Porter’s Value Chain Analysis

What is a Value Chain Analysis?

The value chain also known as Porter’s Value Chain Analysis is a business management concept that was developed by Michael Porter. In his book Competitive Advantage (1985), Michael Porter explains Value Chain Analysis; that a value chain is a collection of activities that are performed by a company to create value for its customers. Value Creation creates added value which leads to competitive advantage. Ultimately, added value also creates a higher profitability for an organization.

Porter’s Value Chain Analysis

The strength of the Porter’s Value Chain Analysis is its approach. The Porter’s Value Chain Analysis focuses on the systems and activities with customers as the central principle rather than on departments and accounting expense categories. This system links systems and activities to each other and demonstrates what effect this has on costs and profit. Consequently, it (Value Chain Analysis) makes clear where the sources of value and loss amounts can be found in the organization.

The Value Chain activities

Porter’s Value Chain Analysis consists of a number of activities, namely primary activities and support activities. Primary activities have an immediate effect on the production, maintenance, sales and support of the products or services to be supplied. These activities consist of the following elements:

Inbound Logistics

These are all processes that are involved in the receiving, storing, and internal distribution of the raw materials or basic ingredients of a product or service. The relationship with the suppliers is essential to the creation of value in this matter.

Production

These are all the activities (for example production floor or production line) that convert inputs of products or services into semi-finished or finished products. Operational systems are the guiding principle for the creation of value.

Outbound logistics

These are all activities that are related to delivering the products and services to the customer. These include, for instance, storage, distribution (systems) and transport.

Marketing and Sales

These are all processes related to putting the products and services in the markets including managing and generating customer relationships. The guiding principles are setting oneself apart from the competition and creating advantages for the customer.

Service

This includes all activities that maintain the value of the products or service to customers as soon as a relationship has developed based on the procurement of services and products. The Service Profit Chain Model is an alternative model, specific designed for service management and organizational growth.

Support activities of the Value Chain Analysis

Support activities within the Porter’s Value Chain Analysis assist the primary activities and they form the basis of any organization. In the figure dotted lines represent linkages between a support activity and a primary activity. A support activity such as human resource management for example is of importance within the primary activity operation but also supports other activities such as service and outbound logistics.

Firm infrastructure

This concerns the support activities within the organization that enable the organization to maintain its daily operations. Line management, administrative handling, financial management are examples of activities that create value for the organization.

Human resource management

This includes the support activities in which the development of the workforce within an organization is the key element. Examples of activities are recruiting staff, training and coaching of staff and compensating and retaining staff.

Technology development

These activities relate to the development of the products and services of the organization, both internally and externally. Examples are IT, technological innovations and improvements and the development of new products based on new technologies. These activities create value using innovation and optimization.

Procurement

These are all the support activities related to procurement to service the customer from the organization. Examples of activities are entering into and managing relationships with suppliers, negotiating to arrive at the best prices, making product purchase agreements with suppliers and outsourcing agreements. Organizations use primary and support activities as building blocks to create valuable products, services and distinctiveness.