The boss or senior management of a company need to make decisions about the future development of the company. Which areas require more resources to be invested in the coming year or in the future? How should they make the decision to enhance the company’s competitive advantage?
Porter’s value chain analysis should be used to help making the decision.
Value chain analysis competitive advantage ensures decision-making is on the right track
Strategy guru Michael Porter pioneered the concept of value chain in “Competitive Advantage”. The concept dismantles every process by which an enterprise converts input into output. The use of value chain analysis can identify the cost characteristics of an enterprise and the possible directions for establishing an enterprise’s competitive advantages. Porter’s Value Chain is named as “a basic tool for analyzing the sources of competitive advantage.”
The value chain can be divided into two main parts, including the profit margin obtained by the company from selling products/services, and the various value activities carried out in the production process (value activity). Value activities are divided into primary activities and support activities that support the smooth progress of the primary activities. The way different activities are combined with each other can reflect the characteristics and advantages of the enterprise. The enterprise’s competitive advantages may come from a single value activity or from good linkage between multiple value activities.
General strategy
Porter believes that activities within an enterprise can add value to services and products, and activities should be run horizontally. Competitive advantage is an enterprise’s ability to put “general strategies” into practice. Generic strategies include:
1. Cost Leadership: provide customers with the lowest prices and achieve price advantages through economies of scale, including mass production, pre-orders, etc.
2. Differentiation: grasp market needs and win with service and quality. Areas to achieve differentiation include: products, sales, channels, markets, services, corporate image, etc.
3. Focus: implement strategies according to each market segment, and the company leads its peers in individual markets or industries.
Decision makers need to first carefully examine which aspects of the enterprise can create more value, and use value chain analysis to help decision makers determine which areas require more resources to achieve competitive advantage. By consolidating core competitiveness and developing the company’s unique competitive advantages, resources can be optimally allocated.
Then take the e-commerce giant Amazon as an example to analyze the value chain model.
Amazon generated over half a trillion dollars in revenue in 2023, of which $231.87B from online stores, over $140.05B from third-party seller services, $90.76B from AWS, $46.9B from advertising, $40.21B from subscription services, and $20.03B billion in physical stores.
Primary activities
As a major online retail company, Amazon does not produce its own products. Its Fulfillment by Amazon allows customers to select, pack and ship their products among the company’s many fulfillment centers around the world. Added value through massive economies of scale and additional services such as free shipping and buyer traffic. Its logistics services handle both customer service and product returns.
Amazon’s operations are divided into three core segments:
North America – which includes websites in the United States, Canada, and Mexico.
International – which includes country-specific websites in a further 13 locations such as Australia, China, France, Germany, and Spain.
Amazon Web Services (AWS) – incorporating sales of cloud infrastructure services, storage and database items, plus other services for enterprises, governments, and academic institutions.
Amazon’s logistics services take advantage of approximately 185 fulfillment centers around the world, fully mechanical inventory technology, and delivery by aircraft, ships, trucks, drones and local couriers. Logistics Services works with the Whole Foods Market chain to handle product logistics.
Marketing and Sales:
Amazon spends billions of dollars each year on online and offline marketing, citing its wide selection of products and services, fast delivery, excellent customer service and its Amazon Prime membership program. Amazon provides buyers with an unprecedented level of customer service when it comes to shipping, refunds, returns, and exchanges. At the same time, we assist suppliers to set competitive prices and increase their chances of success.
Support activities
Supporting activities include company infrastructure, reliable and scalable logistics systems, including cloud network services. In terms of human resource management, Amazon hires a mix of permanent employees, contractors, and seasonal or temporary workers to respond to short-term needs and develops ways to evaluate employee performance. In the United States, Amazon has a minimum wage of $18 an hour, twice the federal wage, and provides employees with comprehensive benefits.
Research and development:
Amazon takes full advantage of technology, including drone delivery and fully robotic inventory technology. In 2020, Amazon’s filings with the SEC showed that the company obtained 2,244 patents, most of which were in fields such as machine learning and artificial intelligence.
Sales and Operations (S&OP):
Amazon uses receipts and shipments from fulfillment centers to predict sales of individual products and monitor real-time inventory levels. The procurement also includes the necessary equipment, resources, technology and infrastructure required for its core e-commerce platform.
Comprehensive analysis of corporate competitive advantages
The reason why Porter developed value chain analysis was mainly because he was dissatisfied with the mainstream strategic management system analysis at the time which believed that the company’s strategic planning only focused on market share and market growth rate. Porter advocates analyzing the fundamentals of business operations and fully understanding the formation process of industrial value.
When analyzing an enterprise’s competitive advantage, it is not necessary to “treat the entire enterprise as one.” This is because competitive advantages originate from multiple independent activities within the enterprise such as product design, production, marketing, transportation, and support operations. These activities have an impact on the relative costs of the enterprise. Different contributions and economic benefits can also form the basis for differentiation. Therefore, when conducting value chain analysis, it is necessary to first analyze the different value creation activities in the enterprise.