Porter’s Value Chain Analysis

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This article explains the Porter’s Value Chain Analysis, developed by Michael
Porter in a practical way. After reading you will understand the basics of this powerful
management tool. This article also contains a downloadable and editable Porter’s
Value Chain Analysis template.

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.

What is the Porter’s Value Chain Analysis Model?

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.

Using the Porter’s Value Chain Analysis

Porter’s Value Chain Analysis: There are four basic steps that have to be followed if
you wish to use the Value Chain as an analysis model. By following these basic
steps the organization can be analyzed using the Value Chain.

Step 1: identify sub activities for each primary activity

For each primary activity, sub-activities can be determined that create a specific
value for an organization.

There are three categories of sub activities, namely:

 Direct activities (for instance online sales from Marketing& sales)

 Indirect activities (for instance keeping the CRM up-to-date from Marketing&
sales or organizing a golf tournament for customers)
 Quality assurance (Proofreading and editing advertisements from Marketing&
sales).

Step 2: identify sub activities for each support activity

Here it concerns the idea how value support activities such as firm infrastructure,
human resource management, technology development and procurement can create
value within the primary activities. Use the same distinction as in step 1 for direct and
indirect activities and quality assurance. For example, consider how human resource
management can create value to inbound logistics, marketing & sales and service.
This will also have to be done for the other support activities.

Step 3: identify links

This is a crucial and time-consuming step because this is about finding the links
between the added value you have identified. This part is of importance for an
organization when it concerns increasing competitive advantage from the value
chain. For example, a development within a CRM solution can have a link with
increasing production and sales volumes through certain investments. Another
example is the link between the complaints that have been recorded within the
primary activity and the increase of unfilled vacancies (human resource
management) within the primary activity outbound logistics.

Step 4: look for opportunities/ solutions to optimize and create

value
After you have completed the value chain analysis it is important to determine what
activities are to be optimized in order to create added value. This is about
quantitative and qualitative investments that can eventually contribute to increasing
your customer base, competitive advantage and profitability. Creating business
cases will help you give priority and return on investment (ROI) to the possibly
required added value creation of a primary or support activity.

Porter’s Value Chain Analysis template

Start listing the activities which adds value to the organization with this ready to use
Value Chain Analysis template.

It’s Your Turn

What do you think? How do you apply the Porter’s Value Chain Analysis in your
work? Do you recognize the practical explanation or do you have more additions?
What are your success factors for the good Value Chain Analysis set up?

Share your experience and knowledge in the comments box below.

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More information

1. Porter, M. E. (1985). Competitive advantage: creating and sustaining superior

performance. Nova Science Publishers.
2. Porter, M. E. (2001). The value chain and competitive advantage.
Understanding Business Processes. Routledge.
3. Porter, M. E. & Millar, V. E. (1985). How information gives you competitive
advantage.