Value Chain Analysis

Michael Porter published the Value Chain Analysis in 1985 as a response to criticism that his Five Forces framework lacked an implementation methodology that bridged the gap between internal capabilities and opportunities in the competitive landscape. This framework focused on industry attractiveness as a determinant of the profit potential of all companies within that particular industry. However, significant differences in performance exist between companies operating within the same industry that can be explained either by the company's participation in a successful strategic group or by a firm's specific competitive advantages.

Value Chain Analysis helped identify a firm's core competencies and distinguish those activities that drive competitive advantage. The cost structure of an organization can be subdivided into separate processes or functions assuming that the cost drivers for each of these activities behave differently. Porter's strength was to condense this activity based cost analysis into a generic template consisting of five primary activities and four support activities. The nine activity groups are:

Primary activities:
1. inbound logistics: materials handling, warehousing, inventory control, transportation;
2. operations: machine operating, assembly, packaging, testing and maintenance;
3. outbound logistics: order processing, warehousing, transportation and distribution;
4. marketing and sales: advertising, promotion, selling, pricing, channel management;
5. service: installation, servicing, spare part management;

Support activities:
6. firm infrastructure: general management, planning, finance, legal, investor relations;
7. human resource management: recruitment, education, promotion, reward systems;
8. technology development: research & development, IT, product and process development;
9. procurement: purchasing raw materials, lease properties, supplier contract negotiations.

By subdividing an organization into its key processes or functions, Porter was able to link classical accounting to strategic capabilities by using value as a core concept, i.e. the ways a firm can best position itself against its competitors given its relative cost structure, how the composition of the value chain allows the firm to compete on price, or how this composition allows the firm to differentiate its products to specific customer segments.

References:

- Competitive Advantage: Creating and sustaining superior performance

- Strategic and Competitive Analysis

- Strategy and the business landscape: Core concepts