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.

Understanding Porter’s Value Chain Model

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.

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.

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.

Other frameworks by Michael Porter

Porter’s Five Forces

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

Porter’s Generic Strategies

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

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.

Porter’s Four Corners Analysis 

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.

More Business Frameworks

Ansoff Matrix

You can use the Ansoff Matrix as a strategic framework to understand what growth strategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growth strategy can be derived by whether the market is new or existing, and the product is new or existing.

Blitzscaling Canvas

The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.

Blue Ocean Strategy

A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

Business Analysis Framework

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.

Gap Analysis

A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.

Business Model Canvas

The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.

Lean Startup Canvas

The lean startup canvas is an adaptation by Ash Maurya of the business model canvas by Alexander Osterwalder, which adds a layer that focuses on problems, solutions, key metrics, unfair advantage based, and a unique value proposition. Thus, starting from mastering the problem rather than the solution.

Digital Marketing Circle

digital channel is a marketing channel, part of a distribution strategy, helping an organization to reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.

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Gennaro Cuofano

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