Question

COURSE( Enterprise Systems )

Q- What is Michael Porter’s Value Chain Model? Explain margin in this model.

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Answer 1

Michael Porter's value chain

As per Michael Porter's value chain analysis, there are 2 types of business activities as mentioned below

1) Primary Activities

2) Support Activities

Breaking down the Primary and support activities.

Primary activities are those which are directly related the profit of the company. This simply means that the product or service are provided by the company are directly related to cost and subsequently profit.

Support activities are not directly related but they affects the function of primary activities.

Further, Porter has stated that primary activities can be listed as 1) Inbound Logistics 2) Production 3) Outbound activities 4) Marketing and sales 5) Services

Support activities are 1) Infrastructure 2) Human Resource Management 3) Technology department 4) Procurement

This model was developed in 1985 when service Industry was not so big. The model mainly emphasis on Manufacturing Industry but this model suits to any Industry subject to the weight of component. The generic idea in this model is that all primary activities have the same weight but same is not true for service industry where post sale service is more important than other activities.

However, using some basic knowledge of any Industry, Porter's model give the clarity about impact of each service on profit of the company. For using this model, one should have clarity of linkage of each service used in it. Based on Porter's value chain model, a effective value chain can be created by following the below mentioned steps.

1. First the primary and support activities to be identified

2. Their relation with cost of production to be established

3. Cost driver to be established

4. Linkage between each activity to be identified

5. Area of cost cutting to be identified

Explanation of Margin in this Model

Porter says the there is a cost of production of a product or service and there is a price which is paid the the ultimate customer. Margin is difference of customer price and cost of production. In a simple way, margin means profit. The overall concept of Porter's model is to gain more profit by applying his management tool.