Hack:
Mapping of Porter’s value chain activities into business functional units

By Avijit Saha - Nash Technologies GmbH

March 15, 2011 at 9:19am

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Summary

According to Michael Porter value is the chain of activities for a company that operates in a specific industry. For gaining the competitive advantages, Porter suggested that going through the chain of organization activities will add more value to the product and services than the sum of added cost of these activities. And thus, the company will gain marginal value for that product or service. If these activities run efficiently the company gains competitive advantage on the product or service. For this case the customers should transact the product or services willingly and provide return on value to the organization.

72 Strategic Business Units

goes through during the life cycle. The best possible value can be achieved in the product development process by adding value in each stage. For that it needs all, or a combination of, value chain activities and a proper synchronization among all the related activities. A proper organization is required that contains all the required functional departments to perform these activities and a proper communication approach is required to synchronize the activities of these functional units efficiently.

The value chain framework can be used as powerful analysis tool for the strategic planning and to build the organizational model ensuring an effective leadership model. The value chain concept can be applied also in the individual business unit and can be extended to the whole supply chains and distribution networks. To form a successful product for an organization it is important to add value in each activity that the product goes through during the life cycle. The best possible value can be achieved in the product development process by adding value in each stage. For that it needs all, or a combination of, value chain activities and a proper synchronization among all the related activities. A proper organization is required that contains all the required functional departments to perform these activities and a proper communication approach is required to synchronize the activities of these functional units efficiently.

Problem

How to map the porter's value chain activities into business functional activities?

To solve this problem, first we have to classify the value chain activities into functional activities:

Classification of Porter's value chain activities:

Porter classified the generic value added activities into two classes which are presented in Figure-1. These activities are: primary activities which are classified as product and market related activities and support activities that are related to infrastructure, technology, procurement, and human resource management.

Figure-1: Porter’s Value Chain Activities

Primary activities can be classified into product related and market related activities which are described below:

Product related activities: The activities that the organization performs to add value to the products and services itself. The activities are classified as:

1. Inbound logistics: For the production and development activities, organizations need inputs as goods which are received from the suppliers. Inbound logistics refer to all the activities related to receive goods from the suppliers, decision about the transportation scheduling, storing the goods as inventory, managing the inventory, and make the inputs ready to use for the production of end products.

2. Operations: These include the production process, development activities, testing, packaging, maintenance, and all other activities that transform the inputs into finished product.

3. Services: Organization offers the services after the products and/or services have been sold. These service activities enhance the product’s value in the form of after sales guarantees, warranties, spare parts management, repair services, installation, updating, trainings, etc.

Primary activities can be classified into product related and market related activities which are described below:

Product related activities: The activities that the organization performs to add value to the products and services itself. The activities are classified as:

2. Operations: These include the production process, development activities, testing, packaging, maintenance, and all other activities that transform the inputs into finished product.

Market related activities: The activities that the organization performs to transfer the finished products or services to the customers. The activities are classified as:

1. Outbound Logistics: The finished products are developed using the product related activities. Now activities are required to transfer the finished products to the customers via warehousing, order fulfillment, transportation, and distribution management.

2. Marketing and Sales: These activities include the advertising, channel selection, product promotion, selling, product pricing, retail management, etc. The activities are performed to make sure that the products are transferred to the targeted customer groups. Marketing mix can be an instrument to take the competitive advantage to the target customers.

Support activities: The activities that the organization performs to assist the primary activities to gain the competitive advantage. The activities are classified as:

1. Procurement: This is the purchasing activity of the inputs to transform these into finished products or services. Procurement adds value by the acquisition of appropriate goods or services at the best price, at the right time, and in the desired place with the desired quality and quantity.

2. Technology Management: This is very important in today’s technological driven environment. Technology can be used in production to reduce cost, to develop new products, increase customer service facility, build up cost effective process, etc. It supports the value chain activities such as research and development, process automation, process design, etc.

3. Human Resource Management: The key roles of HR are to support the attainment of the overall strategic business plan and the objectives. As a strategic business partner HR designs the work positions by hiring, recognition, reward, appraisal systems, carrier planning, and employee development. They act as an advocate of the employees to motivate them and create a happy working environment. For the organizational changing situation, HR executes the strategic needs of the organization with minimum employee dissatisfaction and resistance to change.

4. Infrastructure: This includes the planning management, legal framework, financing, accounting, public affairs, quality management, general management, etc. These are required to perform the value added activities efficiently to drive the organization forward to meet the strategic plan and the objectives.

To form a successful product for an organization it is important to add value in each activity that the product goes through during the life cycle. The best possible value can be achieved in the product development process by adding value in each stage. For that it needs all, or a combination of, value chain activities and a proper synchronization among all the related activities. A proper organization is required that contains all the required functional departments to perform these activities and a proper communication approach is required to synchronize the activities of these functional units efficiently. In the solution section, porter's value chain activities are mapped into the related business functions.

Solution

Mapping of porter’s value chain activities into business functionalities:

The product related activities can be divided among functional units: production performs operational activities, partly inbound logistics, and services activities. Software production includes the activities as product development, testing, packaging, maintenance, installation, updating, trainings, etc. Sales performs part of service activities (e.g. guarantees, warranties). Inbound logistics activities can be shared between logistic department and the production function as inventory management activity. In SMEs logistic department can be merged with marketing & sales unit. Production process and production value means profitability analysis is decided by production management functionality. In brief, the function of the production management is to manage the production activities to meet the strategic goals.

Market related activities can be classified as function of marketing and sales. In many organizations marketing and sales are two independent departments that work in collaboration. But in SMEs both departments can be merged into one department to perform all the relative activities. The decision process of marketing and sales depends on the revenue and cost element of all the marketing and sales activities. This decision making functionalities can be defined as marketing and sales management to manage the marketing and sales activities and more importantly they take the decision whether the marketing and sales add value to the products, or services, and the organization.

The Technology Management activities can be presented as research and development (R&D) function which increases the stock of knowledge for the organization.

Infrastructure related activities can be divided into key business functions of general management, finance and accounting, quality management, and general management.

For SMEs procurement activities may belong to the marketing and sales department in collaboration with production operation for scaling the need of quality and quantity.

The Technology Management activities can be presented as research and development (R&D) function which increases the stock of knowledge for the organization.

Infrastructure related activities can be divided into key business functions of general management, finance and accounting, quality management, and general management.

Depending on the size of organization, procurement activities may belong to the marketing and sales department in collaboration with production operation for scaling the need of quality and quantity.

Human resource management activities can be performed by the human resource (HR) department.

Practical Impact

After mapping the porter’s value chain activities to the required business functionality we can summarize the value chain business functions into following categories:

Primary Business Functions: The functions perform product and market related activities. These are production, quality management, marketing and sales, production management, and marketing and sales Management.

Supportive Business Functions: The functions that perform these processes that are necessary for the execution of value added primary activities effectively and efficiently. These are research and development, accounting and finance, human resource management, and general management.

As a summary, the porter value chain model framework can be generally defined as nine major functions of business. These business functions are in brief:

Production (P): This is the process to produce a good or service from the inputs collected from the supplier using the resources that carry a cost determined by production factors.

2. Production Management (PM): This is the decision process about the profitability of the production activity to produce a good or service. The profitability measurement can be done by assessing the revenue and cost of the production factors. The outcomes are the management of the all the production functions as well as heartbeat (day-by-day operations) and integration of operations to achieve the desired strategic outcome.

1. Production (P): This is the process to produce a good or service from the inputs collected from the supplier using the resources that carry a cost determined by production factors.

3. Quality Management (QM): The quality of a product is the integral part of product itself. But maintaining the quality in all level of corporate grows the confidence that the quality requirements of the product or service will be met. To some extent, to assure the quality of the product is the part of production management functionality but in globally the quality management provides the process of quality assurance by fulfilling the requirement of quality management system like ISO 9000 for achieving the desired quality of the products, services, and the entire corporate activities.

4. Marketing and Sales (M&S): Marketing is the social process by which individuals and groups obtain what they need through creating and exchanging products and value with others. In brief, according to the chartered institute of marketing (CIM), marketing is the process that identifies, anticipates, and satisfies the customer requirements profitability. Sales perform all the exchange process of goods or services to the customers in return of money or its equivalent.

5. General Management (GM): GM has overall responsibility for the organization. He has profit and loss responsibility of the company. In general, GM oversees all the firms’ functions as well as day-to-day operations to sustain the company’s integrity and growth.

6. Marketing & Sales (M&S) Management: This is the decision process about the profit and loss elements related to marketing and sales activities. It also oversees the production functions including day-to-day operations to synchronize the marketing and sales activities with the production activities.

7. Accounting and Finance (A&F): Finance creates value from the company’s capital budgeting, financing, and net working capital activities. Accounting is the process for analyzing, summarizing the financial activities as well as interpret, and communicate the financial results to internal and external stakeholders].

8. Research and Development (R&D): This comprises the creative activity in a systematic way for the creation of new business, to improve the knowledge for the efficient usage of the existing resources, and in general to diversify the applications of the stock of knowledge.

9. Human Resource (HR) Management: This is the workforce management process of the organization to build up the desirable working environment and the competence to achieve the strategic goals of the company.

The success of a company is measured by its profitability, which is closely connected to the efficiency of the performed activities. All the activities in an organization have cost and generate a return. If rate of return is greater than the cost the activities add value to the organization. For achieving the premium rate of return, businesses need to perform economic activities efficiently. According to Porter the efficiency of the activities depends on the finalization processes in the interrelated areas of the organization, strategy, and tactics [36]. The platform of performing activities is the business organization. The pre condition to accomplish the value added activities is the efficient organization. The efficient organization must have all the value added functions of business for the proper interrelations of value added activities.

Individually all the single business function also produce the result and perform value creation activities. For achieving Porter’s value added efficiency it is important to include all nine major functions as sub-functions in each major business function.

First Steps

Suggestion for implementation steps:

Step-1: Depending on the business model, we have to find the organizational the value chain activities.

Step-2: The defined value chain activities have to be asigned into proper value added business function.

Step-3: Define an proper organizational structure such that each business units can generate the effective maximum value by performing all needed value added activities.

Step-4: We have to define proper synchronization mechanism for the efficient synchronization of business functional actitivities to achieve common business goal.

Step-5: Effective communication mechanism have to be defined among the business functional units.

Credits

[35] ”Profit and Net Income”, Princeton University, Wordnet Princeton, 2009.

[36] M. Porter, “On Competition”, Harvard Business School Press, Boston MA, 1988.

[37] ”General Management”, http://en.wikipedia.org/wiki/General_manager

[38] P. Tulsian, “Financial Accounting”, Tata McGraw Hill, New Delhi, 2002.

[39] P. Kotler, K. Keller, “Marketing Management”, 13E, 2008.

[40] “Definition of Procurement”, http://en.wikipedia.org/wiki/Procurement

[41] “Definition of Business”, http://www.class.umn.edu

[42] “ASQ: Learn About Quality”, http://www.asq.org/learn-about-quality/continuous-improvement/overview/o...

Special Thanks to Prof. Dr. Thomas Eckardt (GSO-MI).

Few documents and journais:

[1] ”Profit and Net Income”, Princeton University, Wordnet Princeton, 2009.

[2] M. Porter, “On Competition”, Harvard Business School Press, Boston MA, 1988.

[3] P. Tulsian, “Financial Accounting”, Tata McGraw Hill, New Delhi, 2002.

[4] P. Kotler, K. Keller, “Marketing Management”, 13E, 2008.

[5] "How Hierarchy Can Hurt Strategy Execution", Hervard Business Review, Pages: 74 – 75, July-august 2010.

[6] M. Joris, M. J. Brand, “Organisational Structure and Performance”, SCALES-paper N200214, Jun 2002.

and more on.

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November 7, 2012 at 2:59pm

Purvez Panthaki

Dear Avijit, Thanks for your article. For discussion in my Discussion Group, will need to have do a similar exerice for Insurance Accounting. Need some suggestions on how to start, though. Need your suggestions here, since not sure how to identify the primary activities or whether to take the final accounts as result or some other. Gratefulif you can guide. Purvez.

November 8, 2012 at 10:39am

Avijit Saha

Dear Purvez, you are welcome. If you want to map the value chain activities of insurance Accounting in these business unit, I need to know more details about company functions, strategy, etc. Can you please write some details about your organization. You can discuss on this group or In case you need any private consultancy, please contact with me on following e-mail: avijit.saha@outlook.com

May 18, 2015 at 8:10am

Paul Marshall

The edi integration of supply chains, especially upstream and downstream with secondary and tertiary supply chains can become incredibly complex if you don't get the right help with the integration. Someone like http://www.segurasystems.com/ who have experience through many different sectors can help.

July 5, 2017 at 3:41pm

johnny dougherty

Supply chain is very important but sometimes its complicated for some reason. But having a planned and smooth supply chain logistics will help a business function more and gain more revenue. A business will be more successful if the supply chain is efficient and has a competitive advantage within the industry.

Regards,
BR International Value Added Services Logistics Firm

March 16, 2011 at 12:55pm

Marcus Micheal

Nice article. You mentioned that each business units must perform all nine value added activities to gain effective marginal value. For this, each unit must need individuals who can manage all the activities. How can individual units manage these activities?

March 21, 2011 at 2:23am

Avijit Saha

Thanks Marcus for the valuable comment.

Let consider an R&D department and main function is the generation of product ideas, the ideas are screened, and concept is developed for each potential screened idea. The concepts are shared with the responsible stakeholders for the primary feedback. The positive reviewed concepts are considered as potential discovered products.

To achieve the effective marginal value it is important to synchronize all nine value added functional activities in this stage. The nine major functional activities are:

1. Research and Development (R&D): The R&D function has an undoubted functional area research and development. From idea generation to concept development, R&D department has an active participation to improve the stock of knowledge for each activity.

2. Production: Production activity is required to generate general experimental results if required and to perform the operations belong to idea generation, idea screening, concept development, and the analysis of product identification involved in this stage.

3. Production Management: This is the decision making process for the production function that involved in this stage. The main roles are to take decision, manage, and control the idea discovery process.

4. Quality Management: This ensures the quality of entire activities that involved in this stage and provides confidence about the generation of qualified outcome.

5. General Management: This is the important decision making process to sustain the functional integrity and secure that the performed activities are synchronized with business model and business goals.

6. Human Resources Management: The main role is to manage the human resources and creates pleasant environment for the product discovery operation. This function involved actively in the decision process for employee selection, competence improvement, performance appraisal, and guidance of the employees.

7. Finance and Accounting: Accounting and financing is important to balance the financial activities involved in this stage and accountants communicate the financial reports to the stakeholders.

8. Marketing and Sales: Marketing and sales are directly involved for the analysis of market and customer requirements for the ideas. Market and customer requirements are most important factors to identify the product related requirements.

9. Marketing and Sales Management: This is the decision making process related to marketing and sales functional activities.

Here these functional activities have to be performed and synchronized to achieve effective marginal value on the R&D actitivities which will add value on the product life cycle.

March 21, 2011 at 2:45am

Hasan Sikdar

First, thanks for the article. You mentioned that nine functional activities are required for value added activity. For each departmental all nine functional activities have to done! For each function do we individual respective person or not?

April 10, 2011 at 4:30am

Avijit Saha

Dear Sikdar,

Thanks for your comments. Basically in small company we can use this model also. For this case we don't need one or more person for each sub-function. One person can do some sub-functions. As an example, in a small business in which total employee is less than 10 persons, still they must have to perform all the value creation activities. They have to make all the decisions, have to mention the quality, production, and R&D depending on the situation. In this case, may be one person control and perform multiple roles. One who is product manager, can manage also the quality, in some extends can be part of production functions itself.

So it is not important who is doing these activities, most important to identify the value added activities, and performed and synchronized among these. Depending on the context of the activities, individual can perform multiple activities or roles.

Regards

Avijit

April 3, 2011 at 10:34am

Krishnamurthy Prabhakar

Dear Avijit, Thanks for your article on ME. Porter's model. However, this model which was published in the year 1985, in my opinion has out lived its utility. Do you think the same sociological and economic situation prevail in the world? The phenomena of outsourcing as its is known to day is not in existence at that time. The business models ( as given by www.businessmodelgeneration.com) are totally different. We are having different types of capital such as patient capital. Do you still think that this model is universally application or limited in application to few firms? if you have any examples please do share with us.

April 10, 2011 at 4:17am

Avijit Saha

Dear Prabhakar,

Thanks for your valuable inquiry. Yes, it is truth that sociological, economic situation, and business model have changed significantly in last 25 years. But if we analyze the business value model deeply, we can find the key value creation business elements remain almost same. Many more sub-business elements are introduced depending on the business, ecological, social, and demographical model. As an example, in the product oriented company on and off-line services, transportation, consultancy, financing for the product and many more features are the parts of product itself. For the simplicity, management and leadership model, it will be most effective to consider all the product related features that create value on customer on return on profit for the company as part of production function. Also depending on core competences, most companies outsource some parts of full chain production functions to use the business resources efficiently and in some cases to save the cost. So although environment is changed in years, but we can still use the different business functions in one of these 9 value creation business functions and synchronizing among these to achieve the effective value on each business functions. This will not only simplify the model but also helpful to control the key outcome to ease the leadership context.

So I think, this model still can be used in most businesses but have to rearrange the business elements and organize these efficiently in these 9 business functions that will simplify the leadership and controlling process.

Regards

Avijit