Michael Porter's Value Chain

1. Value Chain: A Strategic Tool for Competitive Advantage

A value chain is a series of actions which are carried out in order to deliver a valuable product or service to the market.

Concept and objectives. The value chain, developed by Michael Porter in 1985, is a powerful business management model that maps out value creation within a company. It allows organizations to analyze and improve their activities, maximizing competitive advantage. The three main objectives of the value chain are:

• Improve services
• Reduce costs
• Create value

Analytical framework. By breaking down a company's functions and examining their costs, the value chain enables strategic positioning of products or services based on cost or differentiation. This analytical system helps distribute resources effectively throughout the chain, leading to:

• Optimized manufacturing processes
• Lower raw material costs
• Increased innovation
• Enhanced product functionality and quality
• Improved customer service
• Reduced delivery times

2. Primary Activities: The Core of Value Creation

The primary activities are the main functions organised within a company. They contribute directly to the creation of the product, marketing activity, sales policy, delivery to the end customer and the after-sales service.

Five key components. The primary activities form the backbone of the value chain, directly affecting the added value of the final product. These activities include:

1. Inbound logistics
2. Operations
3. Outbound logistics
4. Marketing and sales
5. Services

Interconnected nature. These activities are not independent but interconnected. Good control of one component can positively impact others, creating a synergistic effect that enhances overall efficiency and value creation.

3. Support Activities: Enhancing Organizational Efficiency

Support activities contribute to the smooth running of operations by enabling the company to perform and coordinate its primary activities in order to maximise efficiency.

Four crucial areas. Support activities, while indirectly involved in creating the final added value, play a vital role in enhancing organizational efficiency. They comprise:

1. Company infrastructure
2. Human resources
3. Research and development
4. Procurement

Strategic importance. These activities may affect some or all of the primary activities, providing the necessary foundation for the company to operate effectively. While not all support activities are present in every company, they are crucial for maintaining competitive advantage and ensuring long-term profitability.

4. Interconnectedness: The Key to Maximizing Value

Indeed, if one of the activities is progressing independently of the others, there may be an imbalance between the different components that generates new costs.

Holistic approach. The key to competitive advantage lies in both the reorganization and the interconnectedness of various activities. Companies must consider how changes in one area affect others to maximize value creation and minimize costs.

Balancing act. Effective value chain management requires:

• Recognizing the relationships between different activities
• Identifying potential imbalances that may generate new costs
• Coordinating improvements across the entire chain
• Ensuring that progress in one area doesn't negatively impact others

5. Adaptability: Tailoring the Value Chain to Your Business

Although Porter's model was developed back in the 1980s, it remains relevant today and still provides the necessary tools for companies looking to increase the added value of their activities and reduce their production costs.

Flexible framework. The value chain is adaptable to various business types, including service providers. Companies should:

• Choose between a short or long value chain based on activity importance
• Reorganize the chain to differentiate from competitors
• Tailor the model to fit their specific industry and needs

Modern relevance. Despite some criticisms and limitations, the value chain remains a vital tool in company management. Its flexibility allows businesses to:

• Address contemporary challenges
• Incorporate new technologies and processes
• Adapt to changing market conditions

6. Implementation: A Six-Step Process for Value Chain Analysis

Unlike general accounting, the value chain is not legally binding, but it remains an important tool in corporate management.

Structured approach. Implementing a value chain analysis involves six key steps:

1. Setting up the analysis (defining scope and boundaries)
2. Mapping out the current value chain
3. Collecting authentic data
4. Submitting the diagram and data for feedback
5. Restructuring the value chain
6. Planning improvement actions

Data-driven decisions. This process enables companies to:

• Identify areas for improvement
• Gather relevant information on all activities and connections
• Verify data authenticity
• Involve team members in the analysis process
• Redesign the value chain for optimal performance

7. Competitive Edge: Leveraging the Value Chain for Market Leadership

Without these significant changes, the company could not have remained a worldwide market leader.

Practical application. The case study of a steel company demonstrates how the value chain analysis can lead to significant improvements:

• Reduced manufacturing time and costs
• Improved product quality and customer satisfaction
• Enhanced coordination with customers
• Optimized organizational structure
• Better quality control of outsourced parts

Continuous improvement. By regularly analyzing and refining their value chain, companies can:

• Maintain market leadership
• Adapt to changing customer needs
• Optimize internal processes
• Stay ahead of competitors
• Drive sustainable growth and profitability

Last updated: July 25, 2024