Using Porter’s Value Chain Analysis as a Means of Identifying the Key Lines for Human Capital Strategy
A major issue for human capital departments is deciding where to focus their time, money, and efforts in an organization. It’s tempting to either try and focus on “everything,” and introduce anything described as a “best practice” for the department, or to focus solely on the latest “problem” experienced by management.
Trying to allocate resources to human capital activities without a robust methodology can lead to a misdirection of resources, and, in turn, credibility problems for the human capital function. Frequently, an overall strategic plan is used to determine human capital management priorities. However, strategic plans often provide only a vague listing of requirements.
What’s needed is a more strategic and rigorous approach towards properly allocating human capital department resources. One way of thinking more rigorously about where to apply human capital department effort is to consider the value chain of the enterprise.
A value chain, first described by Harvard Business School professor, Michael Porter, in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance considers the organization as a “chain” of activities, and is used to help organizations understand how value can be created at each stage. His concept is widely used in strategic planning, but, unfortunately, is rarely used by human capital professionals.
The Value Chain
Porter’s value chain theory states that there are activities common to all businesses:
Inbound logistics – Receiving, storing, controlling, and managing of input materials. Inbound materials can be physical or intellectual (non-physical) in character.
Operations – The activities that transform the inbound materials into the final product. Operations activities can be a “production line,” or concerned with the analysis and/or synthesis of non-physical materials to create a product for the use of a customer.
Outbound logistics – The activities needed to get the finished product to the customer; this can include warehousing and storage, but might also include electronic distribution, etc.
Marketing & Sales – Identifying the needs of customers or groups of customers, and obtaining orders from them. It can include pricing, advertising, channel selection, etc.
Service – After-sales activities dealing with customer support, repair services, warranties, etc.
Porter sees these “primary value chain activities” as supported by four generic “support activities”:
1) Procurement – Purchasing or sourcing inputs used in the value creating activities
2) Technology development – R&D and process development in support of value creating activities
3) Human Resource management – Human asset acquisition, development and management activities, including compensation
4) Firm infrastructure – Activities involving finance, legal, etc.
Throughout the value chain, the main business targets will likely be either performance-related or cost-related. The targets derived form the analysis of an enterprise’s value chain give important clues about the kinds of human capital management activities that need to be undertaken in each area, and how resources should be deployed.
Undertaking a value chain analysis
To apply Porter’s value chain analysis to human resource strategy, one must perform the following actions:
1) Activity analysis – Identify all the activities undertaken to deliver the product (applies to both physical and non-physical products). This is most effectively done in conjunction with others in the organization, and can be presented as a flow chart for each activity.
2) Value analysis – For each factor identified in the activity analysis, describe the attributes that are valued by customers (customers can be internal or external), and what would need to be done to increase value to the customer (in this case, in terms of human capital activities, because that’s what we’re considering here).
3) Plan for action – Look for commonalities and linkages between the actions that would enhance value in the steps of the chain, as well as potential actions that would have the greatest impact on value. This facilitates the prioritization of HCM activities. This framework can be used to explain the reasoning behind the decision to focus resources on particular activities.
Using the value chain as a guideline for human resource strategy can be a powerful methodology to ensure that human capital resources (time and money) are expended on activities that have the most value generating potential for organizations. Such an approach also helps human capital professionals frame the debate in a language and context that is congruent with that of senior managers and executives.
What are your thoughts and comments on this approach? What methodologies do you use for deciding on the allocation of human capital resources in your organization?
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