The Value Chain

What it does:
Helps determine which specific activities give organizations a competitive advantage and build their value.

Its other names:
Porter's Value Chain; The Value Chain Framework.

Where it comes from:
The 1985 book Competitive Strategy: Techniques for Analyzing Competitors and Industries by Michael E. Porter (now available in a 1998 edition from Free Press).

Summary:
An organization's overall efficiency can be analyzed in light of how well it functions as a conduit between suppliers on one end and customers on the other. This conduit can be visualized as a chain linked by these activities:
- Inbound logistics -- Procuring, receiving and warehousing raw materials.
- Operations -- Machining, assembly and manufacturing products.
- Outbound logistics -- Getting the product to the customer.
- Marketing and sales -- Advertising, marketing and selling.
- Service -- Providing customer support and product repairs.

The primary value chain activities described above are facilitated by support activities. Porter identified four generic categories of support activities, the details of which are industry-specific.
- Procurement: The purchasing of materials used to create value for the firm
- Technology Development: Any technology used to support the firms value chain activities.
- Human Resource: The Activities surrounding the Recruiting, Hiring, Training and compensation of an organizations employees.
- Firm Infrastructure: The activities and functions that support a firm's ability to create value such legal, accounting, management, strategy, etc.

The efficiency of each step in that value chain can be improved by implementing what Porter called his 10 Cost Drivers:
1. Capacity utilization.
2. Cost and differentiation.
3. Economies of scale.
4. Geographic location.
5. Institutional factors, such as unionization and regulation.
6. Interrelationships among business units.
7. Learning.
8. Linkages among activities.
9. Timing of market entries.
10. Vertical integration.

The key is to find new ways to make each phase more efficient. Example: Could a warehouse that stores raw materials also store finished products?

What else you need to know:
The value chain has become a useful tool for determining how effectively an organization is using outsourcing to maximize efficiency. In non-manufacturing industries, a company's activities may not neatly fit into the categories that the Value Chain is built upon.