What Is Porter's Value Chain? A Definitive Guide

By Indeed Editorial Team

Published November 30, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Porter's value chain is a strategic management tool companies use to analyze and improve the value they offer their customers. Regardless of your role within an organization's management team, learning about Porter's value chain can help you create more value for your customers and potentially increase company profits. Gaining this information may be useful for your organization and your career, but it requires research. In this article, we define Porter's value chain, list its elements and describe how to use it.

What is Porter's value chain?

Porter's value chain is a collection of processes Harvard Business School professor Michael Porter developed to create value for an organization's customers. Companies use this management tool to gain an advantage over their competitors. Through its processes, Porter's value chain organizes the business' operations into distinct elements and builds a value chain, or a set of activities, that creates more value than they cost. Companies often choose this model because it focuses on the customers.

Related: Value Chain Analysis: What It Is and How To Use It

Elements of Porter's value chain

When outlining the elements of his value chain, Porter listed a series of activities all businesses perform. Then, he divided them into primary and support activities:

Primary activities

An organization's primary activities are the processes involved in making, selling, maintaining and supporting a good or service. They include:

  • Inbound logistics: These are all the processes involved in receiving, storing and distributing resources internally. Companies can create additional value through inbound logistics by improving their relationships with suppliers.

  • Operations: Operations are the activities an organization performs to turn inputs into outputs, or goods or services. Improving the company's operational systems usually creates additional value.

  • Outbound logistics: These are the activities the organization performs to deliver its product or service to the consumer. They can be internal or external and might include collection, storage and distribution systems. The more efficient a company's outbound logistics, the more value they typically provide.

  • Marketing and sales: Marketing and sales include all processes the organization uses to convince clients to purchase its goods or services instead of those sold by competitors. A company can create value by offering customers additional benefits from purchasing its goods or services. It can also add value by improving communication with potential customers.

  • Service: An organization's service is all the activities it performs to maintain its products' worth to the consumer after purchase. Customers often see value in quality after-sale service.

Related: Value Chain Model: What It Is and How To Use It

Support activities

These activities support an organization's primary activities:

  • Purchasing: Purchasing is the acquisition of relevant resources for the organization. It includes all activities the company performs to get materials at low prices, including finding suppliers and vendors and negotiating deals. It's associated with the inbound logistics primary activity.

  • Human resource management: This activity describes the quality of an organization's employee recruitment, hiring, training, motivating, retaining and rewarding processes. It supports all primary activities, making effective HR practices essential for any organization's well-being.

  • Technological development: These activities include managing all hardware, software, procedures and employee knowledge the company needs to transform raw resources into finished goods. It also supports all primary activities, as reducing technology costs and improving efficiency by staying up to date with the latest developments in the industry can add value to any organization.

  • Infrastructure: An organization's infrastructure is its support functions and departments, including legal, quality assurance, accounting, administrative, finance, planning and upper management. Organizations can add value by optimizing how all support departments operate.

Related: What Is Value Creation? (With Tips)

How to use Porter's value chain

Follow these steps when using Porter's value chain:

1. Find the subactivities that relate to each primary activity

Each primary activity has subactivities that create value. The three types of subactivities are:

  • Direct activities: The activities that directly create value. For example, an auto dealership's marketing and sales department can add value by making sales calls to potentially interested customers and advertising on automotive-related websites.

  • Indirect activities: The activities that indirectly create value by supporting the direct activities. Indirect activities at an auto dealership might include keeping detailed customer records so you can personalize advertising and train sales staff to make effective sales calls.

  • Quality assurance activities: The activities that directly and indirectly ensure the organization's goods or services are of a certain quality standard. At the auto dealership, an example of a quality assurance activity is inspecting all pre-owned vehicles for potential faults.

2. Find the subactivities that relate to each support activity

Identify the subactivities within three of the main support activities—purchasing, human resource management and technological development—that improve their efficacy and add value to the primary activities. These subactivities can be direct, indirect or related to quality assurance. You can then identify the subactivities that add value to the organization's infrastructure. They are also direct, indirect and quality-assurance-related and typically improve all primary activities.

Related: 12 Management Tools for a More Productive Workplace (With Tips)

3. Find connections between activities

After identifying all activities, look for connections between them that can add value to the organization by giving you an advantage over competitors. This process can take a significant amount of time and might involve redeveloping the organization's entire value chain framework. It's an important step because each activity that improves the quality of a good or a service or the benefits of using your company's products can add potentially lead to increased profits.

4. Constantly look for new ways to add value

Continue making adjustments that maximize the output the organization offers its customers. These adjustments can be internal, such as management's decision to improve a certain activity, or external, such as a technological update or new ways in which customers perceive your goods and services. Most organizations that achieve long-term success do so by constantly looking for ways to offer more value to their customers.

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