The Porter’s Value Chain Model

Subject: Management
Pages: 8
Words: 2286
Reading time:
9 min
Study level: PhD

Introduction

Porter’s value chain model outlines procurement as a complementary activity. In the same analysis, Porter compares procurement with other complementary activities such as firm infrastructure, human resource management, and technology development (McPhee 2006). He says these activities support the primary functions of an organisation (like inbound logistics, operations, outbound logistics, marketing, and service delivery) (Porter & Kramer 2011). Through this analysis, Porter disaggregated organisational activities into different components that explain the value-chain process. Indeed, through the grouped function analysis, Porter strived to explain how organisations achieve their competitive advantages.

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However, in a recent publication of the Harvard Business Review, Porter revisited the importance of procurement (as a supportive activity) and said that procurement made an important contribution to shared values (Porter & Kramer 2011). In other words, Porter no longer sees procurement as (just) a supportive activity, but also as a main activity in the value chain model. This paper analyses this change of perception by exploring why Porter now sees procurement in a strategic light.

Broadly, this paper shows that Porter’s value chain model failed to consider the increased role of technological advancements, depletion of natural resources, increased role of shared value, and the increased importance of business-supplier collaboration in today’s businesses when formulating the value chain model. Therefore, this paper shows that a reconsideration of the above oversights may inform Porter’s reconsideration of procurement as a strategic component of the value chain model.

Technological Advancement

The level of technological advancement has greatly increased in the past few years. This development has brought a tremendous shift in organisational behaviour. More importantly, this development has changed the traditional way of how companies used to make acquisitions and define their corporate cultures (Aktouf 2005). Porter’s value chain analysis relied on an older interpretation of the importance of technology in influencing a company’s value chain process. However, Porter was right in saying companies should identify the main technologies that influence their value addition processes to determine their competitive advantages (McPhee 2006). However, the scope and influence of technology in today’s organisational processes have significantly expanded. More importantly, technology has greatly revolutionised the procurement process, thereby making it a primary influence on an organisation’s value chain process (as opposed to a secondary influence of the same).

Initially, Porter only had a superficial understanding of an organisation’s internal processes and its potential ramifications in the value-chain process. Porter made this assertion when he explained the “relative technological skills” of an organisation (Aktouf 2005, p. 79). In Porter’s understanding, relative technological skills mainly depended on a few organisational functions such as “management, company culture, and organisational structure” (McPhee 2006, p. 39).

In the same context, Porter also said companies “use acquisitions or joint ventures to introduce new technological skills to the corporation, or to invigorate existing skills” (Aktouf 2005, p. 80). However, intrinsic factors in an organisation may significantly lead to technological advancements that affect a company’s competitive advantage (Porter’s initial analysis of procurement in the value chain model did not mention this fact). Moreover, the importance of understanding the effect of corporate cultures when making supplier contracts (and the role of integrating new technology) in such agreements rarely sufficed in Porter’s first assessment of the role of procurement in the value-chain process (Aktouf 2005).

Several researchers have contested Porter’s initial understanding of the role of procurement in the value-chain process. For example, Prahalad and Hamel (cited in Aktouf 2005) contested this view through an article titled “core competence.” At the same time, Stalk, Evans, and Schulman (cited in Aktouf 2005) contested the same view through an article titled “capabilities based competition.” These authors hold the view that the competitive environment that informed Porter’s understanding of the value-chain process has significantly changed. Therefore, new competitive dynamics face current businesses. They also propose that Porter’s structured approach of the value-chain process is irrelevant in today’s fast-paced and ever-changing business environment.

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Depleting Natural Resources

An increased world population has caused a lot of pressure on natural resources. Unfortunately, as the population grows richer, the pressure on natural resources also multiplies (through increased demand for energy). Halldórsson (2013) says this trend poses a challenge to organisations that primarily rely on natural resources for their sustenance. Certainly, the unfortunate trend of dwindling natural resources may even affect organisations that do not rely on natural resources for their main activities. For example, many organisations today rely on energy, which comes from natural resources. If the demand for energy outstrips its supply, such companies may suffer increased costs of production (through high-energy costs) (Williams 2007).

The importance of understanding the impact of natural resource depletion on Porter’s value-chain analysis stems from the importance of natural resources as a crucial source of raw materials for companies. In other words, resource depletion poses a threat to the supply of raw materials. If companies do not have sufficient raw materials, they may shut down. Through this understanding, raw material availability is an important factor in the operations of most companies (Yang 2010).

The threat of depleting raw materials was not a vivid business reality as it is today. Indeed, when Porter developed his value-chain analysis, he did not consider the real effects of a global economy facing the threat of diminished natural resources. However, this threat is now real and companies have to grapple with the possibility of closing business because of the lack of sufficient raw materials. Even if such companies do not necessarily close down, they will have to manage the possibility of sourcing their raw materials expensively. This reality is especially true for manufacturing companies.

From the above understanding, procurement surfaces as a primary activity in an organisation because a frustrated procurement process (caused by depleted natural resources) may significantly affect an organisation’s bottom-line. The sheer significance of such an eventuality informs Porter’s reconsideration of the procurement process as a primary organisational activity, as opposed to a secondary activity.

Increased Importance of Shared Value in Today’s Businesses

There is an ongoing paradigm shift among scholars about the role of marginalised suppliers in increasing an organisation’s value (Aktouf 2005). One school of thought that is emerging from this argument is the growing belief that marginalised suppliers do not significantly increase the value of an organisation. In other words, people are slowly realising that the probability of marginalised suppliers to remain productive, competitive, effective, and sustainable is slim. This school of thought gives way to a new paradigm, which outlines that “by increasing access to inputs, sharing technology, and providing financing, companies can improve supplier quality and productivity, while ensuring access to growing volumes” (Porter & Kramer 2011, p. 4).

Organisations may derive several advantages of increasing the capabilities of their suppliers. One such advantage is the reduction of the environmental impact of the suppliers. This advantage closely complements the need to preserve natural resources as a way of guaranteeing an organisation’s sustainability. Moreover, improving the productivity of suppliers may overcome low prices (Porter & Kramer 2011). The empowerment of suppliers also introduces another critical issue in Porter’s new understanding of the value-chain addition – shared value.

The concept of shared value stems from the fact that societal needs and economic needs should define market operations (Green 2001). In the above context, the concept of shared value would say companies should benefit from supplier empowerment. Therefore, as suppliers are empowered to improve their efficiency and productivity, the companies that rely on their produce also benefit from lower prices and improved quality of raw materials. The society also benefits from this relationship through better environmental maintenance (by the suppliers).

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Nestlé’s operations in its key supply areas demonstrate the success of the shared value principle. Indeed, the company’s fastest growing division (Nespresso) depended on the quality and reliability of coffee supplies from farmers who are located in Africa and South America (Porter & Kramer 2011). For a long time, these farmers planted coffee in small scale. However, their farming cycles trapped them in an endless cycle of “poor quality yields, low quality production, and significant environmental degradation” (Porter & Kramer 2011, p. 7). Nestle decided to help the farmers overcome some of their production challenges by empowering them. The company offered them access to finances, farmer education, and farming inputs to improve their production. Consequently, the farmers used these facilities to improve their productivity. Since Nestle found an opportunity to purchase quality coffee beans from the farmers, they paid them at a premium. The increased revenue gave the farmers more incentives to plant more coffee. Besides the increased revenues to the farmers and the improved quality of coffee beans, the environmental impact of the farmers also declined. This example shows how shared value occurs and the positive ramifications it has to the organizations that embrace it. Therefore, since the concept of shared value significantly improves an organisation’s value chain process (as demonstrated by the Nestle case) it is imperative to consider procurement in a strategic light. This possibility may have informed Porter’s decision to reconsider his position on procurement.

Failure to Consider Collaboration Power

Collaboration is an important business strategy that many companies pursue today. In fact, Kim (2005) explains that collaboration is just one way of competition. Even proponents of the resource-based view see collaboration as an important organisational tool in most modern businesses because it leads to the acquisition of new technologies and skills (Aktouf 2005). Collaboration also stands out as an important strategy in supply chain analysis because different companies today use collaboration as a means to build alliances with different suppliers. Companies often develop these agreements outside their formal areas of agreements (Aktouf 2005). Similarly, companies often dissipate the skills and competencies derived from such agreements throughout different organisational layers. Aguayo (1990) explores the importance of collaboration in the development of organisational value and says “quality cannot be obtained, and improvement is impossible without cooperation: cooperation among workers, among managers, between the company and its suppliers, and even between the company and its competitors” (p. 12). From this statement, Aguayo (1990) opposes Porter’s understanding of the role of suppliers in adding value to an organisation. He contradicts Porter’s view that says purchasing and supply chain management is a secondary value-adding feature of an organisation. Instead, he says procurement is an important part of an organisation’s process because it may significantly improve an organisation’s bargaining position (Aguayo 1990). To support his view, Aguayo (1990) says organisations that adopt spread purchases (where an organisation’s purchase spreads across different suppliers) significantly benefit from increased bargaining power. This advantage significantly adds to their organisational value.

However, it is crucial to point out that some analysts have introduced specific conditions where the above outcome suffices. For example, Hingley (2011) recommends that an increased organisational bargaining power may only occur when an organisation spreads its purchases to suppliers who are critical to the organisation. In other words, the “spread purchase” concept should be very significant to the business, such that the business owner should be worried about losing such businesses (Aktouf 2005). Therefore, spread purchases do not necessarily lead to improved organisational fortunes when the suppliers spread too widely.

Situations where a business relies on one supplier (too much) often highlight the importance of procurement as a primary organisational function, as opposed to a secondary function. Indeed, Aktouf (2005) affirms that the over-reliance on one supplier may give the supplier immense powers in the business. Therefore cutting across supplier considerations offer the best bet for business owners to negotiate with their suppliers for more volumes and better quality products.

Porter’s initial conception of the importance of procurement in business centred on the philosophy that the adoption of a proper strategy might easily lead to the realisation of the lowest prices from the suppliers (Sheehan 2005). However, as Aguayo (1990) affirms, “no mention is made of quality, reliability, or improvement. Implicit in this view is a win-lose view of the business process” (p. 16). Another researcher, Deming (cited in Aktouf 2005) also supports this view by suggesting that the reference to price, without quality considerations, provides an unreliable assessment of supplier power. The understanding that what may appear to be cheap (initially) may turn out to be very expensive in the end also support his view (Aktouf 2005). This view has always sufficed in business. Therefore, in Deming’s view (cited in Aktouf 2005), the main concern for business owners should be to lower their total costs and not pursue a strategy that seems to be “cheap” (Aktouf 2005). Deming (cited in Aktouf 2005) further goes ahead and encourages business owners to use one supplier, as opposed to having several suppliers, because this is the best way that they may get quality goods.

Broadly, from the above analysis, cooperation is an easy way for organisations to improve the value of their businesses. Indeed, it is unsurprising to hear companies signing agreements with their suppliers to safeguard their commercial interests. Occasionally, companies that have such agreements with their suppliers rely on the success of their partnership for market prosperity. This outcome shows that procurement is a primary business activity, as opposed to a secondary activity.

Conclusion

Porter’s initial understanding of the role of procurement in his value-chain model fails to consider the changes in the business environment. Indeed, there have been significant changes in the business environment that have redefined the role of suppliers in most business processes. This paper demonstrates the increased role of suppliers (and by extension, the procurement process) in the value chain process through the arguments that Porter’s value chain model failed to consider the increased role of technological advancements, depletion of natural resources, increased role of shared values and the increased importance of business-supplier collaboration in today’s businesses. Comprehensively, these factors outline why Porter sees procurement in a strategic light.

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References

Aguayo, R 1990, Dr. Deming: The American Who Taught the Japanese About Quality, Simon and Schuster Inc., New York.

Aktouf, O 2005, ‘The False Expectations Of Michael Porter’s Strategic Management Framework’, Revista Gestao e Planjamento, vol. 6 no. 11, pp. 75-94.

Green, F 2001, ‘Managing the unmanageable: integrating the supply chain with new developments in software’, Supply Chain Management: An International Journal, vol. 6 no. 5, pp. 208 – 211.

Halldórsson, A 2013, ‘Energy resources: trajectories for supply chain management’, Supply Chain Management: An International Journal, vol. 18 no. 1, pp. 66 – 73.

Hingley, M 2011, ‘Using fourth-party logistics management to improve horizontal collaboration among grocery retailers’, Supply Chain Management: An International Journal, vol. 16 no. 5, pp. 316 – 327.

Kim, B 2005, ‘The impact of decision-making sharing between supplier and manufacturer on their collaboration performance’, Supply Chain Management: An International Journal, vol. 10 no. 3, pp. 223 – 236.

McPhee, W 2006, ‘Making the case for the added-value chain’, Strategy & Leadership, vol. 34 no. 4, pp. 39 – 46.

Porter, M & Kramer, M 2011, Creating Shared Value, Harvard Business School, Harvard.

Sheehan, N 2005, ‘Why old tools won’t work in the new knowledge economy’, Journal of Business Strategy, vol. 26 no. 4, pp. 53 – 60.

Williams, S 2007, ‘A supplier development programme: the SME experience’, Journal of Small Business and Enterprise Development’, vol. 14 no. 1, pp. 93 – 104.

Yang, B 2010, ‘Service postponement: Translating manufacturing postponement to service operations’, Journal of Manufacturing Technology Management, vol. 21 no. 4, pp. 470 – 483.