Porter's Value Chain
Porter's Value Chain breaks a company into the primary activities that create and deliver its product and the support activities that make them possible, so you can see exactly which links add margin and which just add cost.
Support functions stretch along the top, resting above a row of primary activities that turn inputs into margin.
Reach for this when…
- Margins are falling and nobody can point to which activity is actually eating them.
- You are deciding what to outsource and need to know which activities are truly core.
- Two departments blame each other for a cost problem that sits between them.
How to run it
- List the primary activities end to end: inbound logistics, operations, outbound logistics, marketing and sales, service.
- List the support activities underneath: infrastructure, HR, technology development, procurement.
- Cost and value each activity, not the business as a whole.
- Find the links between activities where a change in one affects the cost of another.
- Invest in the activities that create real differentiation or cost advantage, and cut or outsource the rest.
A worked example
Situation. Marco Santos ran an automotive parts manufacturer in Cebu, Philippines, where margins had been sliding for two years despite steady sales.
Applied. Costing every link separately, he found outbound logistics, not production as everyone assumed, was quietly eating the margin through a bloated regional distribution contract.
Result. He renegotiated the logistics contract and kept production exactly as it was, recovering most of the lost margin without touching the factory floor.
The catch
The Value Chain assumes activities sit in a clean line, but in most real businesses they loop and overlap, especially in services where the customer is inside several stages at once. It also takes real time and data to cost each activity honestly, and it is easy to stop at the obvious activities and miss the links between them where the real cost often hides.
The biggest cost is rarely in the activity everyone already suspects. Cost each link before you believe the assumption.
Origin: Michael Porter