The Value Chain

The value chain helps to analyse particular activities through which firms can generate value and competitive advantage. The firm is represented as a chain of value-creating activities.

Porter (1998) recognized a set of frequent interconnected generic activities in the firms. The resulting model is known as the value chain where Porter identified primary and support activities as illustrated below (Fig.2):

Click on the thumb nail to enlarge figure 2: Value Chain Model by Michael Porter

Primary Value Chain Activities

The purpose of these activities is to produce value that exceeds the cost of providing the product or service, i.e. to make a profit margin.

  • Inbound Logistics, includes receiving, storing, inventory control of input materials and their distribution to manufacturing as they are required;
  • Operations, includes all the activities that transform the inputs into the final product (as machining, packaging, assembly, equipment maintenance, testing ...);
  • Outbound Logistics, includes the activities required to get the final product to the customers (as warehousing, order fulfilment, transportation, distribution management);
  • Marketing and Sales, includes activities associated with the identification of customer needs and the generation of sales (as channel selection, advertising, promotion, selling, pricing, retail management, etc);
  • Service includes the activities that maintain and enhance the value after the products and services are sold to the customers (as customer support, repair services, installation, training, spare parts management, upgrading, etc.).

Every primary activity may be crucial in developing a competitive advantage. For example, logistics activities are critical for a provider of distribution services, and service activities may be crucial for a firm offering on-site maintenance contracts for office equipment. These five categories are generic and described here in a broad way. Each generic activity comprises specific activities that differ from firm to firm.