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.
Porter’s Value Chain Model
Description
Analysis
Implications
Applications
Examples
1. Primary Activities (PA)
Primary activities are the core value-adding activities within a company’s operations that directly contribute to the creation and delivery of a product or service.
– Identify and analyze primary activities, which typically include inbound logistics, operations, outbound logistics, marketing and sales, and service. – Assess each activity’s efficiency, cost-effectiveness, and quality. – Understand the interrelationships among these activities and how they contribute to the final product or service.
– Reveals areas where cost savings, quality improvements, or competitive advantages can be gained. – Helps in optimizing the value chain to enhance overall performance.
– Streamlining manufacturing processes to reduce production costs. – Improving supply chain logistics to enhance product delivery.
Primary Activities Example: Analyzing a fast-food restaurant’s primary activities, including food preparation, order fulfillment, and customer service, to identify areas for process improvement.
2. Support Activities (SA)
Support activities are functions that provide the necessary infrastructure, resources, and support to enable primary activities to operate effectively and efficiently.
– Identify and examine support activities, including procurement, technology development, human resource management, and firm infrastructure. – Evaluate how support activities contribute to the overall competitiveness of the company. – Analyze resource allocation, technology adoption, and organizational capabilities in these areas.
– Determines the extent to which support activities enhance the effectiveness of primary activities. – Identifies opportunities for cost reduction, innovation, or resource optimization.
– Enhancing the efficiency of procurement processes to reduce material costs. – Investing in technology development to support product innovation.
Support Activities Example: Assessing a software development company’s support activities, including employee training, IT infrastructure, and supplier relationships, to identify areas for improvement.
3. Value Chain Analysis (VCA)
Conduct a comprehensive analysis of the entire value chain to identify opportunities for cost reduction, differentiation, and competitive advantage.
– Examine the entire value chain, including both primary and support activities. – Identify points of differentiation and cost drivers within the value chain. – Assess how each activity contributes to value creation and customer satisfaction. – Compare the company’s value chain with competitors’ to identify relative strengths and weaknesses.
– Provides a holistic view of the company’s value creation process. – Helps in crafting a competitive strategy based on differentiation or cost leadership. – Enables the identification of areas where process improvements or innovation can lead to a competitive edge.
– Developing a cost leadership strategy by reducing production costs across the value chain. – Creating a differentiation strategy by enhancing customer service and product features.
Value Chain Analysis Example: Analyzing an e-commerce company’s entire value chain, from supplier relationships and website design to order fulfillment and customer support, to identify opportunities for cost reduction and customer experience enhancement.
4. Implications and Strategy (IS)
Interpret the results of the value chain analysis and make strategic decisions based on the insights gained from the assessment.
– Evaluate the implications of the value chain analysis, considering areas of strength, weaknesses, opportunities, and threats. – Formulate a competitive strategy that leverages the identified strengths and addresses the weaknesses. – Align strategic objectives with the value chain improvements and innovation initiatives. – Ensure that the strategy aligns with the company’s long-term goals and competitive positioning.
– Informs strategic decision-makers about the company’s competitive advantages and vulnerabilities. – Guides the development of strategic plans to enhance competitiveness, whether through cost reduction, differentiation, or innovation.
– Developing a cost leadership strategy to compete on price in the market. – Crafting a differentiation strategy to offer unique and premium products or services.
Implications and Strategy Example: Deciding to invest in advanced technology to improve product quality and customer service based on the value chain analysis that highlights technology as a critical driver of competitiveness.
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.
Value Chain vs. Supply Chain
A value chain comprises the activities a company performs to create value for customers and maximize its competitive advantage.
A supply chain, on the other hand, describes the network of entities that source raw materials, transform them into products, and distribute or sell them to customers.
Understanding value chains
Value chains encompass the input activities a company performs to create value for customers.
Essentially, these companies take inputs and transform them into outputs that are then presented to the end user.
Since each is in the business of making money, the output must be more valuable than the process of creating it.
Manufacturing companies create value by turning raw materials into products that the population can use and benefit from.
Retailers create value by taking the product and packaging it in a way that is convenient for customers.
This may be physical packaging or, in the case of an insurance company, the way the product is presented or where it is sold.
Insurance companies offer insurance to individuals at an affordable price, but to do so, they must secure their own insurance with a larger provider that is better equipped to underwrite the policy.
If a private citizen was required to take out one of these re-insurance policies themselves, the cost would be prohibitively high.
By facilitating a much cheaper policy, the insurance company adds value to the chain and makes money in the process.
Understanding supply chains
Supply chains, instead, illustrate the connection between various companies, activities, and functions involved in transforming raw materials into a product that is marketed and sold to the customer.
This “journey” usually involves suppliers, manufacturers, wholesalers, distributors, and retailers – though the order may be different in some contexts while others will omit certain entities completely.
Supply chains are controlled by a cross-functional system known as supply chain management, which may include product development, integration, information sharing, procurement, distribution, customer service, and performance analysis.
While the idea of value chains arose from business management, supply chains have their roots in operational management since they are more concerned with product conveyance.
In other words, they exist to ensure that raw materials are turned into end products that can actually reach the customer.
Supply chains and value chains
Despite the differences between each idea, both are integral parts of efficient global logistics.
Supply chains operate 24/7 and ensure that cobalt mined in the Democratic Republic of Congo can be incorporated into the battery of a smartphone sold in San Francisco.
Value chains motivate or incentivize the various supply chain entities to provide value at different stages as raw materials are turned into useable products.
over value adding and work to ensure customers can conveniently access products.
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.
Broadly speaking, the objective of inbound logistics is to ensure that the necessary inputs are available in the right quantities, at the right time, and at the right cost to support the company’s operations.
When these requirements are satisfied, inbound logistics can facilitate cost savings, improved quality control, and increased supply chain efficiency.
2. Operations
Operations encompass any process that turns raw materials into a finished product ready for sale, including labeling, branding, and packaging.
Operations tend to be at the core of a company’s value chain. As a result, improvements in this area can lead to a significant competitive advantage.
Key activities include process design, capacity planning, and production scheduling.
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.
Effective outbound logistics management can lead to improved customer satisfaction, reduced lead times, and increased profitability.
Key activities in this process include order processing, inventory management, transportation, and warehousing.
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.
Marketing and sales can encompass the 4 Ps of marketing (product, price, place, and promotion), but it may also include activities such as public relations and sales management.
All contribute to increasing brand awareness, revenue, and customer loyalty.
5. Services
Services include any processes that occur after a purchase has been made, including customer service, repairs, refunds, and warranty acknowledgment.
In an era where companies have never been under more scrutiny around their interactions with customers, exceptional customer service can provide a point of differentiation to stand out from competitors and build a positive brand reputation.
A focus on customer service can also lead to valuable feedback and insights that can be used to improve products and operations.
Secondary activities
Within Porter’s Value Chain model four secondary activities 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.
Key activities within this secondary process include financial management, budgeting, risk management, recruitment and selection, training and development, and technology management.
Effective infrastructure can also provide a strong foundation for growth and expansion, as well as support for strategic decision-making.
When the focus is on infrastructure, companies can improve their ability to manage resources, adapt to dynamic market conditions, and build a desirable organizational culture.
2. Human resource management
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.
When a company has streamlined its human resource management processes, it is likely to experience increased employee satisfaction, productivity, and engagement. What’s more, it will be better able to attract top talent and ensure that its workforce aligns with broader strategic objectives. Like infrastructure-related processes, human resource management can also have positive implications for organizational culture.
This is an area that is currently undergoing a significant shift.
In its 2023 Global Human Capital Trends Report, Deloitte noted that “in a boundaryless world, work isn’t defined by jobs, the workplace isn’t a specific place, and many workers aren’t traditional employees.
Those who partner with workers and experiment with what’s possible will create sustainable work models and elevated outcomes – making work better for humans and humans better at work.”
To that end, Deloitte advocated specific activities such as prioritizing human outcomes, becoming a curious researcher to solve problems, and establishing employee-employer relationships based on new, co-created rules and boundaries.
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.
The most obvious benefit of research and development is that it enables a company to develop a sustainable competitive advantage that others cannot replicate.
There are also additional benefits such as reduced production costs and increased product quality.
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.
Procurement is a critical activity that can significantly impact a company’s cost structure and overall profitability. It also has important implications for quality assurance, supply chain resilience, and innovation.
Starbucks and Porter’s value chain model
To better understand the value chain concept, let’s take a look at the various value chain and secondary process activities using Starbucks as an example.
Value chain activities
Inbound logistics
The Starbucks value chain begins with buyers purchasing high-quality coffee beans from primary producers in Asia, Africa, and Latin America.
The beans are roasted and packaged – which adds value to their sale price – and sent to a mixture of Starbucks-owned and third-party distribution centers.
Note that the procurement process is never outsourced to ensure quality standards are enforced from the start of the chain.
In 2023, Starbucks operated 19,592vs. 18,253 licensed stores. Starbucks leverages primarily company-operated stores to keep tight control over product development, branding, distribution, and customer experience. It also leverages licensed stores for better amplification of brand, revenue, and profits.
Stores are either company-owned or licensed to other companies who have access to desirable retail spaces such those inside airports.
Starbucks also owns a range of related brands such as La Boulange, Teavana, Ethos Water, and Seattle Coffee Co.
Outbound logistics
Starbucks does not tend to employ a B2B model where other brands distribute its products, but a small selection of coffee products can be found in supermarkets.
Most products are transported from warehouses and distribution centers and then sold in Starbucks stores and cafés around the world.
Marketing and sales
Starbucks is one of the world’s most recognizable brands, and for good reason.
The company is able to promote its brand with consistent messaging across social media, video, television, events, and various in-store experiences such as new product sampling.
Service
The company aims to build brand loyalty through a superior in-store experience. After witnessing the café culture in Italy, CEO Howard Schultz wanted to bring a similar experience to American coffee lovers.
In a later interview, he wanted Starbucks to serve “as a third place between home and work, an extension between people’s lives, at a time when people have no place to go.”
In addition to home-based comforts, Starbucks invests heavily in customer service training to add value to the chain.
Secondary process activities
Let’s now take a look at the secondary process activities.
Company infrastructure
This encompasses various departments that are necessary to maintain company operations, such as finance and legal.
Starbucks also employs business managers in corporate offices and store managers in each café to oversee the baristas.
Human resource management
Starbucks is well known for its effective human resource management.
Starbucks had 381,000 employees in 2023, compared to 402,000 employees in 2022, 383,000 in 2021, and 228,000 in 2020.
Employees are offered a range of perks, including health coverage, paid leave, retirement plans, subsidized university education, company stock plans, and discounts on work-related transportation expenses.
These initiatives result in a motivated, efficient, and engaged workforce which increases employee retention.
Research and development
Each Starbucks store provides unlimited bandwidth free of charge which creates significant value for casual diners and businessmen alike. The company also uses technology to ensure the taste of its coffee is consistent across its stores.
The Starbucks Rewards program app is another example of the café chain using technology to its advantage. Customers can download an app, use it to pay for their coffee, and collect stars that can be redeemed for food, drinks, and more.
Customers must preload the app with money or redeem a gift card to make a purchase.
Procurement
As we noted earlier, procurement for Starbucks means sourcing coffee beans directly from primary producers on several continents.
Purchasing agents that are employed by the company form strategic partnerships with each producer and communicate the standards they must meet in terms of bean quality.
Amazon Value Chain modelExample
Now will repeat the value chain analysis, this time for eCommerce behemoth Amazon.
Amazon generated over half a trillion dollars in revenue in 2023, of which $231.87B from online stores, over $140.05B from third-party seller services, $90.76B from AWS, $46.9B from advertising, $40.21B from subscription services, $20.03B billion in physical stores, and $4.96B from other sources.
Value chain activities
Inbound logistics
In general terms, Amazon does not source raw materials from suppliers because it does not manufacture its own products.
As a primarily online retail business, the Fulfillment by Amazon (FBA) service allows sellers to have their items picked, packed and shipped by the company in one of its many fulfillment centers around the world.
Value is added via immense economies of scale and additional perks such as free shipping and access to buyer traffic.
The company also takes care of customer service and product returns as part of the FBA service.
Operations
Amazon’s operations are divided into three core segments:
North America – which includes websites in the United States, Canada, and Mexico.
International – which includes country-specific websites in a further 13 locations such as Australia, China, France, Germany, and Spain.
Amazon Web Services (AWS) – incorporating sales of cloud infrastructure services, storage and database items, plus other services for enterprises, governments, and academic institutions.
Outbound logistics
Amazon utilizes approximately 185 fulfillment centers around the world as part of its FBA service. Product fulfillment is supported by robotic inventory technology and then delivered via aircraft, ships, trucks, drones, and local couriers.
Outbound logistics also encompasses the delivery of downloadable products and physical store sales such as those from the Whole Foods Market chain.
Marketing and sales
Amazon spends billions of dollars on marketing each year across online and offline channels. The company promotes its vast selection of products and services, rapid delivery, superior customer service, and membership programs such as Amazon Prime.
Services
Amazon offers customers unprecedented levels of customer service for buyers in terms of shipping, refunds, returns, and exchanges. It also works with vendors to ensure warranties and other promises are honored when applicable.
Vendors are also offered a suite of business tools that increase their odds of success. This includes training and documentation on advertising products, setting competitive prices, and earning exemplary customer reviews.
Secondary process activities
Company infrastructure
A company of Amazon’s size would not be viable for long without the necessary infrastructure in place.
The company has an extremely consistent, reliable, and scalable logistics system. What’s more, it has managed to turn some parts of its infrastructure into businesses in its own right. One example is the cloud-based Amazon Web services.
Human resource management
Amazon utilizes a mixture of employees, contractors, and seasonal or temporary labor to cope with periods of increased consumer demand.
Employee performance is assessed with a lean, data-driven, Six Sigma-Esque approach instituted by CEO Jeff Bezos.
The company also offers benefits that extend to an employee’s immediate family, such as paid parental leave, retirement plans, and healthcare coverage.
Research and development
Amazon has utilized technology to its advantage, whether that be drone deliveries and robotic warehouses or via acquisitions of virtual and augmented reality companies such as Oculus.
In 2020, the company’s SEC filing noted it was granted 2,244 patents. The majority of these were in machine learning, artificial intelligence, computer vision.
Procurement
Amazon procurement is formally known as Sales and Operations (S&OP). The company forecasts individual product sales and monitors real-time inventory levels based on receipts and shipments from fulfillment centers.
Procurement also includes the necessary equipment, resources, technology, and infrastructure required for its core eCommerce platform.
Also included here is vendor and supplier procurement, which encompasses information systems, supply chain partner eligibility rules, and performance evaluation.
Apple Value Chain Model Example
In the third example, let’s discuss Apple’s value chain.
Value chain activities
Inbound logistics
Apple is known, among other things, for its superior supply chain management and mostly relies on overseas manufacturers for components.
It costs Apple $501 to make an iPhone 14 Pro Max, and the company sells it at a base price of $1099. This makes Apple’s base markup on the latest iPhone model at 119% Apple is the only tech company able to sell its tech products at such a premium, thanks to a combination of hardware, software, and marketplace.
The company has a lot of leverage when dealing with suppliers because of its financial clout. It sets stringent quality standards and finds innovative ways to decrease its storage costs.
Operations
Operations are divided into five market segments: America, Europe, Greater China, Japan, and Rest of Asia Pacific. Manufacturing is concentrated in Asia where labor is more affordable.
Outbound logistics
Assembled Apple products are sent to intermediate warehouse facilities where they are then made available to online stores, retail stores, sales teams, wholesalers, retailers, and cell network carriers.
Marketing and sales
While most Apple products tend to sell themselves, the company nevertheless spends millions on marketing its brand. It promotes its technological products with simple sales copy and has promoted a brand that is cool, fun, and friendly.
Apple tends to avoid traditional forms of advertising such as PPC, instead of relying on positive reviews from news media and celebrity product endorsements.
Services
Apple maintains strong customer service across the pre-purchase, purchase, and post-purchase periods. Service staff in Apple stores embody the brand and are polite, helpful, and knowledgeable about the product range.
The vast majority of Apple software and hardware products include 90 days of free support.
Secondary process activities
Now for Apple’s secondary process activities.
Company infrastructure
The company is supported by a hierarchical organizational structure with product-based divisions and some degree of inter-divisional collaboration.
Apple has become less hierarchical and more collaborative over the years in a shift that was precipitated by CEO Tim Cook.
Human resource management
Apple’s human resource management focuses on maximizing the returns (and minimizing the risks) of human capital.
HR is responsible for leadership development, incentive compensation, employee development, employee relations, and recruitment and selection.
Apple has a rigorous recruitment process that consists of initial screening sessions, up to five FaceTime interviews, assessment center exercises, and onsite interviews that may last for up to six hours. This competitive process ensures the company hires the best talent.
Research and development
Apple is synonymous with research and development, spending $21.91 billion on innovation in the 2021 fiscal year.
Many company innovations have changed the world, including the Mac, iPhone, iPod, and Apple Watch. Apple is also invested in the self-driving car, sustainable energy, and healthcare industries.
Procurement
Apple has a robust supplier ecosystem that helps the company obtain high-quality products and services.
Importantly, these products and services are delivered promptly and at a price that represents the best possible value to customers and shareholders.
Procurement is underpinned by fair and equal treatment of suppliers.
There is also a core focus on supplier diversity, which means Apple does business with companies that are owned by women, LGBTQ+ individuals, minorities, and those with a disability.
Tesla Value Chain Model Example
Here is another example of Porter’s value chain. This time, we’ll analyze the chain in terms of electric vehicle manufacturer Tesla.
Primary activities
Inbound logistics
To overcome the obstacles associated with sourcing batteries for its vehicle fleet, Tesla partnered with Panasonic to build the Gigafactory. This also reduced the cost of battery production. Tesla then entered into deals with Daimler and Toyota to learn more about the vehicle manufacturing process and fund their powertrain and battery technology.
Tesla stores its various raw materials and tech in multiple warehouses around the world and a principal factory in Fremont, California.
Operations
Unlike other vehicle manufacturers, Tesla vertically integrates aspects of production, packing, assembly, design, and recharging systems. With both the engineering and design teams based in Fremont, value is created from more efficient production and logistics systems.
Outbound logistics
For consumers who live within a certain radius, Tesla vehicles are delivered directly to their homes. Others are delivered to dealerships or in some cases, third-party carriers.
Marketing and sales
Complementary to Tesla’s unique direct delivery model is a multi-faceted model for vehicle sales comprising online stores and Apple-esque retail outlets. The latter are typically found in large cities where brand exposure can be maximized.
The company also relies on the public persona of Elon Musk for much of its marketing returns. Musk’s Twitter account is never far from the headlines and his decision to purchase the social media platform may also bode well for Tesla.
Services
Tesla provides after-sales services via its dealerships and service centers. Services are also provided by a fleet of vehicles that allows the company to scale its service capability with very little capital investment.
Secondary activities
Procurement
For now, Tesla is heavily reliant on its direct suppliers of battery metals such as lithium, cobalt, and copper. The value created from inbound logistics allows Tesla to procure materials at a competitive price.
To future drive down costs, Musk has mentioned on more than one occasion that Tesla owning and operating a lithium mine is a future possibility.
Human resource management
To some extent, Tesla relies on the value created by its enigmatic leader who is unlikely to ever leave the company or sell his vision to someone else.
However, more value is created by Tesla’s large cohort of engineering, manufacturing, marketing, sales, tech, installation, and service personnel.
Infrastructure
Tesla operates two infrastructure segments:
Automotive – including the design, manufacture, sale, and leasing of EVs.
Energy Generation – which includes similar functions for solar energy systems, energy storage products, and related services and incentives.
Technological development
It goes without saying that Tesla creates massive value through technological development. The company owns proprietary powertrain systems and is a leader in lithium-ion batteries, radar sensors, autopilot control systems, and renewable energy.
Tesla also shares car telemetry data with communications companies in the event a driver experiences a flat battery and requires assistance.
For every vehicle that is sold, Tesla spends more than any other manufacturer on research and development. In 2020 this equated to $2984 per car compared to just $1186 at Ford and $878 at General Motors.
McDonald’s Porter’s value chain example
In this case study, let’s take look at the fast-food restaurant chain McDonald’s.
Primary activities
Inbound logistics
McDonald’s uses a variation of just-in-time (JIT) manufacturing to handle inventory in its stores. In other words, the customer is the initiator of demand.
When a customer orders a Big Mac, for example, the server obtains one from the rack. The employee who makes the Big Mac monitors the rack and replenishes it when stock runs low. Similarly, the restaurant manager monitors the inventory in the kitchen and will order more beef and other ingredients as necessary.
To ensure the correct amount of raw materials arrive right when they are needed, McDonald’s has a sophisticated supply chain that also minimizes inventory-related costs and reduces waste. This is at least partly thanks to the company’s high degree of vertical integration.
Operations
McDonald’s owes much of its success to process standardization. Streamlined cooking processes enable meals to be prepared quickly whilst not sacrificing the consistent quality and taste for which the company is known.
With minor variations to account for different cultures or locations, menu items and the way they are branded and packaged are almost identical around the world.
Outbound logistics
In more recent times, McDonald’s has made a delivery option available in some countries called McDelivery. The service can be accessed in the McDonald’s app in addition to DoorDash, Uber Eats, and GrubHub for consumers in the United States.
The company takes extra steps to ensure food arrives hot and fresh, with fries and McFlurries in particular notorious for not traveling well. McDonald’s aims to have all meals delivered in under 30 minutes and only packages items once the order is ready to be delivered.
The company prefers to use radio, television, and billboard spots to increase brand awareness and promote new menu items. It also advertises at sports matches but tends not to discriminate which competitions it is associated with. Indeed, McDonald’s advertises at everything from amateur youth leagues to the Olympic Games.
These offline channels are supported by various digital marketing campaigns designed for those who mostly interact with the brand online. Many such campaigns are run inside the company’s app which is also packed with exclusive deals and bonuses.
Services
In addition to its cooking process, McDonald’s also standardizes its customer service. Employees are trained to deliver exemplary customer service with extra instruction provided for interacting with children and the disabled. Individuals are also trained on how to maintain a certain standard of personal and restaurant hygiene.
Services can also encompass the free wi-fi and McDonald’s PlayPlaces & Parties offered in most restaurants. The latter is a children’s birthday party service where a restaurant will provide Happy Meals, cake, decorations, and party favors for attendees who can also access the restaurant’s indoor or outdoor play equipment.
Support activities
Procurement
On its website, McDonald’s claims “Our supply chain model is based on a culture of partnership and collaboration which makes it possible for us to serve consistently safe and high-quality food.” The company has been able to maintain long-term relationships with many of its suppliers and negotiate more favorable terms as a result. Keystone Foods, for example, has been supplying chicken and beef products to McDonald’s in the USA since the 1960s.
While some suppliers remain the same, the company’s procurement process has evolved over the past 60 years. Initially, the task of forecasting demand and ordering the necessary items was left to individual franchisees who are often time-poor or ill-equipped to do so. In response, the company created the Restaurant Supply Planning Department in 2004 to assist store owners with procurement based on store-specific data, holidays, and promotions.
It was also around this time that the company developed a global e-procurement platform to enable franchisees to buy raw materials, liaise with suppliers, and benefit from economies of scale. With McDonald’s itself able to streamline communications, manage transactions in one location, and hold e-auctions for certain raw materials, it was able to reduce labor costs by 85% and supply costs by 15%.
Technology
McDonald’s acquired Dynamic Yield for over $300 million in 2019. The company acquired the Israeli start-up to access its “Amazon-style” personalized online experience tech which is used in the eCommerce, finance, travel, and media industries.
McDonald’s planned to implement the technology across all levels of infrastructure from customers to suppliers. One application in restaurants is dynamic smart menus that change as customers place their orders. If the customer orders a burger, it will suggest an upgrade. If they orders a healthy meal, it may offer a bottle of water instead. Drive-thru menus now also recommend items based on the time of day, traffic levels, and weather conditions.
The company subsequently acquired AI-based voice technology startup Apprente in 2019. In essence, the technology enables AI to take orders using natural language processing algorithms and communicate with the customer in a synthetic human voice.
Human resource management
Like most companies, McDonald’s emphasizes the recruitment of employees who align with its culture, values, and standards. The company’s recruitment process is also standard with an application, assessment, and interview phase used to identify the best candidates.
To that end, McDonald’s provides various training and development opportunities that strengthen employee capabilities in teamwork, communication, problem-solving, and adaptability. In addition to on-the-job training, the company also offers nationally recognized qualifications that equip employees with the skills to pursue careers elsewhere.
Infrastructure
McDonald’s has a well-established hierarchical management structure with a board of directors, an executive leadership team, and numerous levels of middle and lower-level managers who support day-to-day operations.
As we touched on earlier, the company uses tech to underpin its online, point-of-sale, and inventory management systems. In 2018, McDonald’s embarked on a two-year journey to build a cloud-based data and analytics platform to better manage its global supply chain.
However, perhaps the most important infrastructure for McDonald’s is its restaurants. While many companies thrive online or have shifted operations there, McDonald’s and its approximately 40,000 worldwide restaurants are integral to the company’s brand and business model.
Boeing Porter’s value chain example
In this example, let’s take a look at Boeing.
Inbound logistics
Boeing’s inbound logistics are focused on sourcing raw materials, components, and parts from suppliers worldwide. The company works with suppliers to source materials that include metals, composites, and electrical components for aircraft assembly.
Boeing has an efficient supply chain management system that allows it to optimize its inbound logistics and reduce costs. This system ensures the company can anticipate the needs of customers, reduce costs, and increase “combat capabilities in everything from parts and repairs to delivery and analysis.”
The company’s “Critical Operational Readiness” system contains six components that enable it to project complex market demand years in advance:
Demand planning & forecasting.
Modeling and simulation.
Sourcing and supply base management.
Warehousing.
Logistics, and
Asset lifecycle management.
Operations
Boeing’s operations are focused on designing, engineering, and manufacturing aerospace-related products and services. The company has a well-integrated manufacturing process that, since 2020, has adopted aspects of Toyota’s lean production methodology.
While lean production is most prevalent in the auto industry, it is less common in aviation where volume is substantially lower and customers demand more customization.
But as demand for new aircraft continues to rise, Boeing VP of manufacturing Walter Odisho believes production needs to become more predictable and repeatable. In an interview with Manufacturing Digital, he noted that “If you look at aerospace with market demand rising, we need to start thinking differently and move efficiencies from the auto industry into this arena.”
Outbound logistics
New aircraft are shipped from one of two factories in Seattle, Washington. The Renton plant manufactures narrow-body aircraft such as the 737, while the wide-body 777 and 787 are assembled at Boeing’s Everett facility.
How each plane is delivered to the airline depends on the distance to the destination country and the range of the aircraft itself. Models such as the 737 with a short range may need to take a circuitous route to the customer with frequent stops to refuel. The larger 777 is simply flown directly to the customer.
In any case, flights depart from the Boeing Delivery Center – a small airport terminal that features meeting and banquet spaces for pre-flight events and even a Boeing collectible shop. If an airline opts to hold an event to commemorate the delivery of a new aircraft, Boeing will present its representatives with a ceremonial key.
Marketing and sales
Boeing’s advertising efforts are currently focused on differentiating the company as a global aerospace brand.
While the company is best known for its commercial aviation history, what is less appreciated “is that Boeing is also a leader in space technology, defense aircraft and systems, and communication systems. Our advertising campaigns close the gap between current perceptions of Boeing and our true scope as a global aerospace company.”
Boeing spends significant sums of money on advertising. Primarily, its audience is business leaders and investors who can increase the company’s share price and leverage their connections to negotiate deals. The latter is especially useful when Boeing bids for highly competitive military contracts.
In commercial aviation, however, the target audience extends to consumers also. While consumers do not buy the planes, Boeing still wants the general public to recognize its brand and associate its aircraft with prestige and safety. In this way, the company benefits from increased brand equity and sales like any other would.
Services
Boeing Global Services is a portfolio of value-focused, cost-competitive aviation services and aftermarket support. Some of the services on offer include:
Asset Management Solution (AMS) – a software tool that enables airlines, lessors, and financial institutions to make smarter decisions around asset management.
Insight Accelerator – a predictive, cloud-based aircraft maintenance solution that enables airlines to derive more value from their data. One of the main features involves the use of augmented analytics to identify patterns of premature part failure and facilitate pre-emptive maintenance.
Boeing Business Jet Services – a holistic suite of maintenance, performance, and crew operations tools for operators of Boeing business and VIP jets. The service prioritizes safety and aircraft readiness.
Secondary process activities
Company infrastructure
Boeing is organized into three distinct business units:
Commercial Airplanes.
Defense, Space & Security, and
Boeing Global Services.
These units are supported by the subsidiary Boeing Capital Corporation whose mission is to arrange, structure, or provide finance to assist in the sale of the company’s products and services. At present, the subsidiary has a $4.1 billion portfolio of around 200 aircraft.
Various functional organizations across the company focus on areas such as technology and development program execution, engineering and project management, advanced design and manufacturing systems, finance, safety, quality and product improvement, and information technology.
Human resource management
Boeing’s recruitment process from application to offer is known to be exhaustive and can take anywhere from three to five months. Candidates submit their applications via the company’s application portal and are subject to a panel interview if selected.
Each candidate is expected to know about the company’s history and values and ask questions during the interview itself. Boeing’s interview preparation guide also stresses the importance of adequate responses to behavioral and situational questions. Furthermore, those applying for technical roles may be required to demonstrate their proficiency at a later time.
Once employed, Boeing offers staff benefits such as tuition assistance, health and retirement plans, paid time off, and family and community support programs. The company also invests over $17 billion annually in staff compensation and incentives.
Research and development
Boeing’s research and development department is one of the key drivers of the company’s success. With a focus on innovation and continuous improvement, Boeing invests around $3 billion in R&D each year to design and develop new products, technologies, and manufacturing processes.
The company’s efforts span areas such as aerodynamics, materials science, propulsion, avionics, and autonomous systems. Through partnerships with universities, government agencies, and other industry leaders, Boeing remains at the forefront of aerospace technology and can maintain its competitive edge.
Recent innovative examples in commercial aviation include the 737 MAX 9 and 787-10 aircraft. In defense, Boeing’s T-X aircraft was recently selected by the U.S. Air Force as its new advanced jet trainer for pilots.
Procurement
In keeping with aspects of lean manufacturing, Boeing’s procurement policies “govern the purchase of materials of the right quality, in the right quantity, at the right time, at the right price and from the right sources.”
Boeing aims to treat suppliers with fairness and impartiality, but it does emphasize competitive bidding as good business practice.
Before committing to purchase from a supplier, the company considers its ability, integrity, financial status, capacity, performance, reliability, geographical locations, product quality, delivery, and prior customer relations.
Yet, Porter’s frameworks have been developed in a timeframe where the market context was slightly different from today’s environment.
While those frameworks have been very useful in assessing the competitive landscape up to the late 1990s.
There has been an important shift in paradigm in the current business landscape.
As the Internet took over, it enabled companies to go more directly to consumers.
This opened up the way to the demand generation era.
An era where digital-first companies, reinvigorated by the wreck off of barriers to entry, are now following a different business playbook.
In other words, until the 1990s, the supply side played a much more important role. Those have been working as a big incentive for new entrants.
In short, if you want to start a new company in an existing vertical, you got to understand all the supply dynamics first.
However, at this stage, we live in an era of demand generation. If new entrants can figure out how to build demand, they will be able to enter also more complex markets.
Companies like Tesla or SpaceX have entered very capital-intensive markets by mastering the ability to build their business by starting from a microniche and scaling from there.
Figuring out demand first and supply later has become a rule of thumb in an era where you must ensure that people want something if you build something.
Thus, hitting the so-called product-market fit before you can scale up supply.
Marc Andreessen defined Product/market fit as “being in a good market with a product that can satisfy that market.” According to Andreessen, that is a moment when a product or service has its place in the market, thus enabling traction for the company offering that product or service.
Thus, in this context, Porter’s frameworks are more useful to established organizations than startups.
Indeed, another key point to realize. Today, startups are mostly driven by software.
Even an incredible piece of hardware like an iPhone gains a competitive edge due to the software side.
If your iPhone gets better and better, that is partly due to hardware improvements. But most of it is due to software improvements (your pictures are way better because AI algorithms can improve the quality at the software level).
The same is with a Tesla. If you look at it simply from the hardware standpoint, Tesla has no competitive edge concerning other EVs, which are quickly picking up.
Instead, what makes Tesla valuable is the software side. This enables engineers to improve the car with software upgrades slightly, thus making it easier to drive, more secure, and adding more and more features (just like on your iPhone).
And also, as an established organization, you have to think about non-linear competition.
In short, today’s competitive landscape has become pretty blurred, with boundaries that are not well defined, requiring a non-linear way of thinking.
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving can at times, create a big impact.
For such reason, if you’re an entrepreneur or executive today, much simpler heuristics can help you thrive in such a context.
For example, heuristics like Occam’s Razor can help you make sense of an ambiguous market context.
And that is the paradox. By implying your thinking, you make your actions way more effective in a complex environment!
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.
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. It is comprised of five primary value chain activities that are further supported by four secondary process activities.
For instance, the value chain of a company like Starbucks starts from the moment it sources beans from primary producers in various countries. Value is also added to the Starbucks in-store experience and consistent brand messaging.
Porter’s Value Chain Model Highlights:
Value Chain Concept: Michael Porter’s Value Chain model focuses on a company’s collection of processes that create value for consumers, leading to competitive advantage.
Primary Activities: The model includes five primary activities: Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales, and Services. These activities work together to create value and enhance the customer experience.
Secondary Activities: Four secondary activities support primary activities: Company Infrastructure, Human Resource Management, Research and Development, and Procurement. These activities contribute to a company’s overall efficiency and competitiveness.
Value vs. Supply Chain: Value chains relate to processes that create value for customers, while supply chains involve the network of entities that source, transform, and distribute products. Both are essential for efficient global logistics.
Customer Focus: Porter’s model emphasizes customer value through value chain systems, unlike other models that might focus on internal expenses.
Competitive Advantage: Companies gain a competitive advantage by ensuring that each value chain process adds more value than its cost, resulting in profitability and differentiation from competitors.
Amazon Example: Amazon’s value chain involves inbound logistics, operations, outbound logistics, marketing and sales, and services. Its secondary activities include company infrastructure, human resource management, research and development, and procurement.
Starbucks Example: Starbucks’ value chain starts with high-quality coffee bean sourcing, followed by operations, outbound logistics to stores, marketing and sales to enhance the brand, and services like superior in-store experiences.
Comparison’s Table
Porter’s Value Chain Model
Resource-Based View (RBV)
Activity System Map
Dynamic Capabilities Framework
Purpose
Analyze internal activities to achieve competitive advantage.
Identify and leverage unique resources and capabilities.
Visualize and optimize activities within an organization.
Enhance adaptability and innovation for sustained competitive advantage.
Focus
Sequential activities adding value from raw materials to finished product/service.
Internal resources, capabilities, and competencies.
Interdependencies and linkages between activities.
Organizational capabilities to respond to changing environments.
Key Features
Identifies primary and support activities to understand cost drivers and sources of differentiation.
Focuses on tangible and intangible resources, knowledge, and capabilities.
Visual representation of interconnected activities and their impact.
Identifies how organizations create and sustain competitive advantage over time.
According to Porter, a value chain is a collection of processes that a company performs to create value for its consumers to create a competitive advantage. Porter’s value chain leverages five main processes/activities (inbound logistics, operations, outbound logistics, marketing & sales, and services) to design a value chain.
Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces
In his book, “Competitive Advantage,” in 1985, Porter conceptualized the concept of competitive advantage, by looking at two key aspects. Industry attractiveness, and the company’s strategic positioning. The latter, according to Porter, can be achieved either via cost leadership, differentiation, or focus.
Porter’s Diamond Model is a diamond-shaped framework that explains why specific industries in a nation become internationally competitive while those in other nations do not. The model was first published in Michael Porter’s 1990 book The Competitive Advantage of Nations. This framework looks at the firm strategy, structure/rivalry, factor conditions, demand conditions, related and supporting industries.
Developed by American academic Michael Porter, the Four Corners Analysis helps a business understand its particular competitive landscape. The analysis is a form of competitive intelligence where a business determines its future strategy by assessing its competitors’ strategy, looking at four elements: drivers, current strategy, management assumptions, and capabilities.
A failure mode and effects analysis (FMEA) is a structured approach to identifying design failures in a product or process. Developed in the 1950s, the failure mode and effects analysis is one the earliest methodologies of its kind. It enables organizations to anticipate a range of potential failures during the design stage.
Agile Business Analysis (AgileBA) is certification in the form of guidance and training for business analysts seeking to work in agile environments. To support this shift, AgileBA also helps the business analyst relate Agile projects to a wider organizational mission or strategy. To ensure that analysts have the necessary skills and expertise, AgileBA certification was developed.
Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.
A paired comparison analysis is used to rate or rank options where evaluation criteria are subjective by nature. The analysis is particularly useful when there is a lack of clear priorities or objective data to base decisions on. A paired comparison analysis evaluates a range of options by comparing them against each other.
The Monte Carlo analysis is a quantitative risk management technique. The Monte Carlo analysis was developed by nuclear scientist Stanislaw Ulam in 1940 as work progressed on the atom bomb. The analysis first considers the impact of certain risks on project management such as time or budgetary constraints. Then, a computerized mathematical output gives businesses a range of possible outcomes and their probability of occurrence.
A cost-benefit analysis is a process a business can use to analyze decisions according to the costs associated with making that decision. For a cost analysis to be effective it’s important to articulate the project in the simplest terms possible, identify the costs, determine the benefits of project implementation, assess the alternatives.
The CATWOE analysis is a problem-solving strategy that asks businesses to look at an issue from six different perspectives. The CATWOE analysis is an in-depth and holistic approach to problem-solving because it enables businesses to consider all perspectives. This often forces management out of habitual ways of thinking that would otherwise hinder growth and profitability. Most importantly, the CATWOE analysis allows businesses to combine multiple perspectives into a single, unifying solution.
It’s possible to identify the key players that overlap with a company’s business model with a competitor analysis. This overlapping can be analyzed in terms of key customers, technologies, distribution, and financial models. When all those elements are analyzed, it is possible to map all the facets of competition for a tech business model to understand better where a business stands in the marketplace and its possible future developments.
The Pareto Analysis is a statistical analysis used in business decision making that identifies a certain number of input factors that have the greatest impact on income. It is based on the similarly named Pareto Principle, which states that 80% of the effect of something can be attributed to just 20% of the drivers.
A comparable company analysis is a process that enables the identification of similar organizations to be used as a comparison to understand the business and financial performance of the target company. To find comparables you can look at two key profiles: the business and financial profile. From the comparable company analysis it is possible to understand the competitive landscape of the target organization.
A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.
The PESTEL analysis is a framework that can help marketers assess whether macro-economic factors are affecting an organization. This is a critical step that helps organizations identify potential threats and weaknesses that can be used in other frameworks such as SWOT or to gain a broader and better understanding of the overall marketing environment.
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.
In corporate finance, the financial structure is how corporations finance their assets (usually either through debt or equity). For the sake of reverse engineering businesses, we want to look at three critical elements to determine the model used to sustain its assets: cost structure, profitability, and cash flow generation.
Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.
Value investing is an investment philosophy that looks at companies’ fundamentals, to discover those companies whose intrinsic value is higher than what the market is currently pricing, in short value investing tries to evaluate a business by starting by its fundamentals.
The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.
Financial accounting is a subdiscipline within accounting that helps organizations provide reporting related to three critical areas of a business: its assets and liabilities (balance sheet), its revenues and expenses (income statement), and its cash flows (cash flow statement). Together those areas can be used for internal and external purposes.
Post-mortem analyses review projects from start to finish to determine process improvements and ensure that inefficiencies are not repeated in the future. In the Project Management Book of Knowledge (PMBOK), this process is referred to as “lessons learned”.
Retrospective analyses are held after a project to determine what worked well and what did not. They are also conducted at the end of an iteration in Agile project management. Agile practitioners call these meetings retrospectives or retros. They are an effective way to check the pulse of a project team, reflect on the work performed to date, and reach a consensus on how to tackle the next sprint cycle.
In essence, a root cause analysis involves the identification of problem root causes to devise the most effective solutions. Note that the root cause is an underlying factor that sets the problem in motion or causes a particular situation such as non-conformance.
A break-even analysis is commonly used to determine the point at which a new product or service will become profitable. The analysis is a financial calculation that tells the business how many products it must sell to cover its production costs. A break-even analysis is a small business accounting process that tells the business what it needs to do to break even or recoup its initial investment.
Stanford University Professor Ronald A. Howard first defined decision analysis as a profession in 1964. Over the ensuing decades, Howard has supervised many doctoral theses on the subject across topics including nuclear waste disposal, investment planning, hurricane seeding, and research strategy. Decision analysis (DA) is a systematic, visual, and quantitative decision-making approach where all aspects of a decision are evaluated before making an optimal choice.
A DESTEP analysis is a framework used by businesses to understand their external environment and the issues which may impact them. The DESTEP analysis is an extension of the popular PEST analysis created by Harvard Business School professor Francis J. Aguilar. The DESTEP analysis groups external factors into six categories: demographic, economic, socio-cultural, technological, ecological, and political.
The STEEP analysis is a tool used to map the external factors that impact an organization. STEEP stands for the five key areas on which the analysis focuses: socio-cultural, technological, economic, environmental/ecological, and political. Usually, the STEEP analysis is complementary or alternative to other methods such as SWOT or PESTEL analyses.
The STEEPLE analysis is a variation of the STEEP analysis. Where the step analysis comprises socio-cultural, technological, economic, environmental/ecological, and political factors as the base of the analysis. The STEEPLE analysis adds other two factors such as Legal and Ethical.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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