Value Chain Framework
(Porter)

Analyse activities through which firms can create value. Explanation of Value Chain Framework of Michael Porter. ('85)

The Value Chain framework of Michael Porter is a model that helps to analyze specific activities through which firms can create value and competitive advantage.

 

The activities of the Value Chain

  • Value Chain framework modelPrimary activities (line functions)
    • Inbound Logistics. Includes receiving, storing, inventory control, transportation planning.
    • Operations. Includes machining, packaging, assembly, equipment maintenance, testing and all other value-creating activities that transform the inputs into the final product.
    • Outbound Logistics. The activities required to get the finished product at the customers: warehousing, order fulfillment, transportation, distribution management.
    • Marketing and Sales. The activities associated with getting buyers to purchase the product, including: channel selection, advertising, promotion, selling, pricing, retail management, etc.
    • Service. The activities that maintain and enhance the product's value, including: customer support, repair services, installation, training, spare parts management, upgrading, etc.
  • Support activities (Staff functions, overhead)
    • Procurement. Procurement of raw materials, servicing, spare parts, buildings, machines, etc.
    • Technology Development. Includes technology development to support the value chain activities. Such as: Research and Development, Process automation, design, redesign.
    • Human Resource Management. The activities associated with recruiting, development (education), retention and compensation of employees and managers.
    • Firm Infrastructure. Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc.

Creating a cost advantage based on the value chain

A firm may create a cost advantage:

  • by reducing the cost of individual value chain activities, or
  • by reconfiguring the value chain.

Note that a cost advantage can be created by reducing the costs of the primary activities, but also by reducing the costs of the support activities. Recently there have been many companies that achieved a cost advantage by the clever use of Information Technology.

 

Once the value chain has been defined, a cost analysis can be performed by assigning costs to the value chain activities. Porter identified 10 cost drivers related to value chain activities:

  1. Economies of scale.
  2. Learning.
  3. Capacity utilization.
  4. Linkages among activities.
  5. Interrelationships among business units.
  6. Degree of vertical integration.
  7. Timing of market entry.
  8. Firm's policy of cost or differentiation.
  9. Geographic location.
  10. Institutional factors (regulation, union activity, taxes, etc.).

A firm develops a cost advantage by controlling these drivers better than its competitors do. A cost advantage also can be pursued by "Reconfiguring" the value chain. "Reconfiguration" means structural changes such as: a new production process, new distribution channels, or a different sales approach.

 

Normally, the Value Chain of a company is connected to other Value Chains and is part of a larger Value Chain. Developing a competitive advantage also depends on how efficiently you can analyze and manage the entire Value Chain. This idea is called: Supply Chain Management. Some people argue that network is actually a better word to describe the physical form of Value Chains: Value Networks.

 

Book: Michael E. Porter - Competitive Advantage -

 

Value Chain Framework Special Interest Group


Visit the Special Interest Group

Value Chain Framework Forum

Recent User Comments
Merlene - Barbados Links between Michael Porters Models "I was told that all Michael Porters models are linked in some way. So I am having difficulty in understanding when I should apply which model."    0
 - Namibia Role of Information Systems "How does Porter's value chain model help a business to use information systems for competitive advantage?"    1
Joyce Bediako - Ghana Legal and Social Issues "Where do we put legal and social issues? These sometimes destroy the growth of value chain operations."    0
Samat - Kyrgyzstan Value Chain Narrow Minded "Porters value chain is very good at explaining how a product adds value throughout the whole process starting from procurement and ending with reaching the end user. Supporting activities also add value to the product, though indirectly. Value chain analysis, despite of being for long in business studies, still is one of highly theoretical concepts.
But what is the value of value chain analysis if a more efficient, cheaper substitute rivals a firm's product?
None. That is exactly what Chine has realized recently. Not only production of currently common goods but also acquisition of promising R&D for future production of substitutes. Although value chain is industry-based analysis, it can also be applied country-based."		    -1
 - Lebanon Value Chain vs. Credit Crunch "In spite of today’s credit crunch crisis, the Value Chain model in my experience proved to be one of the most valuable tool, if not THE most valuable, to remedy the economical downturn.
The major benefits of developing a realistic and sound Value Chain that reflects your business dynamics, is your chance to optimize and/or reduce investment where it really make sense.
It doesn’t matter how much money you can raise if your organization is bleeding in silence without its management putting their hands on the source of leakage.
The Value Chain is your best bet ever."		    1
Best User Comments
Al - Malaysia How to apply the value chain? Activities and Linkages "The value chain has two types of activities which are the primary activities and the support activities. I can remember all the elements in these two activities. However I have difficulty in applying them. Are there any linkages between these two activities?"    95
Mahesh - India Examples of Value Chain Activities? "I understand the concept as described. Who can provide an example, with reference to an industry?"    50
Ashveen - Mauritius Value Chain and SCM? "What is the relationship between Supply Chain Management and Value Chain Management? How are they interdependent??"    38
Bonard Mwape - Tanzania Value Chain model in tourism "How does the model handel a services industry like tourism? It looks to me much of the tourism industry operates on networks allianed globally.. It seems countries doing well in this industry are those who have created linkages to global partners."    37
landrine - S-Africa Michael Porter's value chain "In the context of the value chain, would inventory replenishement be a support value process or a primary value process?"    28
Thornton - USA Value Networks "In an article 'Value Creation, Coordination and Positioning in Supply Relationships' in Long Range Planning (Volume 39, Issue 2, April 2006, Pages 133-153), Lars Huemer has reservations as to the usefulness of the value chain model and the notion of value systems as general representations of value creation, coordination and positioning in supply relationships. He suggests that value configuration analysis including the value network logic provides a fruitful alternative, and can reveal a number of complexities in supply relationships, including differences in value creating logic, sets of interdependencies and more compound supply structures. I agree with him that it's time to say goodbye to Porter's process-oriented, sequential Value Chain model and proceed with the more flexible and interdependent non-sequential collaboration-oriented Value Network models."    28
Elias - Israel Value Chains and Industries "Interestingly, different industries often emphasize different activities in the value chain. For example, retailers traditionally focus on inbound and outbound logistics and procurement, while manufacturing companies might focus on operations and technology development. Many software companies focus on marketing and sales, and typically banks are good at services and firm infrastructure."    14
Paul - Netherlands Some good Value Chain questions "To more deeply understand your Value Chain, these are a few interesting questions you can ask yourself:
- What are the recent / major changes within our Industry? Why?
- On what activities or linkages are the top competitors focusing? Why?
- Can we add certain activities to differentiate our product / firm from the competition?"		    11
 - Netherlands Value Chain Analysis is practical "Even after all these years I find the Value Chain model of Porter still one of the better, practical tools to analyse a process, its costs and its added value(s). Obviously the standard model has to be adapted for a given industry, for a given company / organizational model. The model provides a framework for cost and added value dedicated actions. Next to this Porter's 5 Forces model has proven to be a very practical business tool to make clear were a business is, where threats and opportunities are and therefor i.e. a help to weight energies, investments for the next period. "    -1
Sarah - UK Value Chain - Print Industry "Can anyone explain the value chain model with reference to the printing industry please?"    -3

Value Chain Framework Education & Events



More information?

12manage Premium may contain the following additional information about (the) Value Chain Framework :

        - Expert Tips and Management Papers -

        - News and Videos on this method -

 

Compare with: Porter Five Forces  |  Porter Competitive Advantage  |  Porter Diamond Model  |  Parenting Advantage  |  Core Competence  |  BCG Matrix  |  Growth Phases  |  Distinctive Capabilities  |  Organizational Configurations  |  3rd Party Logistics (3PL)  |  Outsourcing  |  Just-in-time  |  Bricks and Clicks  |  Value Stream Mapping  |  Delta Model  |  Vertical Integration  |  Horizontal Integration  |  Vendor Managed Inventory  |  Kraljic Model

 

Return to Management Hub: Change & Organization  | Finance & Investing  |  Human Resources  |  Knowledge & Intangibles  | Marketing  |  Program & Project Management  |  Strategy  |  Supply Chain & Quality

 

More Management Methods, Models and Theory

12manage for:

 

 
Copyright 2009 12manage - The Executive Fast Track. V10.3 - Last updated: 7/5/2009. All names tm by their owners.


Enter a new Tip, Idea, Comment or Question 


Name:*    
Country:*  
Subject:*  
Comment:*  
   3145

Enter the above 4 digits:*

  

 

 

Please comment only on (the) .

Respect other People's Opinions. Spam Comments will be removed automatically.

Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   2961

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.


Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   1422

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.

  ● André Lopes (PT) Issues "Legal maybe in institutional factors and social perhaps in timing of market entry."

Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   1629

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.


Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   7396

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.


Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   4799

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.

  ● Marc (USA) Linkages are Key "The linkages are the key. Wal-Mart is a great example. Their distribution network is "inbound logistics." However, they gain great leverage by linking it to their IT capability. The linkage is the key to the model."
  ● Amna (Pakistan) Value Chain Activities "V good question"
  ● Hannie (Netherlands) Primary and Support Activities "According to Porter, the primary activities are involved in the physical creation of the product and its sale and transfer to the buyer as well as after-sale service.
The support activities support the primary activities and eachother by providing purchased inputs, technology, human resources, and various firmwide functions.
You need to disaggregate the 9 activities to the degree that is relevant for achieving the competitive advantage (differentiation or cost leadership).
Now, competitive advantage can derive from:
1. the primary activities
2. the support activities
3. the linkages among activities (internal linkages within the firm, and external or vertical linkages with others firms)."
  ●  (Netherlands) How Value Chain can be used for Cost Advantage "In his book Competitive Advantage, Porter gives a detailed description of a Strategic Cost Analysis Process in which the Cost Drivers of value activities are analyzed as well as their interactions and their Cost Dynamics (changes in drivers over time) to create a cost leadership or differentiation strategy."
  ● Sidra Lodhi (Pakistan) Creation of Cost Advantage from Value chain "The basis purpose of doing Value chain Analysis is to reduce the cost and developing the competitive advantage. So emphasize will be on reducing the cost of primary as well as support activities."
  ● James Gunn (UK) The Value is in the Linkages "The linkages are often where the value is created. In my experience, look for improvements between organisations, along the value chain, first within primary activities and then between secondary and primary activities (in that order).
Don't forget adding value as well as reducing cost and don't just reduce cost - you may destroy value in your offering !"

Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   3250

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.

  ● Suzie (Malaysia) VCA for Restaurant Management "How can value chain analysis be applied to the management of a restaurant?"

Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   6870

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.

  ● Elias (Israel) Value Chain and Supply Chain "The value chain of an individual company is normally part of the total supply chain of value-creating activities.
While Porter's value chain concept decomposes all activities of one firm into its parts and analyses each individual activity and their interdepencies, the supply chain concept tries to optimize the supply system as a whole by taking into account the interdependencies between the activities in multiple firms."
  ● Hannie (Netherlands) Value System "A firm's value chain is embedded in a larger stream of activities that Porter terms the Value System. This value system comprises the Supplier Value Chains, the Firm Value Chains, Channel Value Chains and Buyer Value Chains.
Gaining and sustaining competitive advantage depends on understanding not only a firm's value chain but how the firm fits in the overall value system."
  ●  (ARG) Value Chain and SCM Emphasis "But the emphasis should always be on the customer for both perspectives."
  ● Paul (Netherlands) VCA does not stop at company borders "Improvements of the value chain may result from inside the company or from linking the internal activities in an effective way to suppliers, buyers, customers, partners, etc."
  ● Badi (Sweden) Value Chain driver of SCM "Remember that value chain is the driver behind the SCM discipline - its main motivator."

Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   7588

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.


Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   6414

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.

  ● Jeff (USA) Primary and Support Activities "Primary. Watch the picture in this article closely. The bottom half are making up all Primary activities. The activities in the top half are making up the Support activities in the Value Chain."
  ● blshaw (USA) Inventory Replenishment "Regarding landrine's question: Inventory Replenishment is part of a primary value process. You must also identify your POV. Either you are replenishing your customer's inventory (e.g. You are Procter & Gamble and your customer is Walmart); or you are having your inventory replenished (e.g. You are Walmart and Procter & Gamble is your supplier). Also, see SCOR model from Supply Chain Council."

Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   6975

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.

  ● Rob (SA) Value Networks "The notion is sound, but it depends on the nature of the business as to which approach fits best. Please refer to Kotler (2004) for the specific marketing use of the value network."

Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   6161

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.

  ● Gian Z. (Netherlands) Value chains and Industries "That would be a combination of focus, core competencies and specific vertical markets (within banking you can further segment, uncovering even more broad trends...)
In my opinion it all boils down to the strategy and positioning of that particular company. The framework is particularly interesting (to me...) when setting up new organizations... It can then be used as a blueprint."
  ● Warren Miller (USA) Value Chains and Industries "Porter's value chain is much overrated. Unlike his five-forces framework, for which he recently wrote an update in HBR, he never published anything in HBR about his value chain framework. Colleagues of mine have had great difficulty using it as an analytical tool to appraise a company. And it doesn't resonate with clients at all. All in all, it's a better tool conceptually than it is in practice."
  ● Wendy (UK) Value Chains & Industries "Elias, I agree. Organisations tend to focus on those parts of the value chain in which they perceive there is the greatest opportunity to differentiate themselves from the competitors, and thus save costs or add more value in order to win more market share/ retain existing share."
  ● Gustav (Denmark) Value Chain "I think that the work by Stabell and Fjelstad is a valuable supplement to Porter value Chain model. They divide organisations into 3 groups: Value Chains, Value Shops and Value Networks.
Industries like banking, insurance, telephone companies and airlines work as value networks. Software companies, entrepreneurs, etc work as value shops. And physical product focused companies work as value chains."
  ● Enzo Zamboni (Argentine) Value Chain and Industries "I agree, Elias.. but depending on the point of view from the organization to Michael Porter´s Value Chain, example: in the Biotech and Nanotech companies the critical path is the Human Resources Management and the Technology Development.. Is our case.."
  ● Mohamed A. Farah (Uganda) Value Chain "The success or failure of an organisation depends on how it correlated the primary and seconday activities."

Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   2839

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.

  ● F Lenne (France) Keep Value chain analysis simple "OK for taking into account the “Value Networks”: everything is now networked at a global level, but take care not to add too much complexity; don’t “throw the baby away with the bath water”. Remember that complexity (and especially on financial activities!) is one of the main reasons the crisis occurred: n nodes will generate n*(n-1) oriented links! The first steps when analysing your own value chain:
Check your segmentation is aligned with your vision,
Understand what are the costs of your "support activities" you have for each of your “primary activity”, within each segment,
What your most intrinsically profitable primary activities are.
Then you will better understand what activities are strategic, and you will be able to focus on those specific parts of your business, reducing the “value networked chain” complexity. Keep in mind the Occam's razor principle "Entities should not be multiplied more than necessary". Then, answer to the Paul questions on this reduced network. Now you have your strategy!"
  ● Luiz Flores (Brazil) Value Chain Analysis from Customer Point of View "The "internal view" of the value chain is part of the past. Nowadays, we need to understand the value chain from the customer not from the intra-company functions.
What are the critical attributes that generate value to the customer in the value chain? For example, in the door to door market there are a few critical attributes like a) personal service; b)sales offers; c) wide product mix w/quick access; d) reliable service and delivery; e) trainned sales rep; f) sales rep loyal to the customer not to the sellers; g) right price considering all service package.
How do you act considering this particular value chain structure to benefit your firm in the market? - How to create new value elements recognized by consumers? The entire value chain analysis is a result of valued attributes at the consumer level and the "internal functions" or practices don't necessarily add any special value to the customer mainly when we consider that all competitors are doing the same things as usual. "
  ● Atif Ali Khan (UAE) Bridging the gap between Value Factors and Demand Factors "Value Chain Analysis by and large revolves around the firms strategic policy to align intuitive value factors with the intuitive demand factors from producers' and consumers' perspective. Both complement each other. Be it the intrinsic value, that satisfies the need and want of consumer on individual level with longevity, or extrinsic value, that co-relates with perceptions and trends associated or related with the product. Both are a need of each other.
But it is the bridging of the gap that is often overlooked, the strong role that feedback plays in establishing future value standards is the key to progressive and steady success."
  ● Pardeep Kumar (India) Value chain mgt. "This is what I want I need the exellent material thanx."
  ● Ade-Ajayi Gabriel (Nigeria) Value Chain "This is good. Every attempt made by any individual or organisation to create, add and maintain the process / network of adding value appreciated by consumers is an attempt to create wealth and satisfaction!"
  ● Gill (UK) How to bridge the gap between value-delivered to customers and the operations to deliver "This is a complex subject which includes an understanding of what customers want (and how they value that desire/need both now and in the future) - alongside the operations to deliver these needs. Assuming one can find the perfect operation to best meet individual segments' needs (aligning cost to value delivered) - there is also the question as to how to best combine segments within a single operational unit - and thereby draw out potential market positioning options. Does anyone have any practical advice as to how to consider this?"

Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   8242

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.


Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   7703

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.


Enter your Reaction 


Name:*  
Country:*  
Subject:*  
Reaction:*  
   0313

Enter the above 4 digits:*

  

 

 

Respect other People's Opinions. Spam Comments will be removed automatically.