The Value Chain Analysis

The Value Chain

To better understand the activities through which a firm develops a competitive advantage and creates shareholder value, it is useful to separate the business system into a series of value-generating activities referred to as the value chain. In his 1985 book Competitive Advantage, Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. Porter identified primary and support activities as shown in the following diagram:

Porter's Generic Value Chain    

Inbound
Logistics


>


Operations


>


Outbound
Logistics


>


Marketing
&
Sales


>


Service


>


M
A
R
G
I
N


Firm Infrastructure

HR Management

Technology Development

Procurement




The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin.

The primary value chain activities are:

    *

      Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required.
    *

      Operations: the processes of transforming inputs into finished products and services.
    *

      Outbound Logistics: the warehousing and distribution of finished goods.
    *

      Marketing & Sales: the identification of customer needs and the generation of sales.
    *

      Service: the support of customers after the products and services are sold to them.

These primary activities are supported by:

    *

      The infrastructure of the firm: organizational structure, control systems, company culture, etc.
    *

      Human resource management: employee recruiting, hiring, training, development, and compensation.
    *

      Technology development: technologies to support value-creating activities.
    *

      Procurement: purchasing inputs such as materials, supplies, and... [continues]

Read full essay