Knowledge Resource Centre

The Value Chain

M.E. Porter, The Competitive Advantage: Creating and Sustaining Superior Performance, 1985. This diagram has been recreated by LMC.

LMC explains The Value Chain

A strategic business planning tool used to identify and track the role and impact made on a product or service of each and every step from its inception, production or manufacture right through to delivery. By taking a holistic approach to the process, not just the parts the company may be involved in, the individual drivers leading to competitive advantage can be highlighted, monitored and analysed effectively. By analysing added value and cost within each activity in the chain, the process aims to maximise the value created while minimising costs incurred.

The five main stages of the value chain are grouped together as primary activities. These are: inbound logistics, operations, outbound logistics, marketing & sales and service. These activities are supported by the actions of four business strands, together defined as support services. These services are: company infrastructure, human resource management, technology development and procurement.

Primary activities

• Inbound logistics: Relationships with suppliers and activities required to receive, store and initially process inputs such as raw materials, for example warehousing
• Operations: The process of manufacturing or creating a product
• Outbound logistics: Transportation, storage and distribution of the product to the buyer
• Marketing and sales: Creating and analysing customer awareness of the product
• Service: Maintaining or updating and enhancing the product or service such as repairs or training after the product is sold and delivered

Support activities

• Infrastructure: Organisational hierarchy, strategic planning, financial and quality control systems
• HR Management: Recruitment, training, performance management
• Technology development: The hardware, software, procedures and technical knowledge involved in all operational processes
• Procurement: Acquiring materials and all resources

The value chain process enables a company to understand the major contributing factors to cost, quality and image of their end product or service. It can highlight the company's cost position and inform the process of product differentiation directly affecting competitive advantage. An analysis of the value chain also allows management to identify those activities which most affect cost reduction or value addition and to identify the key cost drivers, such as economy of scale or value drivers such as ethically sourced materials within the system.