Porter's value chain

Porter's value chain is a model that can be used as part of the strategic analysis stage of the strategic planning process and is particularly useful to assess whether an organisation has a sustainable competitive advantage.

The value chain model

Porter developed the value chain to help identify which activities within the firm were contributing to a competitive advantage and which were not.

The approach involves breaking down the firm into five 'primary' and four 'support' activities, and then looking at each to see if they give a cost advantage or quality advantage.

Primary activities

• Inbound logistics - receiving, storing and handling raw material inputs. For example, a just-in-time stock system could give a cost advantage.
• Operations - transformation of the raw materials into finished goods and services. For example, using skilled craftsmen could give a quality advantage.
• Outbound logistics - storing, distributing and delivering finished goods to customers. For example, outsourcing delivering could give a cost advantage.
• Marketing and sales - for example, sponsorship of a sports celebrity could enhance the image of the product.
• Service - all activities that occur after the point of sale, such as installation, training and repair, e.g. Marks & Spencer's friendly approach to returns gives it a perceived quality advantage.

Secondary activities

• Firm infrastructure - how the firm is organised. For example, centralised buying could result in cost savings due to bulk discounts.
• Technology development - how the firm uses technology. For example, the latest computer-controlled machinery gives greater flexibility to tailor products to individual customer specifications.
• Human resources development - how people contribute to competitive advantage. For example, employing expert buyers could enable a supermarket to purchase better wines than competitors.
• Procurement - purchasing, but not just limited to materials. For example, buying a building out of town could give a cost advantage over high street competitors.

All organisations in a particular industry will have a similar value chain, which will include activities such as:

• obtaining raw materials
• designing products
• building manufacturing facilities
• developing co-operative agreements
• providing customer service.

Linkages

It is vital that the linkages between the different elements of a value chain are considered.

Firstly this is to ensure consistency - for example, a differentiator will want to ensure that any cost advantages within the value chain do not compromise overall quality.

Secondly it may be that through linking separate activities more effectively than competitors, a firm can gain a competitive advantage.

Value networks

The organisation's value chain does not exist in isolation. There will be direct links between the inbound logistics of the firm and the outbound logistics of its suppliers, for example. An understanding of the value system and how the organisation's value chain fits in to it will therefore aid in the strategic planning process.

A value network is a web of relationships that generates economic value and other benefits through complex dynamic exchanges between two or more individuals, groups or organisations.

• Tangible value exchanges - involve all exchanges of goods, services or revenue, including all transactions involving contracts and invoices, return receipt of orders, request for proposals, confirmations or payment.
• Intangible knowledge exchanges - include strategic information, planning knowledge, process knowledge, technical know-how, collaborative design, policy development, etc.

Benefits and limitations

Benefits

Proponents suggest that the value chain model has many benefits, including:

• It provides a generic framework to analyse both the behaviour of costs as well as the existing and potential sources of differentiation.
• Activities that are not adding value can be identified and addressed – for example, improved so they do add value or outsourced if this is not possible.
• It emphasises the importance of (re)grouping functions into activities to produce, market, deliver and support products, to think about relationships between activities and to link the value chain to the understanding of an organisation's competitive position.
• It makes it clear that an organisation is multifaceted and that its underlying activities need to be analysed to understand its overall competitive position.
• It is an attempt to overcome the limitations of portfolio planning in multidivisional organisations. Rather than assuming that SBUs should act independently, Porter used his Value Chain analysis to identify synergies or shared activities between them and to provide a tool to focus on the whole rather than on the parts.

Criticisms

The main criticisms of Porter's Value Chain model are as follows:

• It is more suited to a manufacturing environment and can be difficult to apply to a service provider
• The Value Chain model was intended as a quantitative analysis. However, this is time consuming since it often requires recalibrating the accounting system to allocate costs to individual activities.

The value shop

The value shop is an alternative representation of a value chain for a professional services firm which was developed in 1998 by Stabell and Fjelstad.

A value shop is considered to be a workshop which mobilises resources to solve specific problems. This may involve repeating a generic set of activities until a satisfactory solution is reached. The shop model applies to many organisations, particularly those whose main purpose is to identify and exploit specific opportunities like designing a bespoke
product.

The model has the same support activities as Porter’s Value Chain but the primary activities are described differently. In the value shop they are:

• problem finding and acquisition
• problem solving
• choosing among solutions
• execution and control/evaluation

The management in the value shop organisation therefore focuses on areas such as the assessment of problems and opportunities, the mobilisation of resources, project management, the delivery of solutions, the measurement of outcomes and also learning. The value shop primary activities are arranged in a circle showing that they are cyclical, with an organisation often moving back and forth to develop or reject theories before reaching a conclusion.

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Tags:	Porter;value chain;Primary activities;Inbound logistics;Operations;Outbound logistics;Marketing and sales;Service;Secondary activities;Firm infrastructure;Technology development;Human resources development;Procurement;Value networks;value shop