In This Article

  1. Introduction
  2. Primary Activities
  3. Support Activities
  4. Margin Analysis
  5. Linkages
  6. Application
  7. Conclusion

Introduction

The Value Chain, developed by Michael Porter in 1985, disaggregates a firm into its strategically relevant activities. By understanding each activity's cost and value contribution, firms can identify sources of competitive advantage.

The fundamental insight is that competitive advantage comes not from the firm as a whole, but from the many discrete activities it performs in designing, producing, marketing, and supporting its product.

Primary Activities

Activities directly involved in creating and delivering the product to customers.

ActivityDescriptionExamples
Inbound LogisticsReceiving, storing, distributing inputsWarehousing, inventory control, supplier scheduling
OperationsTransforming inputs into final productManufacturing, assembly, packaging, testing
Outbound LogisticsCollecting, storing, distributing productOrder processing, delivery, vehicle scheduling
Marketing & SalesInducing buyers to purchaseAdvertising, pricing, channel selection, sales force
ServiceEnhancing or maintaining valueInstallation, repair, training, parts supply

Support Activities

Activities that support primary activities and each other.

ActivityDescriptionExamples
Firm InfrastructureGeneral management, planning, financeAccounting, legal, quality management
Human Resource ManagementRecruiting, training, compensatingHiring, development, retention programs
Technology DevelopmentImproving product and processesR&D, process automation, design
ProcurementPurchasing inputsRaw materials, supplies, equipment
Key Insight: Support activities cut across all primary activities. For example, procurement happens not just for raw materials (operations) but also for advertising agencies (marketing) and company cars (service).

Margin Analysis

Margin = Total Value Created - Total Cost of Activities

Value = What buyers are willing to pay

A firm is profitable when the value it creates exceeds the cost of performing the value activities. To gain competitive advantage, a firm must either:

  • Perform activities at lower cost than competitors (cost leadership)
  • Perform activities in unique ways that create differentiation

Linkages Between Activities

Competitive advantage often comes from how activities are linked together, not just how individual activities are performed.

Types of Linkages

  • Internal linkages: Connections between a firm's own activities
  • Vertical linkages: Connections with supplier and channel value chains

Example: Just-in-Time

Toyota's JIT system links inbound logistics tightly with operations. Frequent small deliveries (higher logistics cost) reduce inventory and enable flexible production (lower operations cost). The linkage creates value greater than optimizing each activity separately.

Applying Value Chain Analysis

Steps

  1. Identify activities: Break down firm into discrete activities
  2. Assign costs: Determine cost of each activity
  3. Identify value drivers: What makes each activity valuable?
  4. Compare to competitors: Where are you better/worse?
  5. Find linkages: How do activities affect each other?
  6. Develop strategy: Optimize activities and linkages

Strategic Options

  • Reconfigure: Change how activities are performed
  • Outsource: Have others perform non-core activities
  • Integrate: Bring activities in-house
  • Improve linkages: Better coordinate activities

Conclusion

Key Takeaways

  • Value chain breaks firm into strategically relevant activities
  • Primary activities: Inbound, operations, outbound, marketing, service
  • Support activities: Infrastructure, HR, technology, procurement
  • Advantage comes from lower cost or differentiation in activities
  • Linkages between activities create additional value
  • Analyze your chain vs competitors to find advantages
  • Strategy options: reconfigure, outsource, integrate, optimize linkages