In 1985, Michael Porter published Competitive Advantage: Creating and Sustaining Superior Performance. In this book, he described how organizations can achieve competitive advantage in their industries. Porter's focus in this book was not on an overall competitive strategy, but on what organizations needed to do on a daily basis to achieve results. As Porter (3) stated, "My aim is to build a bridge between strategy and implementation. " To create the link between the overall strategy of a firm and how that strategy could be achieved, Porter referred to value.
As Porter (3) stated, "competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm's cost of creating it. " This focus on value led to the concept of the value chain, which refers to the internal processes that occur as the organization creates its product or service. Value chain management is not just a process that occurs within an organization. Instead, it is closely linked to the competitive environment. This means that value chain management takes into account the industry in which the organization operates.
This is referred to as the industry value chain and describes how the industry overall adds value to the consumer. This is an important point because it means that value chain management does not just refer to the series of processes that occur within the organization. As an example, consider the case of Apple's Ipod. If creating value was only considered in the context of what happens within the organization, the focus might be purely on the manufacturing process.
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Apple might consider their value chain as a process where raw materials are converted to the product and where the product is distributed to the consumer. In terms of improving the value of their product, they might consider that saving on raw materials, decreasing production time, and improving distribution will help add value. The problem with this approach is that it does not identify the real value that consumers gain from the product. This real value is identified when the MP3 player industry is considered on a broader level.
This broader view shows that value is added more by marketing than by manufacturing. Apple's value chain includes the major activities that instill value in the product. Marketing with the aim of gaining consumer support is one of the key ways to add value. It is this aspect that Apple competes against with the other organizations in the market. This illustrates that value chain management is a process of recognizing what activities add value to the organization and then focusing on these activities to gain competitive advantage.
The aim is not to improve everything about the organization, but to improve the processes that will allow the organization to gain an advantage on the competition. Porter (39) also identified various generic factors that are part of an organization's value chain. These generic factors are: inbound logistics, operations, outbound logistics, marketing and sales, and service. Porter considered that these five areas add value to a firm. Porter (40) also identified several support factors. These support factors are: infrastructure of the organization, human resource management, technology, and procurement.
Porter identified these generic factors as a general guideline for organizations, while noting that the industry's competitive factors determine what factors will comprise the value chain for a specific firm. For example, in the case of Apple's Ipod, sales and marketing would be a key factor and technology would also be a part of the value chain. In the case of an organization manufacturing and selling nails, sales and marketing is not likely to be a large part of the value chain. Instead, operations may be more important, with the aim being to manufacture the nails as cost effectively as possible so as to maximize profits.
For any organization, value chain management is used to identify the key factors that add value in the industry and then to determine how to improve those key factors so as to become more competitive. Southwest Airlines is one organization that has successfully used value chain management to improve its performance. Southwest Airlines is recognized as a success in the airline industry not just because it is a successful company, but also because it made positive changes to the industry. It is generally considered as a pioneer.
This success is linked, at least partially, to its use of value chain management. Pellet (53) describes Southwest Airlines as a company that found creative ways to make improvements, with these improvements especially related to reducing the downtime of aircraft, improving scheduling, and making maintenance more efficient. At the same time, Southwest Airlines needed to improve cost-effectiveness so it could offer a lower price to its customers, but still maximize profits. Southwest Airlines based its success on identifying the industry value chain.
This included noting the key industry factors that determine success. With the key industry factors identified, Southwest Airlines was able to find creative ways of improving on these factors. One of the important points is that Southwest Airlines' strategy did not just involve copying what other airlines were doing. This was achieved because they were not comparing themselves to what others were doing. Instead, they were only focused on how they could improve. This allowed them to identify unique ways of doing things and this is how they managed to gain competitive advantage.
Southwest Airlines' successes were enough to get them listed in Fortune magazine's "Top 100 Companies" list. In the magazine, it is noted that Southwest Airline won the Triple Crown award for Best Airline five times; a fact that shows their success is more than just financial (Moskowitz and Levering 148). Southwest Airline became the best in the industry. Their success shows how effective value chain management leads to competitive advantage. Finally, it is useful to consider how value chain management has changed since it was first introduced by Porter in 1985.
One of the major changes is that computer software has become an important tool in the process. Computer software has been developed to identify problems and opportunities for improvement in the value chain. This is largely focused on the manufacturing process, but can also be applied to any process where efficiency is desired. Another significant trend is that the value chain is extended further, both upline and downline. For example, many organizations are considering the internal processes of their suppliers.
The idea is that if the supplier improves their value chain, the organization that receives the output of the supplier also benefits. In addition, if the supplier can improve efficiency and reduce costs, the benefits can be passed on to the organization by lowering the price of raw materials. The same applies to considering upline organizations, such as distributors and retailers. This is creating an environment where organizations are demanding more from companies that provide them with any type of service. In turn, many companies are becoming less like suppliers and more like partners.
This allows the organization to assist supplier companies, while also ensuring that they benefit from the improvements that suppliers make. This creates an environment where organizations are linked together by either formal or informal partnerships. In some cases, both organizations work together to determine how they can best assist each other. In other cases, organizations have contractual demands on their suppliers. In other cases, a formal partnership is in place. In all of these cases, the same trend is seen, with organizations recognizing that other companies are part of their value chain.
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