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How to use Porter's Value Chain Analysis

The value chain is a simple graphical method for

  • identifying and describing a firm's main functions,
  • understanding how they add value, and
  • pinpointing a firm's sources of competitive advantage and differentiation

The sample diagram below shows a generic value chain originally described by Porter:
Of course, this value chain describes a typical business dealing in physical goods. For example, manufacturing or distribution. The value chain for a service organisation might look completely different. See, for example, An investment management Value Chain.

To get the most out of value chain analysis it is important to identify the processes that best describe each operation. Each business should be unique. Therefore, each value chain, even at this high level, could be different.

Once you've mapped out the core functions within the organisation, you can then consider each function in more detail. Consider factors, depending on your purpose, such as:

  • people,
  • processes,
  • technology,
  • costs,
  • strengths,
  • weaknesses, etc.

There are many uses for a Value Chain analysis, for example:
  1. Create a general yet holistic and shared level of awareness of the basic functions of a firm and how it creates and consumes value.

    This is a useful underpin for many other forms of strategic analysis. For example, you could create a matrix with the 7-Ss of the McKinsey 7S model along one axis and the processes from the Value Chain along the other axis. This will give you a more thorough and detailed analysis.

    This is also an important step when working with functional teams from within a business. People from different functional areas tend to have incomplete or skewed views of the organisation as a whole. For example, salespeople tend to have a sales-orientated view. They may underestimate the importance of inbound logistics. A value chain can help you to identify and correct this.

  2. Design a Target Operating Model (TOM).

    S
    ee also How to design a Target Operating Model (TOM).

    The Value Chain is a useful model for ensuring you've designed the Operating Model of an entire organisation. That is including both the core operating functions as well as the supporting functions.

  3. Do a gap analysis and design a strategy to close that gap.

    Using the same framework for describing both your existing operation (1 above) and your Target Operating Model (2 above) makes it easier to identify the gaps between the two. Then you can put plans in place to close those gaps. This alone can be sufficient to create a transformation strategy. However, I'd always advise also taking some external factors into consideration before getting too far down this track.

  4. Ensure complete coverage in major change programmes.
    A value chain model provides a useful checklist for major change programmes. This will ensure you've considered the impact and implications for all functions within the organisation. For increased consistency, you could create your project's work breakdown structure along the same lines as the value chain.
  5. Facilitate post-acquisition integration.

    A  post-acquisition integration is one kind of a major change programme. For an integration exercise, you'd first need to describe both organisations using the same value chain. This, in itself, could increase your understanding of the fit between the two organisations.

Use a Porter's Value Chain template


The diagram shown above was drawn with StratNavApp.com, the free online collaborative tool for strategists - try it now for free. It includes and integrates templates for the value chain and many other popular strategy models.

See also:

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