Porter’s Value Chain Analysis

Offering customers value is at the heart of doing business successfully. Think of yourself as a consumer rather than a business owner or manager – what do you look for when you spend your own money? Value, of course.

Porter's Value Chain

Above everything else, this is always what you think of when you decide whether or not to make a purchase. Often, people will refer to this point as ‘getting a good deal’, but what they really mean is they got value for their money. When a product or service is seen as a good value for the price that is being asked in return, a sale will be made.

Porter’s Value Chain Analysis is a tool that can be used to determine exactly how your company goes about the task of creating value. As you might have guessed, the ‘value chain’ is a set of activities that will lead to the creation of value.

How Value is Added

When you understand how the ‘chain’ works within your own business, you can then set about the task of improving on the chain in order to add even more value for your customers.

The Primary Activities

The backbone of this model is the set of five primary activities that have been identified by Porter as being relevant to all businesses. Those activities are as follows.

Inbound Logistics

Everything that you bring in to the business as part of the process of creating your products falls into the category of inbound logistics. For example, the suppliers that you use to purchase raw materials, or the storage systems that you use in-house once materials have been received, would fit nicely into this category.

Operations

This is the day-to-day actions that take place in order to convert inputs to outputs. In many ways, this is the key to your business adding value for the customer. It is your job to take various components or materials and convert them into something that people will want to purchase. Without adding real value at this stage, it is unlikely that you will find success over the long run.

Primary Activities

Outbound Logistics

Once your outputs are finished and ready to be sent off, the value chain moves into this area. How are your products stored and then distributed? It might not seem like you could add value at this stage of the process, but you most certainly can. For example, if you find a way to cut your shipping costs by 10%, you might be able to pass that savings on to your customers, meaning you would be able to sell for a lower price than your competition.

Marketing and Sales

This part of doing business can never be overlooked. How are you going to convince potential customers that they should purchase your products instead of the products of your competition? You can immediately add value to your business by making an effective sales pitch and presenting that pitch in a way that hits home with your target audience.

Service

Once the product is in the hands of your customers, the task of adding value is still not complete. If you can offer quality customer service after the fact, including things like a friendly return policy or product support, you can add even more value to the product. Consumers will often pay a premium for a higher priced item if they know that item comes along with support that will help them down the road in case something goes wrong. Having a reputation for quality service is a great thing for your business over the long term, so you never want to overlook adding value in this manner.

The Support Activities

You aren’t going to be able to run a business with only the functions listed above. Sure, those are the direct ways that you can add value to your products, but there are a number of support activities that are extremely important as well. Without the four support activities listed below, it would be nearly impossible to create valuable goods through the five primary activities already discussed.

Procurement

How do you obtain the things you need to create valuable goods? Procurement, also known as purchasing, is all about getting what you need, when you need it, for the right price. Negotiating great prices at this early stage of the process will pay off in a big way later on when the total cost of your items is calculated.

Human Resource Management

There are few things, if any, more valuable within a business than its people. Understanding the value of people is something that successful businesses never take for granted. A good human resources department – one that successfully brings in and trains talented people in a variety of disciplines – is going to be a huge advantage in almost any market.

Support Activities

Technological Development

Leveraging the technology that is available today, and doing so for a reasonable cost, can be a big help in the battle to bring quality products to market for sale at low prices. It can be a difficult task to strike a balance between using modern, up-to-date technology and also keeping costs down, but that is exactly what you need to do.

Infrastructure

It is easy to take this last group of activities for granted, but they remain essential to the success of your operation. Things like accounting, administrative, legal, and more are all necessary to keep the business moving in the right direction day after day.

If you aren’t adding value for your customers to enjoy, you are going to go out of business quickly. That might sound harsh, but it is the truth. How are you going to add value for your customers? The Value Chain Analysis model should help you get to the bottom of that often-difficult question. Take time to think about each of the primary and support activities, and think about how one impacts the other throughout the course of doing business. By making small improvements in a variety of these areas, you should be able to dramatically increase the value that you take to market with each of your offerings.

Key Points

  • A value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market.
  • The backbone of this model is the set of five primary activities that have been identified as Porter as being relevant to all businesses.
  • Those activities are: inbound logistics, operations, outbound logistics, marketing/sales and service.
  • Inbound Logistics: Involves arranging the inbound movement of materials from suppliers.
  • Operations: Converts raw materials and labor into goods and services.
  • Outbound Logistics: Involves the storage and movement of the final product to the end user.
  • Marketing/Sales: Is concerned with selling a product or service that has value for customers.
  • Service: Includes all of the activities required to keep the product/service working effectively for the customer after it is sold.
  • These primary activities need to be supported by: procurement, human resources management, technological development and infrastructure.
  • Procurement: Involves the acquisition of goods, services or works from suppliers.
  • Human Resources Management: Involves recruiting, developing, and managing the organization’s staff.
  • Technological Development: Involves leveraging technology in the firm’s transformation of inputs into outputs.
  • Infrastructure: Consists of activities such as accounting, legal, finance, public relations, and strategic management.
  • A value chain should be constructed at the business unit level.
  • The chain of activities gives the product/service more added value than the sum of added values of all activities.

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