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Cost Management-final                                                                                                       2

The idea of a value chain was first suggested by Michael Porter (1985) to depict how customer accumulates along a chain of activities that lead to an end product or service.

Porter's Definition : He described the value chain as the internal processes or activities a company performs "to design, produce, market, deliver and support its product." He further stated that "a firm's value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach of implementing its strategy, and the underlying economics of the activities themselves."

Porter classified business activities under two heads viz., Primary activities line activities and support activities. Primary activities are directly involved in transforming inputs into outputs and delivery and after-sales support to output. In other words they include :

material handling and warehousing

transforming inputs into final product

order processing and distribution

communication, pricing and channel management, and

installation, repair and parts replacement.

Support activities are the activities, which support primary activities. They are handled organisation's staff functions and include the following:


Procurement —   purchasing of raw materials, supplies and other consumable ill well as assets.


Technology Development—know-how, procedures and technological inputs needed in every value chain activity.


Human resource management—   selection, promotion and placement, appraisal, rewards; management development; and labour/employee relations.


Firm infrastructure — general management, planning, finance, accounting, legal, government affairs and quality management.   '

Definition of John Shank and V. Govindarajan : They described the value chain in broader terms. According to them "the value chain for any firm is the value-creating activities all the way from basic raw material sources from component suppliers through to the ultimate end-use product delivered into the final consumers' hands." This description views the firm as part of an overall chain of value-creating processes.

Industry Value Chain : The industry value chain starts with the value chain starts with the value-creating processes of suppliers, who provide the basic raw materials and components. It continues with the value creating processes of different classes of buyers or end-use consumers, and culminates in the disposal and recycling of materials.

The industry value chain and the value chain activities within the firm are compared in diagram 1.

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