Value Chain Framework
(Porter)

Analyse activities through which firms can create value. Explanation of Value Chain Framework of Michael Porter. ('85)

The Value Chain framework of Michael Porter is a model that helps to analyze specific activities through which firms can create value and competitive advantage.

The activities of the Value Chain

Primary activities (line functions)
- Inbound Logistics. Includes receiving, storing, inventory control, transportation planning.
- Operations. Includes machining, packaging, assembly, equipment maintenance, testing and all other value-creating activities that transform the inputs into the final product.
- Outbound Logistics. The activities required to get the finished product at the customers: warehousing, order fulfillment, transportation, distribution management.
- Marketing and Sales. The activities associated with getting buyers to purchase the product, including: channel selection, advertising, promotion, selling, pricing, retail management, etc.
- Service. The activities that maintain and enhance the product's value, including: customer support, repair services, installation, training, spare parts management, upgrading, etc.
Support activities (Staff functions, overhead)
- Procurement. Procurement of raw materials, servicing, spare parts, buildings, machines, etc.
- Technology Development. Includes technology development to support the value chain activities. Such as: Research and Development, Process automation, design, redesign.
- Human Resource Management. The activities associated with recruiting, development (education), retention and compensation of employees and managers.
- Firm Infrastructure. Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc.

Creating a cost advantage based on the value chain

A firm may create a cost advantage:

by reducing the cost of individual value chain activities, or
by reconfiguring the value chain.

Note that a cost advantage can be created by reducing the costs of the primary activities, but also by reducing the costs of the support activities. Recently there have been many companies that achieved a cost advantage by the clever use of Information Technology.

Once the value chain has been defined, a cost analysis can be performed by assigning costs to the value chain activities. Porter identified 10 cost drivers related to value chain activities:

Economies of scale.
Learning.
Capacity utilization.
Linkages among activities.
Interrelationships among business units.
Degree of vertical integration.
Timing of market entry.
Firm's policy of cost or differentiation.
Geographic location.
Institutional factors (regulation, union activity, taxes, etc.).

A firm develops a cost advantage by controlling these drivers better than its competitors do. A cost advantage also can be pursued by "Reconfiguring" the value chain. "Reconfiguration" means structural changes such as: a new production process, new distribution channels, or a different sales approach.

Normally, the Value Chain of a company is connected to other Value Chains and is part of a larger Value Chain. Developing a competitive advantage also depends on how efficiently you can analyze and manage the entire Value Chain. This idea is called: Supply Chain Management. Some people argue that network is actually a better word to describe the physical form of Value Chains: Value Networks.

Book: Michael E. Porter - Competitive Advantage -

Value Chain (Porter) Forum (24)

10 Decision Areas of Operation Management (Heizer)
"Heizer wrote there are 10 decision areas of operation Management:
1. Goods and Services Design, 2. Quality Management, 3. Process and Capacity Design, 4. Location, 5. Layout Design, 6. Human Resources and Job Design, 7. Supply Chain Management, 8. Inventory, Material Requirements Planning and JIT, 9. Intermediate and Short-term Scheduling, 10. Maintenance
Source: Heizer, Jay, and Render, Barry. Operations Management, Upper Saddle River, New Jersey: Prentice Hall, 2007.
How are each of these 10 decisions of operation management applied in a company and are they different for the operations of a services versus a physical goods producing company?"

Procurement in the Value Chain Approach
"For long the value chain approach by Michael Porter and as advanced by Peter Hines has placed procurement on the periphery, bundling it with general administration among other things.
Today, with threats of resource depletion, increased intervention of government in supply markets, political turbulence and technological advance (Kraljic, 1983), the days of no surprises have ended and supply arrangements can be disrupted any moment.
There is need for redirection of the focus on competitive competences that can be built upstream rather than downstream because if anything, the upstream activities of any firm are a mirror of the downstream activities. The focus must be on procurement and like many other functions, a number of which probably their time is up in the boardroom, procurement must join the league of boardroom players."

Developing Green Value Chains
"Developing green business strategies in value chains is a new trend to maximize the competitive advantages in terms of minimizing cost within the organizational value chain."

Value Chain in Legal Services
"How can a value chain be incorporated in law firms? What are the primary and support activities in such legal services?"

Value Chain versus Diamond Model
"Hi, can anyone explain in a few words what is the main difference between Porter's Diamond and Value Chain models?"

Value Chain Analysis in Textile Industry
"I am interested in the value chain analysis in textile industry of Uzbekistan to penetrate the EU market. I know that textile has a good opportunities in Uzbekistan, because the availability of raw materials: cotton, yarn and fibers is really improved. Uzbekistan still one of the cotton exporter. I am interested in garment production in textile based on value chain analysis. What criteria should be considered to improve this sector? Labor and other operating costs are relatively competitive with India and China. A disadvantage might be transportation, because in this country there is no connection to sea and sea transportation. Thanks in advance."

Comparing Value Chain and 7S Model
"Hi! I am writing an assignment on a manufacturing company and used Porter's value chain analysis and the McKinsey 7S as internal analysis of the company.
Can someone kindly tell me who to compare these 2 modules to come up with the right analysis? Thanks a lot."

Value Chain for Services Industry
"I have read somewhere, that this model is not applicable for services industry, is it true? And does anybody know, if possible, a good model for strategic management for services industry? Thank you!"

Value Chain in Research and Technology
"Is there anyone having practice or insight on value chain specifically for research and technology?"

Order Management in Porters Value Chain?
"How do I segregate and fit in order management (not order fulfillment ) in Porters list of primary processes? Does it belong in marketing and sales?"

Value Chain and Competitive Advantage Report
"I know that a report on value chain and competitive advantage of the Public Sector in Lebanon was performed in 1999 upon request of the Prime Minister Salim El Hoss. Where can i find this report? Thank you in advance."

Is Value Chain Analyse Only A Tool??
"We study the value chain framework in the marketing plan as a situation analyzing tool. Some say that this can be used as a strategic tool. If we use primary activities of this to enhance the competitive advantages it is very similar to using integration strategy in the diversification of ansoff's matrix. So can this tool be used as a strategy?? How??"

Role of Information Systems in Value Chain
"How does Porter's value chain model help a business to use information systems for competitive advantage?"

Value Chain Narrow Minded
"Porters value chain is very good at explaining how a product adds value throughout the whole process starting from procurement and ending with reaching the end user. Supporting activities also add value to the product, though indirectly. Value chain analysis, despite of being for long in business studies, still is one of highly theoretical concepts.
But what is the value of value chain analysis if a more efficient, cheaper substitute rivals a firm's product?
None. That is exactly what Chine has realized recently. Not only production of currently common goods but also acquisition of promising R&D for future production of substitutes. Although value chain is industry-based analysis, it can also be applied country-based."

Value Chain vs. Credit Crunch
"In spite of today’s credit crunch crisis, the Value Chain model in my experience proved to be one of the most valuable tool, if not THE most valuable, to remedy the economical downturn.
The major benefits of developing a realistic and sound Value Chain that reflects your business dynamics, is your chance to optimize and/or reduce investment where it really make sense.
It doesn’t matter how much money you can raise if your organization is bleeding in silence without its management putting their hands on the source of leakage.
The Value Chain is your best bet ever."

Examples of Value Chain Activities?
"I understand the concept as described. Who can provide an example, with reference to an industry?"

Value Chain Analysis is practical
"Even after all these years I find the Value Chain model of Porter still one of the better, practical tools to analyse a process, its costs and its added value(s). Obviously the standard model has to be adapted for a given industry, for a given company / organizational model. The model provides a framework for cost and added value dedicated actions. Next to this Porter's 5 Forces model has proven to be a very practical business tool to make clear were a business is, where threats and opportunities are and therefor i.e. a help to weight energies, investments for the next period. "

Value Chains and Industries
"Interestingly, different industries often emphasize different activities in the value chain. For example, retailers traditionally focus on inbound and outbound logistics and procurement, while manufacturing companies might focus on operations and technology development. Many software companies focus on marketing and sales, and typically banks are good at services and firm infrastructure."

How to apply the value chain? Activities and Linkages
"The value chain has two types of activities which are the primary activities and the support activities. I can remember all the elements in these two activities. However I have difficulty in applying them. Are there any linkages between these two activities?"

Value Chain and SCM?
"What is the relationship between Supply Chain Management and Value Chain Management? How are they interdependent??"

Inventory Replenishement in Value Chain
"In the context of the value chain, would inventory replenishement be a support value process or a primary value process?"

Value Chain model in Tourism
"How does the model handle a services industry like tourism? It looks to me much of the tourism industry operates on alliance networks globally. It seems the countries that are doing well in this industry are those who have created linkages to global partners."

Agility in Value Chain
"What is the role agility is playing in Porters value chain model?"

Value Chains > Value Networks
"In an article 'Value Creation, Coordination and Positioning in Supply Relationships' in Long Range Planning (Volume 39, Issue 2, April 2006, Pages 133-153), Lars Huemer has reservations as to the usefulness of the value chain model and the notion of value systems as general representations of value creation, coordination and positioning in supply relationships. He suggests that value configuration analysis including the value network logic provides a fruitful alternative, and can reveal a number of complexities in supply relationships, including differences in value creating logic, sets of interdependencies and more compound supply structures. I agree with him that it's time to say goodbye to Porter's process-oriented, sequential Value Chain model and proceed with the more flexible and interdependent non-sequential collaboration-oriented Value Network models."

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