Porter’s Value Chain Model, Definition, Examples, and Use Cases

Owners of all businesses are looking to gain strategic, competitive advantages over their competition. Indeed, in the world of business and its winners and losers, competitive advantages are the only separation between success and failure. 

To develop these advantages, entrepreneurs often turn to the ideas of Michael Porter and his book, Competitive Advantage. It’s a popular text for business strategy and management. Two of Porter’s most popular concepts are his Generic Strategies and his Value Chain Model.

Porter’s Value Chain and Porter’s Generic Strategies are two frameworks developed by Michael Porter that are very closely related. We’ve written about the Generic Strategies in previous articles, but it’s helpful to review some of that framework’s basic principles before moving into the Value Chain.

Porter’s Generic Strategies are a set of three strategies that businesses use to gain a competitive advantage in their industry. They each represent a focus that businesses can choose to push what they do beyond others in their segment:

• Cost Leadership: Become the low-cost producer in its industry
• Differentiation: Offer a unique product or service that is valued by customers
• Focus: Focus on a specific market segment or niche

These strategies guide the business in achieving its goals and leveraging the operational activities the organization does well.

Porter’s Value Chain can be used to implement these strategies by analyzing the company’s internal operations and identifying areas where it can reduce costs, improve efficiency, or differentiate itself from competitors. Together, these frameworks can help businesses create a sustainable competitive advantage in their industry.

The experts at Digital Leadership are happy to share a complete set of instructions and helpful templates for using the Value Chain Model with your business. We provide business model strategy services to help businesses identify competitive advantages, reduce costs, and create value for customers.

In this article, we explore Porter’s Value Chain Model and how it operates in the context of Porter’s Generic Strategies. We provide some real-world examples of businesses that operate following Value Chain Model practices.

What is Porter’s Value Chain Analysis?

Porter’s Value Chain is a framework that helps businesses analyze their internal operations to identify the activities that create value and those that do not. The value chain is composed of two types of activities: primary activities and support activities.

As a tool for evaluation, a company analyzes its internal operations by breaking them down into individual activities that can be assessed for their contribution to value creation and competitive advantage.

What is Porter’s Value Chain Analysis Model?

By analyzing its operational activities, a company can identify places where it can improve efficiency, reduce costs, or add value to its products or services. As we’ve discussed, this can help the company gain an important competitive advantage in the marketplace and improve its overall performance.

Of course, implementing the framework is more complicated than that, as we’ll see going forward.

Porter’s Value Chain Model Importance in Business

It may seem like we’re belaboring the point, but the value of a competitive advantage cannot be overstated. Any tool that helps a business identify theirs is potentially very powerful.

As a result, Porter’s Value Chain Model is important in business for several reasons:

• Identifying areas of competitive advantage: Businesses can identify areas where they can create competitive advantage by adding value to the product or service.
• Improving efficiency and reducing costs: Businesses can identify areas where they can improve efficiency and reduce costs, increasing profitability.
• Identifying opportunities for innovation: Businesses can identify areas where they can innovate and introduce new products or services, which allows the company to stay ahead of the competition and develop new markets.
• Focusing on customer needs: Businesses can identify areas where they can improve the customer experience and generate lasting customer loyalty.

Overall, Porter’s Value Chain Model provides a framework for businesses to understand how they can create value for their customers and remain competitive in the marketplace. By analyzing each primary activity of the value chain, businesses can identify areas where they can add value, reduce costs, and differentiate themselves from competitors. By being different, in a good way, a business improves the odds of finding success.

Moreover, for a more comprehensive exploration of Porter’s Value Chain Model’s importance in business and how it can drive innovation and competitive advantage, we invite you to delve into our book titled “How to Create Innovation.” This resource offers in-depth insights, practical strategies, and real-world examples that showcase how the Value Chain Model can be a catalyst for transformative innovation, ultimately propelling businesses toward sustained success.

The Difference Between Value Chain & Supply Chain

If these terms sound familiar to you, it’s likely that you’ve read about business strategy in the past. For people unfamiliar with classic concepts of business development, some of the terms might easily blend together. It can be especially confusing when the terms share the same words!

To clear things up, let’s unpack the differences between Value Chain and Supply Chain.

What is a Supply Chain?

A Supply Chain is a network of businesses, individuals, organizations, and resources involved in creating and delivering a product or service to a customer. The Supply Chain also includes the steps involved in the production, distribution, and delivery of goods or services, from the sourcing of raw materials and components to the final delivery of the product to the end user.

Modern supply chains can involve multiple suppliers, manufacturers, distributors, and retailers, as well as transportation and logistics companies, and may span across different geographic regions and countries.

Effective Supply Chain Management includes coordinating and optimizing all the processes and activities involved in a product’s creation to ensure timely, cost-effective, and efficient delivery to the consumer.

What is a Value Chain?

A Value Chain is the series of activities that a business completes to create and bring a product or service to its customers. Simply, it’s what a business must do to deliver value.

What might that include?

The Value Chain can encompass a wide range of activities involved in the creation of a product or service, including research and development, production, marketing and sales, and customer service. Each activity in the Value Chain makes the product or service more appealing to the customer, with the business’s goal to optimize the value added throughout the process to achieve a competitive advantage in the marketplace.

Because the Value Chain plays such a vital role in a company’s success, businesses should undertake deep dives into their operational processes. During a Value Chain analysis, the company identifies and analyzes the activities involved in creating a product or service. The goal is to make an evaluation of how these activities contribute to overall value creation.

This analysis helps businesses identify areas where they can improve efficiency and reduce costs, as well as opportunities to innovate and differentiate themselves from competitors. Of course, the goal of a Value Chain analysis is to create a competitive advantage and increase profitability.

Overview of Porter’s Value Chain Model Primary & Supporting Activities

The Value Chain Model focuses on an analysis of the activities within a company’s operations on how they create value and contribute to its competitive advantage in the marketplace. Within this framework, a company’s Value Chain is comprised of two main types of activities: primary activities and support activities.

Primary activities are directly involved in the production and delivery of a product or service to the customer. Experts typically agree that there are five primary activities:

• Inbound logistics
• Operations
• Outbound logistics
• Marketing and sales
• Service

As you can see, primary activities are each directly involved with the products or services a company offers, usually with direct contact with materials that become what the company sells. We’ll discuss each of these more in a moment.

Support activities are those that support the primary activities and help to optimize their performance. We’ll also discuss these more in a moment. There are four support activities:

• Procurement
• Technology development
• Human resource management
• Infrastructure

By analyzing each of these activities, businesses can identify opportunities to improve their operations and reduce costs. For example, by optimizing procurement, a company can reduce the cost of raw materials. By improving operations, a company can increase the efficiency of the production process.

Through understanding the Value Chain, businesses identify their core competencies and competitive advantages; they find ways to improve and leverage those advantages to increase profitability and market share.

Porter’s Value Chain Primary Activities

Primary Activities deal directly with the products and services a company markets.

Inbound Logistics:

Process for inbound Movements such as receiving, warehousing, and managing materials, parts, and other inventory

Production/Operations:

Processes that convert raw materials, labor, or energy into finished goods or products

Outbound Logistics:

Processes that pertain to the storage and movement of the completed product to the customer.

Marketing & Sales:

Processes relating to the advertising, promotions, and pricing of the products to optimize the return on investment.

Customer Service:

Processes that are offered after the product has been sold and delivered, such as customer service and support, maintenance, repairs, and funds

Porter’s Value Chain Supporting Activities

Supporting Activities facilitate a company’s efforts to deliver its main products and services to its customers.

Firm Infrastructure:

Company’s Support System and the functions that allow it to maintain operations including all legal, administrative, and accounting.

Human Resources:

Hiring and retaining employees who fulfill business strategy, as well as help design, market, and sell the product, involves the process of delivering the final product.

Technology:

Research and development help in designing the product and improving the automation of the process, for example, a business working towards reducing inventory and labor waste by implementing RFID technology in the warehouse to improve overall stock accuracy and minimize labor tasks.

Procurement:

Processes of acquisition of inputs, raw materials, or resources for the firm, relate heavily to inbound logistics where a company is looking for resale of the goods they procure, for example in the case of an e-commerce business.

How You Use Porter’s Value Chain Model? Step-By-Step

What does the Value Chain Model look like in practice?

As you’ll see from the step-by-step description that follows, putting the Value Chain Model into motion requires a lot of deep and sober thinking about how your company spends its time and other resources.

Step 1: Identify subactivities for each Primary Activity

No activity is accomplished without a series of steps to make it possible. Once you’ve identified your Primary Activities as described by the framework, investigate each one to unpack the smaller subactivities that make it possible.

Step 2: Identify subactivities for each Supporting Activity

As in Step 1, Step 2 asks you to break down subactivities, this time for each Supporting Activity.

Step 3: Identify Connections between Activities

Once you have identified the primary and support activities, and all the myriad subactivities that make them possible, analyze each activity to determine how it contributes to the value creation process. This involves examining the costs associated with each activity and how it affects the final product or service.

Step 4: Identify Hidden Opportunities to Increase Value

After analyzing each activity, identify areas where improvements can be made to increase efficiency or reduce costs. For example, the business may be able to streamline its procurement process or invest in new technology to improve operations.

Some of these opportunities may be obvious once you start looking but be ready to think outside the box to find those “hidden” opportunities to deliver value better.

Step 5: Implement Changes

The final step is to implement the changes identified in Step Four. This may involve restructuring the business, investing in new technology, or hiring additional staff with different skills. Going forward, be sure to measure the effectiveness of these changes to ensure they achieve the desired results.

Download Porter’s Value Chain Model Template + Instructions

Porter’s Value Chain Examples

Understanding the Value Chain Model is easier when you see how other companies are putting it into motion.

Below we consider some successful businesses that are using the Value Chain Model with good results. There’s an excellent chance your company can do something similar to one of these businesses.

Value Chain Model Example: Starbucks

Starbucks, the global coffeehouse chain, uses the Value Chain Model to create value for its customers in several ways. Let’s consider the company’s five primary activities:

• Inbound Logistics: Starbucks sources high-quality coffee beans from around the world and transports them to its roasting facilities. The company also purchases other raw materials, such as milk and syrups, to be used in its beverages. Focusing on quality allows them to charge higher prices and sell the experience of visiting one of their stores.
• Operations: At its roasting facilities, Starbucks roasts and packages the coffee beans into various blends and flavors. In its stores, the company prepares beverages and food items, trains employees, and maintains equipment and facilities. These centralized facilities allow for economies of scale without sacrificing quality.
• Outbound Logistics: Starbucks distributes its packaged coffee and merchandise products to its retail stores and other distribution channels. The company also uses a network of suppliers and distribution centers to supply its stores with raw materials and other products.
• Marketing and Sales: Starbucks is an excellent example of brand development utilizing marketing efforts, including advertising, social media, and in-store promotions. Their stores are designed to provide a unique and comfortable environment for customers. Employees are trained to provide a particular customer service experience.
• Service: Starbucks places a strong emphasis on providing high-quality customer service, including personalized interactions and customized beverage options. A loyalty program, mobile ordering, and other services enhance the customer experience.

Starbucks has taken steps to improve efficiency, reduce costs, and create more value for its customers, like investing in sustainability initiatives to improve its inbound logistics and reduce its environmental impact. Recently, Starbucks has been maneuvering through fraught relations with its labor force. The company will need to decide how its reputation and corporate image contribute to its primary activities and whether or not how it responds to calls for labor force unionization affects them.

Value Chain Model Example: Amazon

The online retailer Amazon also leans on the Value Chain Model to improve the value it’s able to provide its customers, as seen through decisions it’s made to improve their primary activities:

• Inbound Logistics: Amazon sources products from suppliers around the world and transports them to its fulfillment centers. Advanced logistics and inventory management systems optimize its inbound logistics and ensure that products are available for sale in a timely manner.
• Operations: Orders are processed and prepared for shipment through Amazon’s fulfillment centers. The company utilizes advanced automation technologies and robotics to streamline its operations improve efficiency and reduce labor costs.
• Outbound Logistics: Amazon ships products to customers around the world using a network of carriers and logistics partners. It provides fast and convenient service through a range of delivery options.
• Marketing and Sales: Its website, mobile app, and social media platforms give Amazon a variety of ways to reach customers. The company also offers personalized product recommendations and targeted advertising to enhance the customer experience.
• Service: Amazon places a strong emphasis on providing high-quality customer service, including fast and easy returns, 24/7 customer support, and a range of self-service options. Amazon Prime is a loyalty program that provides customers with free shipping, exclusive discounts, and other benefits in addition to supplying the company with more revenue.

The company has invested heavily in automation and robotics to improve its operations and reduce labor costs. New technologies like voice-activated assistants and drone delivery enhance the customer experience. Like Starbucks, Amazon will need to decide how their relationship with their labor force does or doesn’t contribute to their overall success.

Value Chain Model Example: Tesla

Electric car producer Tesla has driven a lot of the news and interest in EVs. The company is an interesting study in Value Chain management:

• Inbound Logistics: Tesla sources raw materials, such as lithium and nickel, and components from suppliers around the world and transports them to its production facilities. The company also produces its own battery cells and modules at its Gigafactory in Nevada.
• Operations: At its production facilities, Tesla designs, manufactures, and assembles electric vehicles, energy storage systems, and solar products. The company uses advanced manufacturing technologies, such as robotics and automation, to improve efficiency and quality.
• Outbound Logistics: Tesla ships its products to customers around the world using a combination of its own logistics network and third-party carriers, though they’ve encountered pushback from traditional car dealerships. The company also offers delivery and installation services for its energy products.
• Marketing and Sales: Tesla markets and sells its products through its website, company-owned stores, and a network of authorized dealerships. Digital marketing and social media platforms reach customers and promote its products, and the company’s leader, Elon Musk, has cultivated a public presence that attracts many potential buyers.
• Service: The company offers maintenance and repair services, over-the-air software updates, and 24/7 roadside assistance. The company also offers a range of customer support options, such as online chat and phone support, to enhance the customer experience.

Tesla has invested heavily in vertical integration and in-house production of critical components like batteries to reduce its dependence on suppliers, improve its supply chain efficiency, and reduce costs. Direct-to-consumer sales and digital marketing create a strong brand and customer base while disrupting the traditional automotive and energy industries.

Porter’s Value Chain Model vs. Other Porter’s Frameworks

Now that we’ve walked through Porter’s Value Chain Model, let’s take some time to consider it within the context of some of Porter’s other frameworks.

We’ll give some information about each of them, along with some thoughts on how they may be used in conjunction with the Value Chain Model.

Porter’s Generic Strategies

Overall, Porter’s Generic Strategies provide a framework for businesses to choose a clear and consistent direction for their competitive positioning. By focusing on either cost leadership, differentiation, or focus, a business can build a sustainable competitive advantage and improve its overall performance in the market.

We’ve written about the Generic Strategies elsewhere, so that’s all we’ll say by way of description, but it’s easy to see how they work well with the Value Chain Model. Businesses can apply Value Chain thinking to their selected strategy to ensure that they are laser-focused on taking steps to leverage competitive advantages as well as they can.

Porter’s Five Forces

Porter’s Five Forces helps businesses analyze the competitive environment in their industry. The framework identifies five key forces that determine the overall level of competition and profitability in an industry:

• The threat of new entrants: the degree to which new competitors can enter the industry and threaten the position of existing players. This threat is higher when entry barriers are low and when there are no significant economies of scale or other advantages enjoyed by existing competitors.
• Bargaining power of suppliers: the degree to which suppliers can exert influence on the industry by raising prices, reducing quality, or limiting the supply of critical inputs. The threat level increases when suppliers are concentrated, when there are few substitutes available, and when the costs of switching to alternative suppliers are high.
• Bargaining power of buyers: the degree to which buyers can exert influence on the industry by demanding lower prices, higher quality, or better service. This threat is higher when buyers are concentrated, when they have access to information about prices and quality, and when they can easily switch to alternative products or services.
• Threat of substitutes: the degree to which products or services from other industries can substitute for those produced by the industry. This threat is higher when there are many substitute products or services available, when they are comparable in quality and price, and when switching costs are low.
• Intensity of competitive rivalry: The degree to which existing players in the industry compete with each other to gain market share and profits. The potential for trouble is higher when there are many players in the industry when they have similar market shares, and when there are few opportunities for differentiation.

By analyzing these five forces, businesses can identify the key drivers of competition in their industry, develop strategies to mitigate the threats, and take advantage of the opportunities.

In the context of the Value Chain Model, Porter’s Five Forces can help direct how you act to increase the value you deliver. Your response to the Forces will play into how you see your primary and secondary activities and to what effect you can make changes to them.

Porter’s Diamond Model

Porter’s Diamond Model, also known as the Diamond Theory of Competitive Advantage, explains why some countries and industries are more competitive than others. The model identifies four key factors that contribute to the competitiveness of a country or industry:

• Factor Conditions: the factors of production that are available in a country, including labor, capital, natural resources, and infrastructure. Their quality and availability affect competitiveness.
• Demand Conditions: the characteristics of the domestic market, such as its size, growth rate, and sophistication. Strong demand conditions might motivate local companies to innovate and improve their own products and services.
• Related and Supporting Industries: the presence or absence of complementary industries that support and facilitate the growth of the industry. A strong local supplier base can help companies reduce costs, respond to orders quicker, and improve quality.
• Firm Strategy, Structure, and Rivalry: the domestic environment in which companies operate, including the degree of competition, the level of investment in innovation and technology, and the quality of management practices. A strong domestic rivalry can stimulate companies to innovate and improve their products and services, while a weak rivalry can lead to complacency and decreased productivity.

According to Porter’s Diamond Model, these four factors are mutually reinforcing and create a cycle of competitiveness. The Diamond Model is often used by governments and businesses to identify the strengths and weaknesses of their national or industrial competitiveness and to develop strategies to enhance their competitive advantage.

As we’ve seen, the Value Chain Model pushes companies to reflect on their competitive advantage. The environmental conditions described by the Diamond Model play into how a business can address the areas of focus for improving its value delivery.

Porter’s Four Corners Model

Porter’s Four Corners Model is based on four key factors that determine the strategic posture of a company or industry. It’s distinct from the Diamond and Five Forces Models, though there are some similarities. The Four Corners include:

• The Industry’s Existing and Potential Customers: the characteristics of the industry’s customer base, including their needs, preferences, and behavior.
• The Industry’s Competitors: The number, size, and capabilities of the industry’s competitors.
• The Industry’s Suppliers: the suppliers of raw materials, components, and other inputs to the industry.
• The Industry’s Substitutes and Complements: the products or services that could substitute or complement the industry’s products or services.

According to the Four Corners Model, the strategic position of a company or industry depends on the relative strength and position of those four factors. Businesses use the Four Corners model to identify the key drivers of competition in their industry and develop strategies to mitigate the threats to their success.

Again, we can see that Porter’s various models work well together. As you use the Value Chain Framework, the Four Corners Model helps you understand where there are dangers that must be addressed. Additionally, you may be able to identify and exploit a competitive advantage.

Closing Thoughts

We believe that Porter’s Value Chain Framework is a useful tool for driving innovation that targets your customers’ needs.

A lot of lip service is given to innovation and various changes in the way we do business. While we are in favor of innovation in most of its forms, innovation without a target or roadmap is wasteful, and many times, poorly executed innovation programs destroy the company.

Be targeted. Be deliberative. And be deliberate. Most importantly, never forget your purpose is to deliver value to the customers who sustain your work. You exist for them, and not the other way around.