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71Principle · Group 9

Value Chain

Porter’s value chain

“Your advantage lies not in the company as a whole but in individual activities and in how well they fit together.”

Every organization is a chain of activities. Buying, making, delivering, selling, serving; behind them are procurement, technology, people management and leadership.

Group 9: Markets and OrganizationsT6 Business Strategy
Go to the in-depth section ↓
Five teal circles stand in a row with four mist-blue lines below them as supports; a gold dot travels from left to right and grows a little at each circle. At the turning point, fine gold lines stretch between the circles, a dot runs back on an arc from the last circle to the first, and in the final image the dot travels twice as fast and arrives clearly larger.
In short

Your advantage lies not in the company as a whole but in individual activities and in how well they fit together.

What it’s about: Every organization is a chain of activities. Buying, making, delivering, selling, serving; behind them are procurement, technology, people management and leadership. Each of these activities costs something, and each can contribute something to value. If you ask whether the organization as a whole is good, you won’t get a useful answer. If you ask in which step it is better or cheaper than others, you will.

In depth

The principle in detail

Three steps through the principle: grasp it, place it, put it to work. Open each topic on its own.

The core messageCore statement and 3 clarifications
In essence

An advantage can be pinned down to individual activities. If you look at them separately, you see where value arises and where there are only costs.

It does not say
That each link should be as cheap as possible on its own. A cheaper but slower supplier can weaken the whole chain.
It does not say
That the image of the chain fits equally well everywhere. There are separate models for consulting, hospitals or platforms.
It also says
The connections between the activities often matter more than any single link.
The explanationWhen sales tells design every day what is selling, something emerges that no department has on its own.
  • It is precisely in the connections that the strongest advantage often lies.
  • When sales tells design every day what is selling, something emerges that no department has on its own.
  • Such linkages are hard to copy because outsiders can hardly see them.
The question

In which step does your value arise, and where does the thread break between two steps?

The signs3 signs when you heed it · 3 when you overlook it
When you heed it
  • You can name the step in which your area is better than others.
  • Feedback also flows backward, for example from customer service to planning.
  • Before outsourcing, you check whether the activity carries your advantage.
When you overlook it
  • Every department improves its own metrics, and orders pile up at the handoffs.
  • People management and administration are seen only as costs.
  • Outsourcing decisions are made on price, even for the things you are strong at.
The backgroundFrom Michael E. Porter’s book “Competitive Advantage” (1985). · T6 Business Strategy
  1. 1985
    OriginMichael E. Porter

    Competitive Advantage

  2. 1996
    SupplementedMichael E. Porter

    What Is Strategy?

  3. 1998
    SupplementedCharles B. Stabell and Øystein D. Fjeldstad

    Configuring Value for Competitive Advantage

  4. Tradition T6
    TraditionBusiness Strategy

    Michael E. Porter, Richard P. Rumelt, Henry Mintzberg, Clayton M. Christensen, W. Chan Kim and Renée Mauborgne

    See the tradition on the Origin page
Read more: the full background

From Michael E. Porter’s book “Competitive Advantage” (1985). Supplemented by his article “What Is Strategy?” (1996) and by the value shop and value network of Charles B. Stabell and Øystein D. Fjeldstad (1998).

The research3 sources: 2 theories, 1 classic · 1985–1998 · with limitations of the research
3 sources1985–1998 period2 theories1 classic
Strength of evidence
  1. weak
  2. moderate
  3. strong

A recognized classic of strategy and a widely used tool; that the linkages carry the strongest advantage is Michael E. Porter’s thesis and has not been measured.

  1. 1985
    Classic
    Michael E. Porter

    “Competitive Advantage”: primary and support activities, each with its own costs and its own contribution to value; a company’s chain as part of a value system of suppliers, channels and buyers.

  2. 1996
    Theory
    Michael E. Porter

    “What Is Strategy?”: a lasting advantage arises from the fit among many activities.

  3. 1998
    Theory
    Charles B. Stabell and Øystein D. Fjeldstad

    “Configuring Value for Competitive Advantage”: the chain fits manufacturing; alongside it stand the value shop (hospitals, law firms, consultancies) and the value network (telephone companies, banks).

Where the research reaches its limits
  • The value chain arose in industry, where goods pass step by step through a plant.
  • For consulting, hospitals or platforms, the image fits less well; according to Charles B. Stabell and Øystein D. Fjeldstad, it can even obscure the core of value creation there.
  • That the linkages in particular are hard to copy is a plausible inference, but it has not been measured in the sources.
Read more: what research shows

Michael E. Porter described the value chain in 1985 in “Competitive Advantage.” He distinguishes primary activities, which bring a product or service to the customer (inbound logistics, operations, outbound logistics, marketing and sales, service), from support activities (procurement, technology development, human resource management, firm infrastructure). Each one can lower costs or create value. He places a company’s chain within a value system of suppliers, channels and buyers. In 1996, he stressed that a lasting advantage arises from the fit among many activities. In 1998, Charles B. Stabell and Øystein D. Fjeldstad showed that the chain fits manufacturing best. For problem-solving services, they proposed the value shop, and for intermediaries the value network. The value chain is a tool for analysis, not a measured result.

The related principles15 Logistics · 70 Positioning · 73 Core Competence · 74 Valuable, Rare Resources
Core CompetenceValuable, Rare Resources

To go deeper, see 73 Core Competence (the know-how usually sits in a few links of the chain) and 74 Valuable, Rare Resources (linkages are among the things that are hard to imitate)

Logistics

15 Logistics describes two load-bearing links of many chains

Positioning

70 Positioning sets the direction: the activities have to fit the chosen position

Read more: the full text

To go deeper, see 73 Core Competence (the know-how usually sits in a few links of the chain) and 74 Valuable, Rare Resources (linkages are among the things that are hard to imitate); 15 Logistics describes two load-bearing links of many chains. 70 Positioning sets the direction: the activities have to fit the chosen position.

The action steps5 things you can actually do
  1. Draw the chain of your area on a sheet of paper: the steps that bring your work to people and the activities that support them.

  2. For each step, mark whether you are better, equally good or weaker than others there, and note your evidence.

  3. Follow one order from start to finish and measure where it sits idle between two steps.

  4. Set up regular feedback from the back of the chain to the front, and after a month check what it has changed.

  5. Before any outsourcing, check whether the step carries your advantage. Hand over what others can do better, and keep what sets you apart.
The reflection questions3 questions: In which step of your chain are you demonstrably better than others?
  1. In which step of your chain are you demonstrably better than others?
  2. Where does an order sit idle longest between two steps in your area?
  3. What feedback from the end of the chain are you missing that would improve the first step?

Take your time with one question. Write down your answer – or talk it over with someone you trust.

To finish
The picture to rememberThe animation once more, with an explanation
  1. Five teal circles stand in a row with four mist-blue lines below them as supports
  2. A gold dot travels from left to right and grows a little at each circle
  3. At the turning point, fine gold lines stretch between the circles, a dot runs back on an arc from the last circle to the first, and in the final image the dot travels twice as fast and arrives clearly larger
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In context

Group 9: Markets and Organizations

Guiding question: How does an organization win in the long run?

Stage 3 of 5: Choose the path

Where the 92 principles come from: eight traditions of strategy, from classical war theory to dealing with uncertainty.

More about the origin

Background: WEGVISOR’s own selection from the strategy literature · More about the origin

Examples

The principle in practice

From the different spheres of society.

Business

Amancio Ortega, Zara and the Value Chain

Zara brings new fashions from design to store in a few weeks, while the rest of the industry needs months. Its lead lies not in any single idea but in how design, purchasing, production, logistics and store work together.

Value Chain
MediaBusiness

Walt Disney, His Strategy Sketch and the Value Chain

Around 1957, the entire Disney company fits on a single sheet of paper: the feature films stand at the center, surrounded by television, Disneyland, music, books, comics and licensing. Arrows connect everything. The sketch shows that value lies not in the individual businesses but in their connections.

Value Chain
Culture & Sports

Lee Soo-man, SM Entertainment and the Value Chain

In June 2011, in Paris, Lee Soo-man, the founder of SM Entertainment, explains his “culture technology.” It describes how casting, years of training, production and partners abroad mesh together. The advantage lies not in any single star but in the chain that produces stars.

Value Chain
Business

Movie: American Gangster

In Ridley Scott’s 2007 movie, Frank Lucas builds a drug empire in Harlem by cutting out all the middlemen: he buys at the source, handles transport himself and sells under his own brand. The movie shows how much power lies in controlling the value chain, and it shows it through a crime.

Value Chain
FAQ

Questions about the Value Chain

What does the principle of the Value Chain say?

You break your work down into individual activities to see where value arises. The strongest advantage often lies in the connections between the activities, because they are hard to copy.

Where does the value chain come from?

Michael E. Porter described it in 1985 in his book “Competitive Advantage.” It adds a look inside the company to his earlier work on positioning.

What are some examples?

Zara links design, manufacturing and store into a fast system. In the 1950s, Disney had films, television and the park strengthen one another. SM Entertainment has made a chain out of casting and training.

How well is the Value Chain supported by research?

Evidence: moderate – a recognized classic of strategy and a widely used tool; that the linkages carry the strongest advantage is Michael E. Porter’s thesis and has not been measured.

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