Q1-6 How Does Competitive Strategy Determine Value Chain Structure? Flashcards
How does competitive strategy determine value chain structure?
Competitive strategy dictates how an organization structures its activities to implement the strategy.
For example, a business that follows a cost leadership strategy will focus on minimizing costs in essential activities.
In contrast, a differentiation strategy involves investing in more costly activities, provided the benefits outweigh the risks.
What is the definition of “value” according to Porter?
Porter defines value as the amount of money a customer is willing to pay for a product, resource, or service.
The value is generated when the cost of an activity is less than the price the customer is willing to pay.
What is the “margin” in a value chain?
Margin is the difference between the value an activity generates and its cost.
For a differentiation strategy, the business adds cost to an activity as long as it maintains a positive margin.
What is a “value chain”?
A value chain is a network of value-creating activities that consists of five primary activities and four support activities, according to Porter.
What are the primary activities in a value chain?
Primary activities include:
Inbound logistics - Receiving, storing, and disseminating inputs.
Operations - Transforming inputs into final products.
Outbound logistics - Collecting, storing, and distributing products.
Sales and marketing - Inducing buyers to purchase products.
Customer service - Assisting customers with product use and enhancing product value.
What activities make up inbound logistics in the value chain?
Inbound logistics involves receiving, storing, and handling raw materials and other inputs for production.
How does the value chain add value and margin?
Each stage of the value chain adds value to the product and incurs costs.
The net margin is the difference between the total value added and the total cost incurred.
What are support activities in the value chain?
Support activities facilitate or contribute to the primary value chain activities.
They include procurement, technology, human resources, and firm infrastructure.
What is procurement according to Porter?
Porter defined procurement as the process of finding vendors, setting up contractual arrangements, and negotiating prices.
How does Porter define technology in the value chain?
Technology includes research and development, as well as other activities within the firm aimed at developing new techniques, methods, and procedures.
What does human resources involve in the value chain?
Human resources involve recruiting, compensating, evaluating, and training full-time and part-time employees.
What is firm infrastructure in the value chain?
Firm infrastructure includes general management, finance, accounting, legal, and government affairs.
How do support activities add value?
Support activities add value indirectly and contribute to the overall margin, even if the value added is difficult to measure directly.
What are value chain linkages according to Porter?
Value chain linkages are interactions across value activities.
These linkages allow different departments or functions within an organization to work together, such as using sales forecasts to determine production needs and subsequently scheduling purchases to reduce inventory costs.
How do manufacturing systems use linkages to reduce costs?
Manufacturing systems use linkages to implement just-in-time inventory systems.
This process uses sales forecasts to plan production, which in turn determines raw material needs and schedules purchases, reducing inventory sizes and associated costs.
