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Value Chain

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Summary

The Value Chain (VC) 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 VC

Value Chain framework model
  • Primary 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 VC 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 VC

A firm may create a cost advantage:

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

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 VC has been defined, a cost analysis can be performed by assigning costs to the VC 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 VC. "Reconfiguration" means structural changes such as: a new production process, new distribution channels, or a different sales approach.


Normally, the VC of a company is connected to other Value Chains and is part of a larger VC. Developing a competitive advantage also depends on how efficiently you can analyze and manage the entire VC. 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


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Forum

Forum discussions about the Value Chain (Porter). Below you can ask a question about this topic, share your experiences, report a new development, or explain something.


topic Value Chain Management versus Supply Chain Management?
What is the relationship between Supply Chain Management and Value Chain Management? How are they interdependent?...
Rating55
 
Comments6 comments
topic Value Chains ⇨ 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 usef...
Rating39
 
Comments1 comments
topic Value Chain for Services Industry
I have read somewhere, that this model is not applicable for services industry, is it true? And does anybody know, if possible, a good model for strategic management for services industry? Thank you!...
Rating27
 
Comments4 comments
topic Value Chain versus Diamond Model
Hi, can anyone explain in a few words what is the main difference between Porter's Diamond and Value Chain models?...
Rating20
 
Comments3 comments
topic How to Deal with Conflicts Between Marketing and Operations
Shapiro recognized several reasons for the conflicts between marketing and operations teams: CAPACITY MANAGEMENT AND LONG-TERM SALES PROJECTIONS: Operations teams are constrained in their ability ...
Rating19
 
Comments14 comments
topic 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 manufac...
Rating16
 
Comments6 comments
topic Value Chain in Legal Services
How can a value chain be incorporated in law firms? What are the primary and support activities in such legal services?...
Rating10
 
Comments1 comments
topic Procurement in the Value Chain Approach
For long the value chain approach by Michael Porter and as advanced by Peter Hines has placed procurement on the periphery, bundling it with general administration among other things. Today, with th...
Rating9
 
Comments3 comments
🔥 Customer Value Chain (CVC)
The Customer Value Chain (CVC) is a bit similar or analogous to Michael Porter's Value Chain (the series of activities such as operations, logistics, and marketing that companies execute in order to c...
Rating5
 
topic Order Management in Porters Value Chain?
How do I segregate and fit in order management (not order fulfillment ) in Porters list of primary processes? Does it belong in marketing and sales?...
Rating2
 
Comments1 comments

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Best Practices

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🥇 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 ...
Rating119
 
Comments7 comments

🥈 Inventory Replenishement in Value Chain
In the context of the value chain, would inventory replenishement be a support value process or a primary value process?...
Rating20
 
Comments2 comments

Expert Tips

Advanced insights about the Value Chain (Porter). Here you will find professional advices by experts.


Subject

The Added-Value Chain Model

3 more Primary and 1 more Supporting Activity Added to Porter's Model
The Added-Value Chain model proposes to add an expanded set of activities to the original Value Chain concept by Porter....
Subject

Good Value Chain Questions to Ask

Optimizing your Supply Chain
To more deeply understand your Value Chain, these are a few interesting questions you can ask yourself: - What are the ...
Subject

Process Classification Framework

Alternative to Porter's Value Chain Analysis
A company's activities or processes classification is mostly based on subjective criteria, experience and sensitivity of...
Subject

Reported Benefits of Value-chain Initiaves

Value Chain Advantages
A survey by G. Taninecz “Forging the Chain” in Industry Week (Dec. 21, 2004) indicated the following major benefits of ...
Subject

Implementing Added-Value Chain Model

Implementation
According to Wayne McPhee and David Wheeler in the article “Making the Case for the Added-Value Chain” (Strategy & Leade...
Subject

How to Design a Value Chain?

Supply Chain Design
Designing or improving a value chain is not easy. Here are five bullet points to get started: 1. Begin by identifying t...
Subject

Online Value Chain

Use of Internet / IT
In Michael Porter's view, traditional firms have a chance to profit from deploying modern IT infrastructure and upgrade ...
Subject

10 Decision Areas of Operations Management (Heizer)

Operations Management
According to Heizer and Render, there are 10 decision areas of Operation Management (each having typical issues): 1. Go...
Subject

List of Major Value Chain Obstacles

Pitfalls in Implementing Value Chain Management
Although the Value Chain approach can be effective, there are major obstacles underlying application of SCM, such as: 1...
Subject

Innovating by Reconsidering Value Delivery

Fundamental Innovation
When innovating their business model, companies need to reconsider their value proposition from all perspectives. One of...
Subject

Remember to Focus your Improvement Efforts?

Achieve More With Less, Kaizen, BPR, JIT, Lean, Value Chain
Very often organizations consider continuous improvement as committing on improvement efforts, and thus creating project...
Subject

Value Networks

Value Chain versus Value Network
Today value chains have become value networks. In a lot of industries ranging from software to manufacturing the boundar...
Subject

Three Reasons for Dysfunctional Buyer - Supplier Relationships

Supply Chain Management, Purchasing, Alliances, Partnerships, Supply Chain Relations
Roloff, Aßländer and Nayier (2015) did research on the conditions for (un)successful buyer-supplier relationships and fo...
Information Sources

Various sources of information regarding the Value Chain (Porter). Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops.


Article

Electronic Markets

Search Costs and Boundaries
Ramesh Sankaranarayan study how electronic markets that facilitate broader inter-firm transactions affect the vertical s...
Article

Connections and Competences in the Governance of the Value Chain

Value Chain Delocalisation
The aim of this paper by Giuseppe Tattara and Paolo Crestanello is to analyse the governance of value chains operating i...
Presentation

The Role of Value Chain Functions, Quality Management and Innovation in Competitive Advantage

Value Chain Management, Quality Management, Innovation, Operational Excellence
This presentation firstly presents the role of functional strategies and the value chain in the achievement of competiti...
Presentation

How Businesses can Use Information Technology (IT) in Strategic Ways

Strategic Management, Information Technology
This presentation looks at Information Technology from a strategic point of view. In other words, it discusses in what w...
Video

Introduction to (Sustainable) Value Chain Analysis

Initial Understanding Value Chain Analysis
Value Chain Analysis involves analyzing three things to identify improvement areas / projects: 1. Material Flow - The f...
Article

Location choices across the value chain

How activity and capability influence agglomeration and competition effects
There has been a recent revival of interest in the geographic component of firm strategy. Recent research suggests that ...
Presentation

Introduction Into Enterprise Resource Planning (ERP)

Enterprise Resource Planning, Supply Chain Management
This presentation provides an introduction into Enterprise Resource Planning and includes the following sections: 1. Wh...
Presentation

Introduction to Supply Chain Management

Supply Chain Management, Supply Chain Design
While Porter’s value chain is a firm-level supply chain, this presentation describes supply chain management in a global...
Presentation

Value Chain Model Diagram

Value Chain Analysis
Download and edit the 12manage PowerPoint model for limited personal, educational and business use. Republishing in int...
Article

Internet-based Distribution of Digital Videos

Economic Impacts of Digitizatization
Digital technologies and, especially, the Internet are profoundly reshaping the motion picture industry. Video-on-demand...

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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


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