Question

1. Explain the value chain defined by Michael Porter, and compare it with the REA ontology definition.
2. Based on Porter’s generic value chain, explain the difference between Primary and Support value activities, and what is the use of a Margin?

Answer 1

Answer

1. According to Michael Porter, value chain is a set of activities that a company performs to deliver a valuable product. Whereas, according to REA (resources, events, agents) ontology definition, the accounting system is viewed as the actual business. A business process roughly corresponds to a function in Michael Porter's value chain e.g. sales, purchases, etc.
2. Based on Porter's generic value chain, the difference between Primary and Support value activities is as follows: -

Primary activities (inbound logistics, operations, outbound logistics, marketing and sales, and service) have an immediate effect on the production, maintenance, sales and support of the products or services to be supplied.

Whereas the Support activities (procurement, human resources, technology development, and firm infrastructure) assist the primary activities and they form the basis of any organization.

For example, a support activity like human resource management is of importance within the primary activity operation but also supports other activities like service and outbound logistics.

Use of a Margin. The value that's created and captured by a company is the profit margin:

Value Created and Captured – Cost of Creating that Value = Margin

The more value an organization creates, the more profitable it would be. When more value is given to customers, competitive advantage is achieved.