What Is Porter's Value Chain?

Transcript

[Presenter] Value is at the heart of every business. But, to be successful, businesses need to create products or services with greater value than the sum of their parts.

For example, manufacturing combines raw materials to create something you can use. Or a package holiday provider combines flights, accommodation, and other services into one convenient bundle.

To develop a competitive strategy, it's important to understand how your company creates value and look for ways to add more. In his 1985 book, "Competitive Advantage," Michael Porter introduced a useful concept for doing this, the Value Chain.

A value chain is a set of processes that an organization carries out to create value for its customers.

Your profit margin is the amount of value you can create, minus the cost of creating that value. So, the greater the value, and the lower the costs, the higher your profits will be. But, even if your value is high, it's of no use if your costs are high, too. Because this means your profit margin will suffer.

You can use a value chain to examine your actions and ask yourself where you can increase value, reduce costs, or both.

Porter's value chain focuses on systems rather than departments, and how inputs are changed into the outputs purchased by consumers. Porter described a chain of activities common to all businesses that feed into the value it creates, which he divided into Primary and Support.

Primary Activities

Primary activities relate directly to the creation, sale, maintenance, and support of a product or service. They include logistics, operations, and marketing.

Take the example of a restaurant: it draws on a network of suppliers, prepares food, and advertises to customers.

Support Activities

Support activities, feed into one or more of the primary activities. They include human resources, procurement, and research and development.

In our restaurant, these might involve hiring staff and developing new recipes.

Primary and support activities can be broken down further into three subgroups.

Direct sub-activities create value by themselves. For example, selling meals in a restaurant or fulfilling takeout orders online.

Indirect sub-activities allow direct activities to run smoothly. This might include managing the accounts or customer loyalty schemes.

And quality assurance sub-activities help your company meet the necessary standards. Continuing with our restaurant example, this might include food tasting, checking stock for freshness, and cleaning workstations.

To use Porter's value chain, start by taking a look at your primary and support activities. Then, break them down into their sub-activities. Identify which ones could give the most added value.

For instance, our restaurant could increase value for customers by investing in sustainable, high-quality ingredients or by hiring, training, and retaining an exceptional team.

Once you've done this, you're ready to add even more value. You can do this by finding links between sub-activities. For example, improving your order turnaround time means you'll spend less time, effort, and money dealing with frustrated customers. This could increase value by reducing costs, making work more enjoyable for your staff, and creating a better experience for your customers. You'll also benefit from added convenience and a good reputation, both of which can also help to add value.

Let's recap.

Porter's Value Chain helps organizations understand the connections between their actions and activities, and examine how and where they can add value. You can use this model to analyze your company's activities, to determine where you're offering value and where you can increase it.