Porter’s value chain as a method of strategic analysis

Breaking a company’s activities down into pieces lets you take a closer look at them and distinguish those that are key to its operation. What is Porter’s value chain? Read on to find out more.

What is Porter’s value chain?

The value chain is a set of processes undertaken by a business entity to produce, sell, and deliver products to customers. The concept is based on viewing the company as a system and its subsystems. In turn, “value” is understood as the sum of money that consumers can spend on the products or services produced by the company.

Porter divided business activities into primary and secondary activities. Primary activities include:

• Inbound logistics − receiving supplies, storing and distributing materials to customers,
• Outbound logistics − distributing ready-made products and order processing,
• Operations − changing raw materials into products,
• Service − corrective actions or maintaining the efficiency of products after their sale and delivery,
• Marketing and sales − providing product information and activities that encourage and facilitate purchasing.

Secondary activities aim at facilitating the performance of primary activities.

• Procurement − purchasing necessary goods and services from external sources,
• Human resource management − refers to activities related to recruitment, employment, training, remuneration, and dismissal of employees,
• Technological development − equipment, machines, software licenses, processes, and know-how,
• Infrastructure − activities enabling the functioning of various departments, e.g. accounting, administration, and marketing.

At each stage of the company’s processes, we should ask ourselves – does it provide added value to the customer? If not, can it be eliminated?

How to conduct a value chain analysis in your enterprise?

Before conducting an assessment of the various elements, it is worthwhile to consider:

• The company’s mission and values, which determine the scope of its activities,
• The specifics of your industry that affect the importance of each activity.

• Identify secondary activities for all primary activities

The value of an enterprise is based on primary activities, which in turn are highly dependent on properly executed secondary activities. Analyze each activity in terms of effort, time, and cost.

• Define what steps will be part of secondary activities

For each secondary activity, note the sub-activities that must be performed.

• Find links between both types of activities

Identifying the dependencies between the processes in question can help you increase your competitive edge or detect errors. For example, hiring people who are not competent enough will negatively affect the company’s operations.

• Think about how you can increase the value of your products/services

Your goal is to deliver value to your customers. So how can you achieve this by either improving or changing your processes?

Benefits of the value chain

Porter’s value chain, just like other methods of strategic analysis, is used to diagnose existing problems in a company and assess its strengths and weaknesses. This is extremely valuable information, thanks to which you will be able to implement new business solutions to improve your work. Depending on the type of business, the effects of value chain analysis may vary, although the main benefits are as follows:

• aligning delivery times with manufacturing processes or providing specific services,
• increasing the company’s potential by diversifying its offer,
• process optimization − increasing production and efficiency while reducing expenses and effort,
• good organization of individual departments has an impact on cooperation with intermediaries – suppliers, vendors, etc. – which ultimately leads to higher profits,
• increasing the efficiency of the company allows it to maintain a competitive advantage in the market,
• coordinating the recruitment and training of new employees with the process of production or provision of services.

Example of a value chain analysis for an online store

With the intensive development of the Internet, the market share of the e-commerce industry has increased significantly. Consumers prefer to purchase goods and services electronically, which made this sector flourish. Performing Porter’s value chain analysis will help you identify how to improve the chosen business model and enhance the performance of the store.

1. Inbound logistics

Using software will facilitate the processes involved in warehousing and inventory. The packing process is usually done manually and can’t be fully automated, but some technological solutions can streamline this work (automated systems to help pack orders, warehouse management systems).

2. Outbound logistics

When it comes to distributing finished products, organizing deliveries, or tracking, GPS technology can be used to ensure smooth delivery. Another solution could be supply chain outsourcing, where certain logistics activities are delegated to separate entities.

3. Operations

Here again, the technology will play an important role. It can support the company’s processes related to mission execution, supply chain support, communications, etc.

4. Service

When running an online store, there is not much need to develop this aspect, because if any of the products is damaged, the customer can make a complaint. In such a situation, the company, after accepting the complaint, should return the money to the customer or send a new, intact product.

5. Marketing and sales

It can be assumed that this will be the most important area since the results of the selected business largely depend on its effectiveness. The quality of customer service plays an important role – communication with the customer should take place through various channels and focus on reliable transmission of information. If you are personally involved in external logistics, you are also responsible for the fulfillment and delivery of orders. It is closely related to technology – the store must have a website that serves both a promotional function and enables the purchase process.

6. Procurement

Collaboration with suppliers and supply chain management can be supported by appropriate software and technology.

7. Human resource management

All primary activities are based on people’s work. Therefore, choosing the right staff, training, and management, have an impact on all processes within the company. Additionally, recruiting systems allow for an efficient and fast selection of candidates, which again indicates the great importance of technology.

8. Technological development

The development of the e-commerce industry is based on the continuous emergence of various technological solutions, so this will be an important factor shaping all processes in the company. Therefore, we should focus on continuous improvement in this area.

9. Infrastructure

Depending on the chosen business model, the structure of our business may be more or less complex (e.g., B2B, B2C, C2B, C2C). This will affect primary activities, particularly inbound and outbound logistics, and the scope of operations.

From the above analysis, it was possible to distinguish the relationships between primary and secondary activities. In the case of an online store, the greatest impact on creating value comes from technology, which is present in every aspect of the business. Improving these areas will therefore yield the greatest benefits.

If you want to learn more, read our article about other methods of strategic analysis.

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