these lines is that there are specific activities, these kinds of activities, that apply to the primary activities. So there's procurement what's the process that your company goes through when buying the goods that you need to do business? Well you can buy goods to support operations, to support inbound logistics, outbound logistics, et cetera. Technology - what kind of technology does your company use, need, how do you apply it to operations, outbound logistics, marketing, sales? Human resource management; same kind of thing. And then here's this catch-all firm infrastructure. Now realize that different companies are going to have different sets of these support activities; those are pretty good start, same thing here for primary activities. A service company might not think about this inbound logistics in exactly the same kind of way, but this is again a good place to start. So now when you're thinking about using this analysis you can start thinking about 'all right we have technology' let's just say Apple computer - and technology applied to marketing and sales. So think 'all right we could try to differentiate ourselves this way we could go the low-cost route. Well if you're Apple you develop something like your iPad based checkout system where they develop the software, use their own hardware, to facilitate sales right, and they also have the wireless network in the store so that they can easily handle customer checkouts, right? And in a sense one way that they're selling their own product. So now we have - and you go through and think about each of these cells - figure out which ones we should be low cost on, which ones should we just try to kill it and do great? Well why would you try to do some low-cost and some really great? The sort of easy answer is what customers would care about some service, some particular part of your doing business, well you should think about that as being core of what you're doing and you'll want to then to do that really well. Right? So you'll want to, you know, throw all your attention to that. Other activities that customers don't care about you might outsource those. You might want to do those as low cost is possible. That's two generic strategies that you can take for each one of these cells is low cost or differentiated, that is try to make it better than someone else. Well think about it a little bit more. Would you want to do some of these low-cost and some of these differentiated? No, probably not. Right? So as much as possible for the ones that companies care about you'll - if you're going to say 'all right we're just going to try to be top notch best player'. Well you'll, for all things that a customer cares about, you'll throw money at it, through your attention it, get a lot of people thinking about how to do it better. For the stuff that customers don't care about you'll outsource that, let someone else do it, let a payroll firm handle your payroll you know you don't want to be the world's best check writers. That's not what you want to do. You'll want to think about 'how can we make our company do a service our customers best?' Which activities do we need to focus on, which can we let other companies focus on? So, implications of this, before when you were thinking of doing this kind of analysis you think about 'what does our company do best', you think about this global kind of analysis. Well here we're thinking of specific activity level: how is it that we can be better than another company based on these particular activities and now you'll know what to focus on. Focus your managerial expertise on. These two generic sources of competitive advantage, on low-cost differentiated, you'll want to be clear which one you're pursuing. If its low-cost then you're certainly not going to bring a lot of resources to bear on things because that will drive up you cost. And superiority of one overall strategy if you're sort of low-cost and sort of differentiated you have a better chance of another company beating you out by being better at differentiated or better at low-cost. If they focus better at servicing what customers want, then you're just going to get beat in the marketplace. And then finally, selective focus. So know what it is that customers care about, don't guess - know your customers. But know what it is so that you'll focus on those activities that matter more to customers. I hope this helps, use it when you're thinking about a company and how they might improve what they're doing; until next time.