What is the value chain?
The value chain is a framework that divides a firm’s activities, from bringing in inputs to delivering products and services to customers, so that each activity’s cost and contribution to value can be analyzed. Michael Porter introduced it in *Competitive Advantage* (1985).
- Author
- Michael Porter (1985)
- Primary activities
- The flow from inputs to customer (5)
- Support activities
- Functions that support the flow (4)
- Margin
- Value customers pay minus total cost
Primary and support activities
| Type | Activity | Examples |
|---|---|---|
| Primary | Inbound logistics | Receiving, storage, inventory |
| Primary | Operations | Machining, assembly, packaging |
| Primary | Outbound logistics | Order processing, delivery |
| Primary | Marketing and sales | Advertising, pricing, channels |
| Primary | Service | Installation, repair, customer support |
| Support | Firm infrastructure | Planning, finance, legal, general management |
| Support | Human resource management | Recruiting, training, compensation |
| Support | Technology development | R&D, process improvement, IT |
| Support | Procurement | Purchasing materials, equipment, services |
Why do some companies selling the same product earn more? Competitive advantage comes from specific activities, not the firm as a whole. Doing an activity more cheaply than rivals creates cost advantage; doing it in a way customers will pay more for creates differentiation. An e-commerce firm built on fast delivery has made outbound logistics its source of advantage.
Steps in a value chain analysis
- Map the firm’s activities into the nine categories.
- Estimate each activity’s cost and value to customers.
- Benchmark against competitors to find strong and weak activities.
- Examine linkages between activities.
- Connect findings to cost leadership or differentiation.
Use it alongside Porter’s generic strategies, Five Forces, SWOT and VRIO.
Smile curve and global value chains
The smile curve, proposed by Acer founder Stan Shih, shows that R&D and design at one end and brand and service at the other capture more value than assembly in the middle. Today a single product’s value chain often spans many countries, forming a global value chain (GVC).
Frequently asked questions
- Who created the value chain?
- Michael Porter, in Competitive Advantage (1985).
- What are the five primary activities?
- Inbound logistics, operations, outbound logistics, marketing and sales, and service.
- What are the four support activities?
- Firm infrastructure, human resource management, technology development and procurement.
References
- Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. Free Press.