, also known as
value chain analysis
, is a concept from businessmanagement that was first described and popularized by Michael Porter. A value chainis a chain of activities for a firm operating in a specific industry. The business unit is theappropriate level for construction of a value chain, not the divisional level or corporatelevel. Products pass through all activities of the chain in order, and at each activity theproduct gains some value. The chain of activities gives the products more added valuethan the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities.A diamond cutter can be used as an example of the difference. The cutting activity mayhave a low cost, but the activity adds much of the value to the end product, since arough diamond is significantly less valuable than a cut diamond. Typically, the describedvalue chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of thebusiness, e.g. ISO 9001.
Over the years, some businesses have controlled almost all factors of production anddistribution (Ford in its early days) whereas others have outsourced almost everything(Dell). In the early days of industry, large enterprises controlled and owned most factorsof production and businesses like Ford Motor Company in the USA had their ownfoundries, railroad, forestry and electricity generating plants, In the UK, Cadbury’s andLever Brothers went so far as to build villages and amenities for their workers. Themotivation for this vertical integration was varied but included cost and quality control,worker loyalty and protection of proprietary processes. As well as control of production,resources and employees, businesses like Ford also controlled the retail sales andservice network.Ford Motor Company developed its structure over many decades of steady growth but,even prior to the advent of e-Business; this kind of structure was being broken down, asa monolithic type of organization like this is less able to respond to changing marketrequirements. Furthermore, external specialized organizations may be able to offer ancillary services such as transport and power more cheaply than a business like FordMotor Company could do it for itself. Ford was an extreme case of internal control of allfactors of production and distribution, whereas most other businesses had longmaintained a mixture of some in-house capabilities together with services sourced fromother businesses
Porter’s Value Chain Model