Value Chain is also known as Value Chain Analysis. The theory was propounded by Michael Porter. The value-chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors.
A firm’s value chain is embedded in a larger stream of activities that form the value system. Suppliers have value chain (upstream value) that create and deliver the purchased inputs in a firm’s chain. Suppliers not only deliver a product but also can influence a firm’s performance in many other ways. In addition, many products pass through the value chains of channels (Channel Value) on their way to the buyer. Channels perform additional activities that affect the buyer, as well as influence the firm’s own activities. A firm’s product eventually becomes part of its buyer’s value chain. The ultimate basis for differentiation is a firm and its product’s role in the buyer’s value chain, which determines buyer needs. Gaining and sustaining competitive advantage depends on understanding not only a firm’s value chain but how the firm fits in the overall value system.
The value chains of firms in an industry differ, reflecting their histories, strategies and success at implementation. One important difference is that a firm’s value chain may differ in competitive scope from that of its competitors, representing a potential source of competitive advantage. Serving only a particular industry segment may allow a firm to tailor its value chain to that segment and result in lower cost or differentiation in serving that segment compared to competitors. Widening or narrowing the geographic markets served can also affect competitive advantage. The extent of integration into activities plays a key role in competitive advantage. Finally, competing in related industries with coordinated value chains can lead to competitive advantage through interrelationships. A firm may exploit the benefits broader scope internally or it may form coalitions with other firms to do so. Coalitions are long-term alliances with other firms that fall short of outright merger, such as joint ventures, licenses and supply agreements. Coalitions involve coordinating or sharing value chains with coalition partners that broadens the effective scope of the firm’s chain.
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