Value chain Analysis

From a Value Based Management point of view, the Value Chain Model helps to build a relative competitive advantage together with Porter´s Competitive Advantage thinking.

The Value Chain Model can be seen as one of two dimensions in maximizing corporate value creation. The other value creation dimension is the Market/Industry Attractiveness for which another model from Porter is often used: the Competitive Forces model (the Five Forces model).1

Activities leading to a competitive advantage:

  1. Identifying the relevant firm-specific activities within the generic value chain;
  2. Mapping the process flows, and
  3. Isolating the individual value-creating activities, by means of the flows.

Once the distinct activities are clear, linkages between activities should be recognized. A linkage exists if the performance or cost of one activity affects that of another. Competitive advantage may be gained by optimizing and coordinating linked activities. The value chain is useful in outsourcing decisions as well. Considering the linkages between activities can lead to more optimal make-or-buy decisions that can result in either a cost advantage or a differentiation advantage.

The value chain model is a helpful analysis tool for defining a firm´s core competencies and the activities in which it can perform a competitive advantage as follows: (1) Cost advantage: by better understanding costs and squeezing them out of the value-adding activities and (2) Differentiation: by focusing on those activities linked with core competencies and capabilities in order to perform them better than do competitors.

The firm´s value chain links to the value chains of upstream suppliers and downstream buyers. The result is a larger stream of activities known as the value system. The development of a competitive advantage depends not only on the firm specific value chain, but also on the value system of which the firm is a part.

1 See unit 2: "The External Environment"