It is a basic truism that producing customer value in excess of your cost to provide it creates profit. Michael Porter helps unpack the deeper mechanics of this process with the value chain analysis framework in his book, Competitive Advantage: Creating and Sustaining Superior Performance. In theory, every step of a company’s activity should add value, as a contribution to the larger whole, and analysis of those steps provides insight into profitability.
Main Activities that Comprise the Value Chain
Porter’s framework begins by breaking up the work done by a company (or an industry) into five primary activities, with the premise that value is generated within and between these activities:
- Inbound logistics refers to the tasks and systems to get raw materials or other inputs from suppliers; value can be added by effectively handling matters such as purchasing, transportation, warehousing, and inventory control.
- • Operations is the activity to transform those inputs into the finished product, which can be improved through plant layout, production control, automation, etc.
- Outbound logistics concerns getting the finished product to the customer, with opportunities for efficiencies in areas such as order fulfillment, how the product is stored and distributed, and how waste is controlled.
- Marketing and sales ensures that customers are aware of your product and helps compel them to buy it; value opportunities include advertising and differentiation within a given market segment.
- Services enhance the product’s value through offerings such as installation, post-sales support, service plans, training, and so on.
Support Activities Where Innovation Can Bolster Value
Porter suggests that, through innovative management and execution, value can be generated from activities that are—at first glance—merely overhead, or “the cost of doing business.” For example:
- Procurement activities can help obtain the highest-quality goods possible for the lowest possible cost.
- Technology development can improve processes for greater efficiency.
- Human resource management can attract, retain, and develop employees to the firm’s overall advantage.
- Firm infrastructure improves profitability through legal, accounting, and competitive intelligence strategy.
The Value-Chain Analysis Framework in Action
Even companies that don’t seem to conform to Porter’s rather manufacturing-centric model, the activities he names can be matched to analogous ones in almost any sector or market segment, to support the following basic analysis approach:
- Map the generic activities to company-specific ones to identify strengths and weaknesses in each.
- Identify potential improvements that could increase the way customer value is generated by each activity.
- Evaluate opportunities and form strategies based on plausibility, potential benefit, cost, and risk.
By Sean Campbell
By Scott Swigart
