The concept of Value Chain was propagated by Michael Porter in the 1980s in his
book “Competitive Advantage: Creating and Sustaining Superior Performance” (Porter,
1985), as a tool for analyzing the firm’s internal environment and resource base. Value Chain
Analysis is an analytical tool that describes all activities that make up the economic
performance and capabilities of the firm, used to analyze and examine activities that create
value for a given firm. A firm can be conceived of as an aggregation of discrete activities and
the competitive edge arises based on how a firm performs these activities better than its
competitors. The cluster of these activities is called the value chain.
According to Porter: “Competitive advantage cannot be understood by looking at a firm as a
whole. It stems from the many discrete activities a firm performs in designing, producing,
marketing, delivering, and supporting its product. Each of these activities can contribute to a
firm’s relative cost position and create a basis for differentiation” (Porter, 1985:33)
The value chain classifies each firm’s activities into two broad categories: Primary activities
and Secondary activities or support activities. The following figure represents the value chain
of a firm:
Primary Activities:
The sequence of activities through which raw materials are transformed into benefits enjoyed
by the customer is called primary activities. These activities relate directly to the actual
creation, development, manufacture, distribution, sales, and servicing of the product or the
service to a customer. Five major activities are involved in this sequence: inbound logistics,
operations, outbound logistics, marketing, and sales and service. Working together, these
activities determine the key operational tasks surrounding the product or services.
• Inbound Logistics: As the word implies, inbound logistics deals with the handling of
raw materials and inventory received from the firm’s suppliers. Detail activities include
Receiving, storing, materials handling, warehousing, inventory control, vehicle
scheduling, and returns to suppliers.
• Operations: Operations are the activities and procedures that transform raw materials,
components, and other inputs into finished end products. Detail activities include
machining, packaging, assembly, equipment maintenance, testing, printing, and facility
operations.
• Outbound Logistics: Outbound logistics refers to the transfer of finished products to
the distribution channel members. The focus of outbound logistics is on managing the
flow and distribution of products to the firm’s immediate customers such as wholesalers
and retailers. Activities and procedures associated with outbound logistics include
inventory control, warehousing, order processing, delivery schedule maintenance, etc.
• Marketing and Sales: Marketing and sales include advertising, promotion, product
mix pricing, specifying distribution channel members, maintaining channel relations,
etc. to induce and facilitate buyers to purchase the product.
• Service: Customer service is a central value-adding activity that a firm can seek to
improve over time. It includes installation, repair, training, parts supply, and product
adjustment to maintain or enhance the value of the product after-sales.
Porter’s Value Chain – Primary Activities: A Summary
Primary Inbound Logistics – Receipt of inputs (materials)
Activities – Storage
– Stock Control
– Internal Distribution of Inputs
Operations – Transformation of inputs into the final
product
– Use of Labor
– Manufacturing Technologies
Outbound Logistics – Distribution of finished goods
– Stock Control & Inventory
– Distribution of final product to buyers
Marketing & Sales – Advertising
– Promotional Activity
– Persuading People to buy
Service – After-sales support
Secondary or Support Activities:
The remaining activities of the value chain are undertaken to support primary activities. They
are therefore referred to as secondary or support activities. Support activities help the firm
improve coordination across and achieve efficiency within the firm’s primary value-adding
activities. Support activities are located across the first four rows of the diagram. This includes
procurement, technology development, human resource management, and firm-level
infrastructure.
• Procurement: Securing inputs (such as raw materials, supplies, and other consumable
items and assets) for primary activities.
• Technology Development: Methods of performing primary activities are improved
(Such as know-how, procedures, and technological inputs needed)
• Human Resource Management: Employees who will carry out the primary activities
are recruited, trained, motivated, and supervised.
• Firm Infrastructure: Activities such as accounting, finance, legal affairs, and
regulatory compliance are carried out to provide ancillary support for primary activities.
Porter’s Value Chain – Secondary Activities: A Summary
Secondary Procurement – Purchasing of Resources
Activities – Purchasing of inputs
Technology Development – Technology to support primary activities &
operations
Infrastructure – Leadership Structure/Management
– Planning/processes
– Finance
– Information Systems
Human Resource Management – Recruitment
– Selection
– Training
– Reward & Motivation
Porter also derives the concept of “margin” which is the difference between total value and the
collective cost of performing the value activities.
