Porter’s Value Chain: Primary & Support/Secondary Activities Explanation

  1. What is Michael Porter’s Value Chain?
  2. Primary Activities of Porter’s Value Chain
  3. Support Activities of Porter’s Value Chain
  4. Step By Step Guide to Analyze Value Chain
  5. What is the Impact of Technology on the Value Chain
  6. Understanding How Value is Created with Porter’s Value Chain
  7. Explanation of Value Chain Map and Value Chain Node
  8. Real World Examples of Porter’s Value Chain
  9. Potential Future Trends in Value Chain Management
  10. Other Business Concepts related to Porter’s Value Chain
  11. How to Derive the Profit Margin using Value Chain Analysis
  12. FAQs of Porter’s Value Chain

What is Michael Porter’s Value Chain?

Value chain analysis is a business concept that describes all activities essential to deliver products or services from start to end. This concept encompasses steps from raw material sourcing, production to distribution, including sales and after-sales activities. In addition to these activities, the value chain concept also describes various supporting activities, including strategic planning, quality management, finances, recruitment, technology, and procurement.

  1. Inbound Logistics
  2. Operations
  3. Outbound Logistics
  4. Marketing and Sales
  5. Service
  1. Procurement
  2. Technology Development
  3. Human Resource Management
  4. Firm Infrastructure
Michael Porter’s Value Chain Diagram – Primary & Support/Secondary Activities

Primary Activities of Porter’s Value Chain

1. Inbound Logistics

Examples: track raw material input, storage, control inventory, transport schedules, warehousing, and return damaged goods to suppliers.

2. Operations

This activity refers to the tasks involved in transforming inputs into finished products or services. This typically includes manufacturing processes, assembly, packaging, and quality control measures. There will be various streams of value are added to the product at this stage as it moves through the production line.

Examples: production belts, production process, packaging, machinery maintenance, quality assurance, defects testing, printing, and all operations of the factory.

3. Outbound Logistics

Outbound logistics is the process of storing and distributing finished products to customers. Typical tasks of outbound logistics are order processing, warehousing, transportation, and delivery to end-users.

For a manufacturing company, their immediate customer would be the wholesaler. The end customer may receive the product through the distribution channels of wholesalers and retailers. The distribution of finished goods from the manufacturer to their immediate customer is considered outbound logistics.

Examples: finished goods distribution, vehicle schedule handling, delivery order handling, sales order processing, and process the sales returns.

4. Marketing and Sales

Every product has a target market of potential consumers. Marketing and sales activities pretty much focused on promoting and selling products or services to customers. This is determined by how well the company presented and sold the product to the target market. The job of the sales professionals in the company is to ensure the target audience is aware of the product. A mix of marketing strategies can be used to fulfill this activity.

Examples: brand building, marketing, promotion, salesforce, tenders, quotations, target market selection, customer relationships, and product pricing.

5. Services

After-sales support is crucial for the long term survival of the business. Negative customer comments can easily damage the reputation of a product. The company should focus on the right processes to take care of the customer inquiries which raise after the sale. Solid after-sales services are essential to enhance or maintain the value of the product after it has been sold and delivered.

Examples: repair, periodic scheduled maintenance services, warranty, guarantee, training, and after-sale services.

Support Activities of Porter’s Value Chain

1. Procurement

Procurement refers to the entire purchasing-related process of the company. Procurement covers the process of acquiring inputs such as raw materials, components, equipment, and services from suppliers. This also further covers raw materials, equipment for technology development, equipment related to periodic maintenance, administrative consumables, and fixed assets such as machinery and buildings. The objective of this activity is to find quality supplies that meet the criteria of procurement.

Examples: Tendering processes, advertising, procurement criteria definition, offer the contract/purchase order, and budget management.

2. Technology Development

This activity is related to the capacity for activities like research and development (R&D), design, engineering, prototyping, and testing of new technologies or products in the company. Technology helps to streamline the entire value chain. This will increase the efficiency of activities, which will lead to a competitive advantage. These activities are related to the effort that the company is making to improve its products and processes.

Examples: enterprise resource planning (ERP) solutions, product research for enhancements, research for new products, and improving the technology used in existing activities/processes.

3. Human Resource Management

To survive in the market, the company needs talented and skillful employees. Recruitment, training, and development of the right people for the right job roles are part of this activity. This further includes workforce planning, talent acquisition, performance management, training and development programs, compensation, and employee relations.

Staff satisfaction should be measured regularly to reduce turnover. Also, staff should be motivated based on fringe benefits and other facilities. The company finds and retains the highest level of talent at the firm. Technological and consulting companies depend heavily on their talented employees.

Examples: recruitment, onboarding, development, training, retention programs, and off-boarding.

4. Firm Infrastructure

Firm infrastructure refers to activities that support the entire value chain, including general management, finance, accounting, legal, and administrative functions. This further relates to the organizational structure, internal control systems, and culture of the company. This is also related to activities such as accounting, finance, legal, control, audit, quality management, and general (strategic) management.

This is the place where business decisions are made like strategic planning, financial management, budgeting, legal compliance, and organizational governance. The effectiveness of these decisions is based on the capacity of the activities of the firm infrastructure. These are the most powerful source of competitive advantage for the company.

Examples: strategic management, finance, legal, customer relationships, public relations, and quality control.

Step By Step Guide to Analyze Value Chain

  • Inbound Logistics: Assess how efficiently raw materials are sourced, transported, and stored.
  • Operations: Evaluate the effectiveness of manufacturing or service delivery processes.
  • Outbound Logistics: Examine the efficiency of product distribution and delivery to customers.
  • Marketing and Sales: Review strategies for promoting products or services and generating sales.
  • Service: Assess the quality and effectiveness of post-sale customer support and service.
  • Procurement: Evaluate supplier relationships, cost-effectiveness of procurement processes, and supply chain resilience.
  • Technology Development: Assess investments in research, development, and technology to improve product quality and operational efficiency.
  • Human Resource Management: Evaluate workforce capabilities, training programs, and employee satisfaction levels.
  • Firm Infrastructure: Examine organizational structure, leadership, and support functions such as finance, legal, and IT.

What is the Impact of Technology on the Value Chain

Explanation of Value Chain Map and Value Chain Node

Understanding How Value is Created with Porter’s Value Chain

A value chain analysis is an internal assessment aimed at gaining a competitive advantage. The idea is to determine the internal links between activities in the company and to increase efficiency in each activity. Customer satisfaction is determined based on the value of the products or services.

Real World Examples of Porter’s Value Chain

  • Toyota Production System (TPS): Toyota revolutionized the automotive industry with its lean manufacturing principles, which are a key aspect of its value chain. By continuously improving processes, minimizing waste, and empowering employees to contribute ideas for efficiency gains, Toyota has achieved high levels of productivity and quality while reducing costs.
  • Walmart: Walmart is known for its efficient supply chain management, which is a critical component of its value chain. Through technologies like RFID (Radio-Frequency Identification) and a sophisticated inventory management system, Walmart optimizes its inventory levels, reduces stockouts, and minimizes holding costs. Additionally, its strong vendor relationships enable it to negotiate favorable terms and maintain low prices for customers.
  • Apple Inc.: Apple’s value chain is characterized by its tight control over design, manufacturing, and distribution. By vertically integrating key aspects of its supply chain, such as chip design, hardware assembly, and software development, Apple maintains a high level of quality and innovation while differentiating its products in the competitive tech market. Additionally, its retail stores and online presence contribute to a seamless customer experience.
  • McDonald’s: McDonald’s excels in its service delivery through efficient operations management, a crucial aspect of its value chain. From standardized processes in food preparation to streamlined order fulfillment and customer service, McDonald’s focuses on speed, consistency, and customer satisfaction across its global network of restaurants.
  • Mayo Clinic: Mayo Clinic’s value chain is centered around patient-centric care and clinical excellence. By integrating medical services, research, and education, Mayo Clinic delivers high-quality healthcare outcomes while maintaining operational efficiency. Its collaborative approach among physicians, researchers, and administrators ensures a seamless patient experience and continuous improvement in healthcare delivery.

How to Derive the Profit Margin using Value Chain Analysis

The margins or profit of a firm are determined by its “effectiveness” in performing the above primary and support activities. The difference between the price the customer is willing to pay for the products and the cost of the activities in the value chain is the profit margin of the company. Hence, the profit margin can be increased in the following ways,

  1. Reduce the cost of the activities (streamline the primary and support activities)
  2. Increase the value of the product through technology development

It would be easy for a company to eventually achieve economies of scale by optimizing the entire value chain.

FAQs of Porter’s Value Chain

Read More About Porter’s Five Forces,

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