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Saturday, July 24, 2010

The Value Chain to Profits!

To create value and profits a company that analyzes and understands the value chain activity can create a competitive advantage.  As Samuel T. Coleridge stated, "The worth and value of knowledge is in proportion to the worth and value of its object."

The primary value chain activities consist of the following:

  • Inbound logistics which includes receiving, warehousing, and inventory control of input materials.
  • Operations are the value creating activities that transform the inputs into the final product.
  • Outbound logistics are the activities required to get the finished product to the customer.
  • Marketing and Sales are activities associated with getting buyers to purchase the product.
  • Service activities maintain and enhance the product's value.
The goal of these activities is to create value greater than the cost of providing.

Along with primary activities there are support activities.  These activities are known as overhead.  Companies strive to create a comparative cost advantage to these activities with information systems.
  • Procurement - the function of purchasing raw materials and other inputs in the value creating process.
  • Technology Development - includes research and development process automation.
  • Human Resource Management - the activities associated with recruiting, development, and compensation of employees.
  • Firm Infrastructure - these activities include finance, legal, and quality management.
To understand activities on the value chain leading to competitive advantage a process flow of the activities will illustrate the individual value adding activities.  Linkages between activities identify when one activity affects another.  Competitive advantage is optimized by coordinating linked activities.

"Markets maximize benefits supported by externally enforced property right rules that prohibit taking without giving in return."  - Vernon Smith