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What is Porter’s Value Chain Model And Why It Matters In Business
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage.
Competitive advantage occurs when a business systematically examines its internal processes and how they interact with each other. Each process in the value chain should create value that exceeds the cost of creating that value. In other words, it should be profitable.
The strength of Porter’s model lies in its focus on customers through value chain systems. This is in contrast to other value chain models that focus on departmental and accounting expenses, for example.
The primary activities of Porter’s Value Chain Model
Porter breaks down his value chain model into five primary processes, or activities.
1. Inbound logistics
This includes the warehousing and associated inventory control of raw materials. This also includes the nature of the relationship with suppliers.
2. Operations
Operations encompass any process that turns raw materials into a finished product ready for sale, including labelling, branding, and packaging.
3. Outbound logistics
Outbound logistics concern any process where the product is distributed to a customer. This includes the storage and distribution of products and the processes involved in fulfilling customer orders.
4. Marketing and sales
Any processes that attempt to enhance product visibility among a target audience are included in marketing and sales. This activity is also heavily reliant on customer relationships.
5. Services
Services include any processes that occur after a purchase has been made, including customer service, repairs, refunds, and warranty acknowledgement.
Secondary activities
Within Porter’s Value Chain Model there are also four secondary activities which support the foundational primary activities common to most businesses.
Here is a brief look at each.
1. Company infrastructure
Company infrastructure entails any process that supports daily business operations. Administration, clerical, financial, and line management are all value-creating infrastructure processes.
Human resource management (HRM) covers any process related to the training, acquisition, or termination of employees. HRM departments and their ability to hire talented and motivated staff are crucial to a company’s competitive advantage.
3. Research and development
Technology can create a competitive advantage in Porter’s value chain because it can streamline important processes. These include payroll automation software, customer service procedures, and distribution networks.
4. Procurement
Procurement is simply the acquisition of necessary goods or services. The most typical example is the procurement of raw materials and the negotiation of pricing and product purchase contracts. It may also include the purchase of equipment, offices, buildings, and machinery.
Key takeaways:
Porter’s Value Chain Model is a strategic management tool for the analysis of a company’s value chain.
Porter’s Value Chain Model is customer relationship centric and is used by businesses to systematically examine each of their many processes for profitability.
Porter’s Value Chain Model is comprised of five primary value chain activities, further supported by four secondary process activities.
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