Introduction:
Porter’s Value Chain framework helps organizations understand how they create value by transforming business inputs into outputs with higher value than the original costs. By identifying activities that increase value, companies can boost profitability and achieve a competitive advantage.
Key Concept:
Value Created and Captured – Cost of Creating that Value = Margin
This margin is critical for understanding the economic foundation of an organization’s existence. The more value created, the more profitable the organization, which strengthens competitive advantage.
Elements of Porter’s Value Chain:
Porter divides value-creating activities into Primary and Support activities.
Primary Activities:
These directly contribute to the creation, sale, and maintenance of products or services:
- Inbound Logistics – Receiving, storing, and distributing inputs. Supplier relationships are key.
- Operations – Transforming inputs into outputs. This is where value is added.
- Outbound Logistics – Delivering products/services to customers.
- Marketing and Sales – Persuading customers to buy through communication of benefits.
- Service – Supporting products/services post-purchase to maintain value.
Support Activities:
These indirectly support the primary activities and include:
- Procurement – Acquiring necessary resources and negotiating with vendors.
- Human Resource Management – Hiring, training, motivating, and retaining employees.
- Technological Development – Managing information, staying current with technology, and protecting knowledge.
- Infrastructure – Organizational systems supporting daily operations, such as legal and accounting.
Steps to Apply Porter’s Value Chain:
- Identify Subactivities for Primary Activities:
For each primary activity, list subactivities that create value, including:- Direct Activities: Directly contribute to value creation (e.g., sales calls).
- Indirect Activities: Support direct activities (e.g., managing sales records).
- Quality Assurance: Ensures quality of direct/indirect activities (e.g., proofreading advertisements).
- Identify Subactivities for Support Activities:
Break down each support activity and determine how it adds value across primary activities, focusing on:- Direct, Indirect, and Quality Assurance Activities.
- Identify Links:
Establish connections between activities. For example, link HR investments in salesforce development to sales performance or link order turnaround times to customer satisfaction. - Look for Opportunities to Increase Value:
Review activities and links, and identify opportunities to maximize value, both internally and externally.
Tips:
- Align your value chain improvements with your broader business strategy (e.g., cost leadership or differentiation).
- Prioritize changes based on their strategic importance.
- Explore team-level value chains for a more granular approach.
Conclusion:
Porter’s Value Chain is a strategic management tool that helps organizations break down activities to understand their cost drivers and sources of differentiation. By identifying opportunities to improve value at each step, businesses can improve profitability and competitive advantage.
