What is Value Chain Analysis?
Porter's value chain (1985) decomposes the firm into nine activities. Five primary activities: inbound logistics, operations, outbound logistics, marketing & sales, service. Four support activities: firm infrastructure, human resource management, technology development, procurement. Each activity adds margin (the difference between value created and cost). The point of the analysis is to identify which activities create competitive advantage and to invest in them disproportionately. Strategic advantage rarely comes from a vague capability — it comes from a specific activity executed differently or better than rivals.
How Value Chain Analysis actually works
The framework breaks down into the following moving parts. Knowing what each piece is — and what it is not — is what separates a B-grade answer from an A-grade answer in a written assignment.
- Inbound logistics — receiving, storing, distributing inputs
- Operations — converting inputs to outputs
- Outbound logistics — distributing finished products
- Marketing & sales — generating demand
- Service — post-purchase support
- Support — infrastructure, HR, technology, procurement
- Each activity is a candidate for cost reduction or differentiation
A worked example: IKEA
IKEA's value chain is integrated for cost. Inbound: long-term supplier contracts and global sourcing. Operations: flat-pack design that reduces shipping volume by 80%. Outbound: customer self-service from warehouse-style stores. Marketing: catalog-driven, low advertising spend. Service: customer-assembly. Support activities — proprietary logistics, vertically integrated forestry, in-house design — reinforce the cost position. Each activity is engineered for the same strategy. A competitor copying one activity would gain little; copying the whole chain is essentially impossible.
Don't lose marks for these
- Listing activities without identifying which create advantage
- Treating support activities as overhead rather than strategic
- Failing to map upstream/downstream linkages
How to use this on the exam
Score-maximizing moves
- Identify 1-2 activities that create the firm's advantage
- Show interactions across activities
- Cite Porter 1985
When to use Value Chain Analysis (and when not to)
Use Value Chain Analysis when your assignment asks you to analyze, structure, or recommend — and when you have at least two data points to populate every cell of the framework. Skip it when the question is asking for a numerical answer or a single recommendation, since Value Chain Analysis is a structuring tool, not a calculator.