Michael Porter has proposed using a value chain as a way to analyze in much more detail the sources of competitive advantage.
The value chain can be used to analyze relative cost, position, and differentiation in achieving competitive advantage.
Differences among competitor value chains are a key source of competitive advantage.
- Creating value for buyers, as measured by total revenue, that exceeds the cost of doing so is the goal of any generic strategy.
- The value chain displays total value, and consists of value activities and margin. Value activities are the physically and technologically distinct activities a firm performs that create a product that is valuable to the buyer.
- Margin is the difference between total value and the collective cost of performing the values activities.
- Each value activity uses purchased inputs, human resources, some form of technology to perform its function, and uses and creates information.
- Every firm is a collection of activities that are performed to design, produce, market, deliver, and support a product.
- The value chain allows a manager to desegregate a firm into its strategically relevant activities so that the behavior of costs and the existing and potential sources of differentiation can be understood.
- A firm gains competitive advantage by performing these strategically important activities more cheaply or better than the competitors can.
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