Framework library · Competitive and market analysis
Value chain analysis
Porter's value chain divides a business into five primary activities that make and deliver the product and four support activities that run across them. Advantage comes from performing particular activities at lower cost than rivals or in a way customers value more, so the analysis asks of each activity what it costs, how it compares with rivals and whether the business should do it at all.
Use it when
- You need to know where cost is concentrated in the business and where the advantage over rivals is actually made.
- You are deciding what to outsource, share or partner on, and need to separate the activities that differentiate from those that do not.
- Margins are falling and you want to find which activities are driving cost up.
Avoid it when
- You are analysing the industry rather than the firm. Use Porter's Five Forces, or map the industry's value chain across companies.
- Cost cannot yet be split by activity. Do the activity costing first, or the analysis will rest on guesses.
- The business is mainly a platform matching two groups of users, where value comes from network effects. The linear chain fits it poorly. Use the Business Model Canvas.
How to run it
Map the activities in your own terms
Use Porter's nine categories as headings and write what each means for your business. For a network operator, inbound logistics covers spectrum, sites, equipment and backhaul.
Attach cost to each activity
Estimate each activity's share of total cost from the accounts. The shares should add up to 100%.
Judge performance against rivals
For each activity, judge whether you are better or worse than the main competitors, and note the evidence.
Mark the source of advantage
Each activity lowers cost relative to rivals, makes the offer more valuable to customers, or does neither. Most do neither.
Look for links between activities
Advantage often sits in how two activities work together, such as network planning and sales choosing the same towns.
Decide what to keep, improve or hand over
Invest where you differentiate. Outsource or share where an activity does neither and a supplier has more scale.
Work through it
Answer the questions below, or load the worked example to see a finished one. The drawing updates as you type. Export the result as a PowerPoint deck, a Word document, an Excel workbook, a PDF or plain text.
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Mistakes to avoid
- Listing departments rather than activities. The organisation chart rarely maps one to one onto the activities that create value.
- Calling every activity a source of advantage. If a rival could buy the same thing from a supplier, it is not one.
- Outsourcing on cost alone and losing an activity that holds the business together, such as network planning.
- Ignoring the links between activities, where much of the advantage sits.
Where it comes from
Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (Free Press, 1985), which set out the value chain as five primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service), four support activities (firm infrastructure, human resource management, technology development, procurement) and margin. Source.
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Further reading
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