Value Chain

Summarized by Sam Mishra, MBA (MIT Sloan)

As propounded by Michael Porter in his 1985 book Competitive Advantage, a Value Chain provides a structural framework to analyze the primary and secondary activities of a business. This framework, as shown below, portrays the business as a value delivery organization. In this figure, the margin is what the business claims or captures as value from the customers. So, Margin = Value Captured = Value Delivered to Customers – Value Created by the Business. Since business success is all about strategizing how to CREATE VALUE, how to DELIVER VALUE, and how to CAPTURE VALUE, Value Chain Analysis remains a singularly important framework in spite of more and more businesses getting a service (as opposed to a manufacturing) orientation.

The above figure depicts that primary activities like inbound logistics, outbound logistics, operations; and support activities like procurement, technology development, and human resource management; are geared towards discerning value at each of these important activity levels within a manufacturing organization.

Between then (1985) and now (2007), the world of manufacturing has changed. High-tech manufacturers in Silicon Valley and elsewhere do not consider the logistics of manufacturing a core competency; consequently volume manufacturing is outsourced through contract manufacturers like Solectron to Taiwan, China, Singapore, etc. In this changed scenario, Porter’s Value Chain can’t be applied directly to discern value within manufacturing organizations.

Moreover, services organizations constitute bulk of the businesses in first world countries. For such organizations, inbound logistics, operations, etc. have a very different meaning. For example, for software firms, inbound activities might include understanding and synthesizing customer requirements prior to product development, which can be off-shored through third-party vendors to India, Russia, and elsewhere.

Similarly, for software and services firms, outbound activities might include educating the channels on the features and benefits of the upcoming products and services, talking to analyst firms like Gartner, Forrester, and IDC, etc. Some of these outbound tasks might come under the domain of marketing and sales.

For examples of value chain analysis, please check our Solved Cases and Special Book Offers. For the value drain analysis of the proposed 800 billion dollar U.S. bailout of the financial institutions saddled with debt related to dealing with mortgage backed securities, please check our economy portal.