Map
Framework

Value chain

The question it answers

A CEO needs to cut cost or raise prices but cannot tell which activities create value and which only burn money: how should the firm's activities be split up and compared with rivals'?

Origin
Porter, 1985
Diagram type
Process by phase
Level of analysis
Firm
Topics
Strategy & leadershipSupply chain & operations
Chess knight on a glass compass, icon for strategy and leadership

Diagram

Value chain

  1. Primary activities
  2. Inbound logisticsReceiving, storing and disseminating inputs to the product: material handling, warehousing, inventory control.
  3. OperationsTransforming inputs into the final product: machining, assembly, packaging, testing.
  4. Outbound logisticsCollecting, storing and physically distributing the product to buyers: order processing, delivery.
  5. Marketing and salesProviding a means for buyers to purchase and inducing them to do so: advertising, sales force, channels, pricing.
  6. ServiceEnhancing or maintaining the product's value after sale: installation, repair, training, parts supply.
  7. Support activities
  8. Firm infrastructureGeneral management, planning, finance, accounting, legal and quality management; usually supports the entire chain.
  9. Human resource managementRecruiting, hiring, training, development and compensation of all types of personnel.
  10. Technology developmentImproving the product and the process, broader than R&D; occurs in many parts of the firm.
  11. ProcurementThe function of purchasing inputs used in the chain, not the inputs themselves; buying is spread throughout the firm.
  12. Result
  13. MarginThe difference between total value and the collective cost of performing the activities.

When to use it, and when not to

Use it when

Use it to find where a cost or differentiation advantage comes from. The decisive category varies by industry: logistics for a distributor, operations for a restaurant or retailer, marketing and sales for a bank lending to companies, service for a high-speed copier maker.

Pitfalls

Pitfall

Drawing all nine boxes without comparing them with rivals. Porter uses the chain to expose where competitors' chains differ, and builds it for a business unit rather than a whole industry. Accounting categories (overhead, direct labour) rarely match value activities.

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Porter, M.E. (1985) Competitive advantage: creating and sustaining superior performance. New York: Free Press.No DOIloc.govSource page