Value-chain analysis views the organization as a sequential process of value-creating
activities. The approach is useful for understanding the building blocks of competitive
advantage and was described in Michael Porter’s seminal book Competitive Advantage.2
Value is the amount that buyers are willing to pay for what a firm provides them and
is measured by total revenue, a reflection of the price a firm’s product commands and
the quantity it can sell. A firm is profitable when the value it receives exceeds the total
costs involved in creating its product or service. Creating value for buyers that exceeds
the costs of production (i.e., margin) is a key concept used in analyzing a firm’s competitive position.
Porter described two different categories of activities. First, five primary activities—inbound
logistics, operations, outbound logistics, marketing and sales, and service— contribute to the
physical creation of the product or service, its sale and transfer to the buyer, and its service after the sale. Second, support activities—procurement, technology development, human
resource management, and general administration—either add value by themselves or add
value through important relationships with both primary activities and other support activities. Exhibit 3.1 illustrates Porter’s value chain.
To get the most out of value-chain analysis, view the concept in its broadest context,
without regard to the boundaries of your own organization. That is, place your organization
within a more encompassing value chain that includes your firm’s suppliers, customers, and
alliance partners. Thus, in addition to thoroughly understanding how value is created within
the organization, be aware of how value is created for other organizations in the overall supply chain or distribution channel.3
Next, we’ll describe and provide examples of each of the primary and support activities.
Then we’ll provide examples of how companies add value by means of relationships among
activities within the organization as well as activities outside the organization, such as those
activities associated with customers and suppliers.
Primary Activities
Five generic categories of primary activities are involved in competing in any industry, as
shown in Exhibit 3.2. Each category is divisible into a number of distinct activities that
depend on the particular industry and the firm’s strategy.5
Inbound Logistics Inbound logistics is primarily associated with receiving, storing, and
distributing inputs to the product. It includes material handling, warehousing, inventory
control, vehicle scheduling, and returns to suppliers.
Just-in-time (JIT) inventory systems, for example, were designed to achieve efficient
inbound logistics. In essence, Toyota epitomizes JIT inventory systems, in which parts deliveries arrive at the assembly plants only hours before they are needed. JIT systems will play
a vital role in fulfilling Toyota’s commitment to fill a buyer’s new-car order in just five days.6
This standard is in sharp contrast to most competitors that require approximately 30 days’
notice to build vehicles. Toyota’s standard is three times faster than even Honda Motors,
considered to be the industry’s most efficient in order follow-through. The five days represent the time from the company’s receipt of an order to the time the car leaves the assembly
plant. Actual delivery may take longer, depending on where a customer lives.
Operations Operations include all activities associated with transforming inputs into the
final product form, such as machining, packaging, assembly, testing, printing, and facility
operations.
Creating environmentally friendly manufacturing is one way to use operations to achieve
competitive advantage. Shaw Industries (now part of Berkshire Hathaway), a world-class
competitor in the floor-covering industry, is well known for its concern for the environment.7
It has been successful in reducing the expenses associated with the disposal of
dangerous chemicals and other waste products from its manufacturing operations. Its environmental endeavors have multiple payoffs. Shaw has received many awards for its recycling
efforts—awards that enhance its reputation.
Efficient operations can also provide a firm with many benefits in virtually any industry—
including restaurants. Strategy Spotlight 3.1 discusses Chipotle’s rather novel approach to
improving its operations.
Outbound Logistics Outbound logistics is associated with collecting, storing, and distributing the product or service to buyers. These activities include finished goods, warehousing,
material handling, delivery vehicle operation, order processing, and scheduling.
Campbell Soup uses an electronic network to facilitate its continuous-replenishment
program with its most progressive retailers.
Each morning, retailers electronically inform Campbell of their product needs and of the level of inventories in their distribution centers.
Campbell uses that information to forecast future demand and to determine which products require replenishment (based on the inventory limits previously established with each
retailer). Trucks leave Campbell’s shipping plant that afternoon and arrive at the retailers’
distribution centers the same day. The program cuts the inventories of participating retailers from about a four- to a two-weeks’ supply. Campbell Soup achieved this improvement
because it slashed delivery time and because it knows the inventories of key retailers and
can deploy supplies when they are most needed.
The Campbell Soup example also illustrates the win–win benefits of exemplary valuechain activities. Both the supplier (Campbell) and its buyers (retailers) come out ahead.
Since the retailer makes more money on Campbell products delivered through continuous
replenishment, it has an incentive to carry a broader line and give the company greater
shelf space. After Campbell introduced the program, sales of its products grew twice as fast
through participating retailers as through all other retailers. Not surprisingly, supermarket
chains love such programs.
Marketing and Sales Marketing and sales activities are associated with purchases of products and services by end users and the inducements used to get them to make purchases.
They include advertising, promotion, sales force, quoting, channel selection, channel relations, and pricing.10,11
Consider product placement. This is a marketing strategy that many firms are increasingly adopting to reach customers who are not swayed by traditional advertising. MercedesBenz is a firm that has aggressively pushed for product placement in Hollywood movies. In
2015, Mercedes products appeared in nine of the top 31 blockbuster movies. For example,
when the villains in the James Bond movie, Spectre, showed up in the desert to pick up
Bond, they arrived in a fleet of Mercedes AMGs.12
Service The service primary activity includes all actions associated with providing service
to enhance or maintain the value of the product, such as installation, repair, training, parts
supply, and product adjustment.
Let’s see how two retailers are providing exemplary customer service. At Sephora.com, a
customer service representative taking a phone call from a repeat customer has instant access
to what shade of lipstick she likes best. This will help the rep cross-sell by suggesting a matching shade of lip gloss. Such personalization is expected to build loyalty and boost sales per customer. Nordstrom, the Seattle-based department store chain, goes even a step further. It offers
a cyber-assist: A service rep can take control of a customer’s web browser and literally lead her
to just the silk scarf that she is looking for. CEO Dan Nordstrom believes that such a capability will close enough additional purchases to pay for the $1 million investment in software.
Support Activities
Support activities in the value chain can be divided into four generic categories, as shown in
Exhibit 3.3. Each category of the support activity is divisible into a number of distinct value
activities that are specific to a particular industry. For example, technology development’s discrete activities may include component design, feature design, field testing, process engineering, and technology selection. Similarly, procurement may include activities such as qualifying
new suppliers, purchasing different groups of inputs, and monitoring supplier performance.
General Administration
• Effective planning systems to attain overall goals and objectives.
• Excellent relationships with diverse stakeholder groups.
• Effective information technology to integrate value-creating activities.
Human Resource Management
• Effective recruiting, development, and retention mechanisms for employees.
• Quality relations with trade unions.
• Reward and incentive programs to motivate all employees.
Technology Development
• Effective R&D activities for process and product initiatives.
• Positive collaborative relationships between R&D and other departments.
• Excellent professional qualifications of personnel.
• Data analytics
Procurement
• Procurement of raw material inputs to optimize quality and speed and to minimize the associated costs.
• Development of collaborative win–win relationships with suppliers.
• Analysis and selection of alternative sources of inputs to minimize dependence on one supplier.
Procurement Procurement refers to the function of purchasing inputs used in the firm’s
value chain, not to the purchased inputs themselves.13 Purchased inputs include raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory
equipment, office equipment, and buildings.14,15
Microsoft has improved its procurement process (and the quality of its suppliers) by providing formal reviews of its suppliers. One of Microsoft’s divisions has extended the review
process used for employees to its outside suppliers.16 The employee services group, which is
responsible for everything from travel to 401(k) programs to the on-site library, outsources
more than 60 percent of the services it provides. Unfortunately, the employee services group
was not providing suppliers with enough feedback. This was feedback that the suppliers
wanted to get and that Microsoft wanted to give.
The evaluation system that Microsoft developed helped clarify its expectations to suppliers. An executive noted: “We had one supplier—this was before the new system—that would
have scored a 1.2 out of 5. After we started giving this feedback, and the supplier understood
our expectations, its performance improved dramatically. Within six months, it scored a 4. If
you’d asked me before we began the feedback system, I would have said that was impossible.
Technology Development Every value activity embodies technology.18 The array of technologies employed in most firms is very broad, ranging from technologies used to prepare documents and transport goods to those embodied in processes and equipment or the product
itself.19 Technology development related to the product and its features supports the entire
value chain, while other technology development is associated with particular primary or
support activities.
Human Resource Management Human resource management consists of activities involved
in the recruiting, hiring, training, development, and compensation of all types of personnel.21 It supports both individual primary and support activities (e.g., hiring of engineers
and scientists) and the entire value chain (e.g., negotiations with labor unions).22
Like all great service companies, JetBlue Airways Corporation is obsessed with hiring
superior employees.23 But the company found it difficult to attract college graduates to
commit to careers as flight attendants. JetBlue developed a highly innovative recruitment
program for flight attendants—a one-year contract that gives them a chance to travel, meet
lots of people, and then decide what else they might like to do. It also introduced the idea of
training a friend and employee together so that they could share a job. With such employeefriendly initiatives, JetBlue has been very successful in attracting talent.
General Administration General administration consists of a number of activities, including general management, planning, finance, accounting, legal and government affairs,
quality management, and information systems. Administration (unlike the other support
activities) typically supports the entire value chain and not individual activities.25
Although general administration is sometimes viewed only as overhead, it can be a powerful source of competitive advantage. In a telephone operating company, for example,
negotiating and maintaining ongoing relations with regulatory bodies can be among the
most important activities for competitive advantage. Also, in some industries top management plays a vital role in dealing with important buyers.26
The strong and effective leadership of top executives can also make a significant contribution to an organization’s success. As we discussed in Chapter 1, chief executive officers
(CEOs) such as Jack Ma and Mark Zuckerberg have been credited with playing critical
roles in the success of Alibaba and Facebook.
