The value chain is a concept developed by Michael Porter in his book "Competitive Advantage" in 1985. It describes all the activities an organization performs to create value for its customers. By analyzing the value chain, organizations identify the key stages where they create the most value and improve overall performance by optimizing their operations.
The value chain is divided into two main categories of activities: primary activities and support activities. Primary activities are those directly involved in the creation, production, and distribution of products or services. Support activities, on the other hand, provide the resources, technology, and infrastructure necessary for primary activities.
Through this structure, organizations analyze each stage of their production process to identify opportunities for improvement and cost reduction. This helps create a both global and detailed view of the costs and benefits associated with each activity.
Value chain analysis involves breaking down an organization's activities into distinct segments to identify sources of value creation and opportunities for improvement. This involves mapping base activities and support activities as well as examining their interdependencies.
The value chain generally consists of base and support activities. Base activities are those directly involved in the creation, production, and distribution of products or services.
Examples of Base Activities:
The base activities identified in the value chain are directly related to the production and delivery of services and can be considered primary centers. These centers generate revenue and add value directly to products or services.
Support activities are those that facilitate and improve base activities. They are essential for the smooth functioning of the organization but do not have a direct impact on the creation of products or services.
Examples of Support Activities:
The support activities identified in the value chain are equivalent to auxiliary centers. These centers provide internal services to primary centers and other auxiliary centers to ensure their efficiency and performance.
Divide the value chain into base and support activities using criteria such as direct impact on production, generated revenue, and the nature of support provided.
Associate direct and indirect costs with each identified activity. Direct costs are generally assigned to primary centers, while indirect costs are often associated with secondary centers.
Associate direct and indirect costs with each identified activity. Direct costs are generally assigned to primary centers, while indirect costs are often associated with secondary centers.
Label each activity as a primary or secondary center based on your analysis. This will provide a clear structure for cost allocation and performance management.
The Value Chain offers a structured framework to identify Primary and Auxiliary Centers within an organization. By understanding the nature and interaction of different activities, managers can allocate costs more accurately, optimize processes, and improve strategic decision-making.
