What is Porter’s Value Chain Model And Why It Matters In Business

In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.

Understanding Porter’s Value Chain model

Porter’s Value Chain model is a strategic management tool developed by Harvard Business School professor Michael Porter.

The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.

In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage.

Competitive advantage occurs when a business systematically examines its internal processes and how they interact with each other. Each process in the value chain should create value that exceeds the cost of creating that value. In other words, it should be profitable.

The strength of Porter’s model lies in its focus on customers through value chain systems. This is in contrast to other value chain models that focus on departmental and accounting expenses, for example. 

The primary activities of Porter’s Value Chain model

Porter breaks down his value chain model into five primary processes or activities.

1. Inbound logistics

This includes the warehousing and associated inventory control of raw materials. This also includes the nature of the relationship with suppliers.

2. Operations

Operations encompass any process that turns raw materials into a finished product ready for sale, including labeling, branding, and packaging.

3. Outbound logistics

Outbound logistics concern any process where the product is distributed to a customer. This includes the storage and distribution of products and the processes involved in fulfilling customer orders.

4. Marketing and sales

Any processes that attempt to enhance product visibility among a target audience are included in marketing and sales. This activity is also heavily reliant on customer relationships.

5. Services

Services include any processes that occur after a purchase has been made, including customer service, repairs, refunds, and warranty acknowledgment.

Secondary activities

Within Porter’s Value Chain model four secondary activities support the foundational primary activities common to most businesses.

Here is a brief look at each.

1. Company infrastructure

Company infrastructure entails any process that supports daily business operations. Administration, clerical, financial, and line management are all value-creating infrastructure processes.

2. Human resource management

Human resource management (HRM) covers any process related to the training, acquisition, or termination of employees. HRM departments and their ability to hire talented and motivated staff are crucial to a company’s competitive advantage.

3. Research and development

Technology can create a competitive advantage in Porter’s value chain because it can streamline important processes. These include payroll automation software, customer service procedures, and distribution networks.

4. Procurement

Procurement is simply the acquisition of necessary goods or services. The most typical example is the procurement of raw materials and the negotiation of pricing and product purchase contracts. It may also include the purchase of equipment, offices, buildings, and machinery.

Starbucks and Porter’s value chain model

To better understand the value chain concept, let’s take a look at the various value chain and secondary process activities using Starbucks as an example.

Value chain activitiesInbound logistics  

The Starbucks value chain begins with buyers purchasing high-quality coffee beans from primary producers in Asia, Africa, and Latin America. The beans are roasted and packaged – which adds value to their sale price – and sent to a mixture of Starbucks-owned and third-party distribution centers.

Note that the procurement process is never outsourced to ensure quality standards are enforced from the start of the chain.

Operations

Starbucks operates more than 32,000 stores in 80 different countries. Stores are either company-owned or licensed to other companies who have access to desirable retail spaces such those inside airports.

Starbucks also owns a range of related brands such as La Boulange, Teavana, Ethos Water, and Seattle Coffee Co.

Outbound logistics

Starbucks does not tend to employ a B2B model where other brands distribute its products, but a small selection of coffee products can be found in supermarkets. 

Most products are transported from warehouses and distribution centers and then sold in Starbucks stores and cafés around the world. 

Marketing and sales

Starbucks is one of the world’s most recognizable brands, and for good reason. The company is able to promote its brand with consistent messaging across social media, video, television, events, and various in-store experiences such as new product sampling.

Service

The company aims to build brand loyalty through a superior in-store experience. After witnessing the café culture in Italy, CEO Howard Schultz wanted to bring a similar experience to American coffee lovers. 

In a later interview, he wanted Starbucks to serve “as a third place between home and work, an extension between people’s lives, at a time when people have no place to go.” In addition to home-based comforts, Starbucks invests heavily in customer service training to add value to the chain.

Secondary process activities

Let’s now take a look at the secondary process activities.

Company infrastructure

This encompasses various departments that are necessary to maintain company operations, such as finance and legal. 

Starbucks also employs business managers in corporate offices and store managers in each café to oversee the baristas.

Human resource management

Starbucks is well known for its effective human resource management. Employees are offered a range of perks, including health coverage, paid leave, retirement plans, subsidized university education, company stock plans, and discounts on work-related transportation expenses. 

These initiatives result in a motivated, efficient, and engaged workforce which increases employee retention.

Research and development

Each Starbucks store provides unlimited bandwidth free of charge which creates significant value for casual diners and businessmen alike. The company also uses technology to ensure the taste of its coffee is consistent across its stores.

The Starbucks Rewards program app is another example of the café chain using technology to its advantage. Customers can download an app, use it to pay for their coffee, and collect stars that can be redeemed for food, drinks, and more. Customers must preload the app with money or redeem a gift card to make a purchase.

Procurement

As we noted earlier, procurement for Starbucks means sourcing coffee beans directly from primary producers on several continents. Purchasing agents that are employed by the company form strategic partnerships with each producer and communicate the standards they must meet in terms of bean quality.

Key takeaways:Porter’s Value Chain model is a strategic management tool for the analysis of a company’s value chain.Porter’s Value Chain model is customer relationship-centric and is used by businesses to systematically examine each of their many processes for profitability. It is comprised of five primary value chain activities that are further supported by four secondary process activities.The value chain of Starbucks starts from the moment it sources beans from primary producers in various countries. Value is also added to the Starbucks in-store experience and consistent brand messaging.Read also: Business Strategy, Examples, Case Studies, And ToolsOther frameworks by Michael PorterPorter’s Five ForcesPorter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. 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