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.
Contents
- Understanding Porter’s Value Chain model
- The primary activities of Porter’s Value Chain model
- Secondary activities
- Starbucks and Porter’s value chain model
- Amazon Value Chain model Example
- Apple Value Chain Model Example
- Tesla Value Chain Model Example
- Key takeaways:
- Other frameworks by Michael Porter
- More Business Frameworks
Understanding Porter’s Value Chain model
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 labeling, 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 acknowledgment.
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.
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.
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.
Operations
Starbucks operates more than 32,000 stores in 80 different countries. 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. 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 model Example
Now will repeat the value chain analysis, this time for eCommerce behemoth Amazon.
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.
In the United States, Amazon’s minimum wage of $18 per hour is twice the federally mandated rate. 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. For example, components for the iPhone are sourced from 43 countries on six continents before assembly in a factory and distribution to warehouses and retailers.
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.
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.
- The value chain of 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.
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