The Value Chain
The term ‘Value Chain’ was used by Michael Porter in his book "Competitive Advantage: Creating and
Sustaining superior Performance" (1985). The value chain analysis describes the activities the organization performs and links them to the organizations competitive position.
Value chain analysis describes the activities within and around an organization, and relates them to an
analysis of the competitive strength of the organization. Therefore, it evaluates which value each particular activity adds to the organizations products or services. This idea was built upon the insight that
an organization is more than a random compilation of machinery, equipment, people and money. Only
if these things are arranged into systems and systematic activates it will become possible to produce
something for which customers are willing to pay a price. Porter argues that the ability to perform particular activities and to manage the linkages between these activities is a source of competitive advantage.
Porter distinguishes between primary activities and support activities. Primary activities are directly
concerned with the creation or delivery of a product or service. They can be grouped into five main
areas: inbound logistics, operations, outbound logistics, marketing and sales, and service. Each of
these primary activities is linked to support activities which help to improve their effectiveness or efficiency.
There are four main areas of support activities: procurement, technology development (including
R&D), human resource management, and infrastructure (systems for planning, finance, quality,
information management etc.).
The basic model of Porters Value Chain is as follows:
The term ‚Margin’ implies that organizations realize a profit margin that depends on their ability to
manage the linkages between all activities in the value chain. In other words, the organization is able
to deliver a product / service for which the customer is willing to pay more than the sum of the costs of
all activities in the value chain.
