Understanding the Michael Porter Value Chain
The value chain is a concept developed by the American economist and academic Michael Porter in his work “Competitive Advantage” published in 1985. This model is essential for analyzing the internal activities of a company in order to optimize its created value and competitive advantages. This article gives you a guide to understanding and using Michael Porter’s value chain.
Definition of the value chain
The value chain represents all of the activities that a company carries out to design, produce, sell, deliver and support its products or services. Each step in this chain is considered a link where value can be added to the final product, from its design to its use by the end customer.
Components of the value chain
Michael Porter’s value chain is divided into two categories of activities: core activities and support activities.
Main activities
- Internal logistics: receipt, storage and distribution of resources used for the product.
- Production : transformation of inputs into final product.
- External logistics: storage of the finished product and distribution to the customer.
- Marketing and sales: strategies to encourage purchasing, selection of sales channels, advertising, promotion, pricing, etc.
- Service : activities that maintain and improve the product, such as after-sales services, training, spare parts and repair.
Support activities
- Company infrastructure: activities that support the entire value chain, such as management, accounting, law, finance.
- Human Resource Management : recruitment, training and skills development of employees.
- Technological development: research and development, automation, design, improvement of production processes.
- Purchases : acquisition of raw materials, resources, services necessary for production.
Using the Value Chain to Create Competitive Advantage
Identifying the activities that create the most value allows a company to focus on these areas to to optimise their performance and maximize their competitive advantage. This can be done either by reducing costs or by providing differentiation that the customer is willing to pay for.
It is also important to consider how each activity interacts with the others. For example, a technology development effort can improve production, which reduces the cost of internal and external logistics, and ultimately influences marketing strategy and sales.
Michael Porter’s value chain model remains a powerful tool for companies wanting to deeply understand their internal processes and look for ways to differentiate themselves in the marketplace. However, it is crucial to adapt this model to the specificities of the company and the industry in which it operates to get the most out of it.
Analysis of primary and support activities in the company
When we are interested in the internal structure of a company, it is essential to understand how it creates value. For this, it is common to refer to the value chain model of Michael Porter. This model breaks down the company into strategic activities which can be classified into two broad categories: primary activities and support or supporting activities. Let us now analyze in detail these two types of activities and their importance in creating value within the company.
Analysis of primary activities
THE primary activities of a company are those that directly participate in the creation of the final product or service, and are therefore essential to the delivery of value to the customer. They are generally broken down into five main categories:
- Internal logistics: This includes receipt, storage and distribution of raw materials.
- Production : This is the stage of transformation of raw materials into finished or semi-finished products.
- External logistics: This concerns the storage of finished products and their distribution to customers.
- Marketing and sales: These activities include promoting the product and closing sales.
- Service : This includes all after-sales service activities, such as customer support or warranties.
A careful analysis of primary activities makes it possible to identify the strengths and weaknesses of the company in its value creation process and can therefore lead to a series of recommendations to optimize the value chain.
Analysis of support activities
THE support activities, or supporting activities, provide the necessary assistance to primary activities so that they can operate effectively. They generally include the following elements:
- Company infrastructure: This includes management, planning, finance, accounting, legal affairs, etc.
- Human Resource Management : All activities related to research, recruitment, training and development of personnel.
- Technological development: Covers all R&D, innovation and product or process improvement activities.
- Supply : This concerns the acquisition of resources, whether raw materials, services, machines, etc.
Support activities play a crucial role in optimizing primary activities. Thus, a successful company will take care to develop effective support activities to strengthen its competitiveness.
To summarize, distinguishing and analyzing primary and supporting activities allows companies to clearly distinguish where and how they can increase their operational and strategic effectiveness. This approach is essential for all companies wishing to improve their competitive position in the market.
Optimizing the value chain to be better than the competition
In an increasingly competitive environment, optimizing the value chain is becoming a strategic imperative for any company aiming to stand out. Mastering it well can provide competitive advantage not negligible.
Strengthening weak links
Each activity within a value chain has its strengths and weaknesses. Optimization consists of identifying the weak links and strengthen them. Either by internalizing key skills or by outsourcing certain non-strategic operations to focus on the core business. The key is to continually improve each segment so that the whole is more robust and more efficient.
Technology Integration
The use of new technologies is a powerful optimization lever. Digital tools, particularly in industry 4.0, make it possible to increase efficiency, reduce deadlines and improve quality. From design to distribution, the integration of systems such as ERP (Enterprise Resource Planning), CRM (Customer Relationship Management) or digital supply chain management platforms transforms the value produced at each stage.
Lean approach and continuous improvement
Take an approach lean is about maximizing customer value while minimizing waste. Via methodologies such as Six Sigma or Kaizen, continuous improvement becomes an intrinsic process within the company. This involves analyzing existing processes, eliminating unnecessary tasks and streamlining the workflow as much as possible.
Cross-functional collaboration
Successful optimization cannot be achieved without close collaboration between the different departments of the company. Information sharing and communication between research, production, marketing, sales and after-sales service teams strengthen the efficiency of the value chain. This allows for overall consistency and the ability to adapt to market developments.
Client orientation
Optimization of the value chain must aim for better customer satisfaction, because this is what will ultimately guarantee a competitive advantage. Understanding the customer’s needs, personalizing the offer, guaranteeing consistent quality and delivering within the promised deadlines are all factors that will consolidate the company’s position in the face of the competition.
Monitoring performance indicators
Finally, no optimization process is complete without a performance monitoring system. Regular monitoring of KPIs (Key Performance Indicators) makes it possible to evaluate the effectiveness of the changes implemented and to correct the situation if necessary. It is essential to measure the impact of optimization on profitability but also on customer satisfaction.
Concrete examples of value chain application in different sectors
Manufacturing Industry
Automotive with Toyota
Toyota, a global leader in the automotive industry, is an excellent example of value chain implementation. By applying the Toyota Production System (TPS), the manufacturer optimizes its activities by emphasizing the elimination of waste. Each step, from design through production to logistics, is scrutinized to maximize efficiency and create added value.
Technology Sector
Software with Microsoft
Microsoft uses the value chain to remain competitive in the software and IT services industry. By investing heavily in key activities such as R&D development, customer relationship management and cloud services, the company is establishing a robust and diversified value offering, ensuring its dominance in the market.
Health sector
Pharmaceutical with Pfizer
For pharmaceutical companies such as Pfizer, the value chain is vital for the development of new drugs. It starts with basic research, followed by clinical trials, large-scale production and culminates in efficient distribution. Additionally, Pfizer integrates post-sales services such as side effect monitoring to complete its value chain.
Food Sector
Fast food with McDonald’s
In the fast food sector, McDonald’s makes a point of optimizing its value chain model. Notable examples of this include standardization of its kitchen processes, efficient supply chain management and seamless customer experience. These efforts translate into an ability to quickly serve a large number of customers while maintaining consistent quality.
Luxury Sector
Haute couture with Chanel
Chanel, luxury icon, exemplifies the importance of the value chain in haute couture. Attention to detail in product design, selection of raw materials, incomparable artisanal know-how, and refined marketing define a value chain that justifies the brand’s high-end positioning.
The previous examples clearly show that regardless of the sector, the value chain is central to understanding how a company can differentiate itself and assert its presence in the market. Porter’s approach provides a framework for analyzing and optimizing value-generating activities. Each company can adapt it to its particular context to develop a sustainable competitive advantage.
