The Value Chain

The Value Chain, developed by Michael Porter, is a proven framework that systematically visualizes a company's value-creating activities. It shows how a product gains value step by step — from production to sales. 🎯 There are primary activities like production and marketing, and supporting activities like IT and HR. When all parts work together perfectly, real value is created for both customers and the company. This analysis helps pinpoint areas for improvement and demonstrates how profit margins can be justified through optimized processes.

Learn more about case interview frameworks in our Case Interview Basics! 🚀

Primary Activities of the Value Chain

The primary activities are the key drivers of value creation. They are essential to developing, marketing, and selling a product or service:

• Inbound logistics: Includes sourcing and storing raw materials. Example: An automotive manufacturer ensures timely delivery of parts to avoid production downtime.
• Operations: Here, raw materials are transformed into the final product. Example: A smartphone maker uses automated production lines to optimize costs and quality.
• Outbound logistics: Refers to storing and distributing the finished product. Example: An online retailer optimizes its shipping processes by strategically placing warehouses.
• Customer service: Provides support after purchase. Example: A software provider offers 24/7 customer support to assist users quickly.
• Marketing and sales: Responsible for promoting and selling the product. Example: A company runs social media campaigns to engage younger audiences.

These primary activities aren't isolated. The examples mainly apply to traditional manufacturing, but they can also be relevant to service industries, where information is processed. Generally, a value chain can also represent an entire industry, covering the activities of multiple companies working together to deliver a complete product.

Supporting Activities of the Value Chain

Supporting activities, on the other hand, are essential for running the business but don’t directly create value in the same way. These are often considered overhead, yet they are crucial for a company’s efficiency and stability:

• Firm infrastructure: Includes management, planning, and strategic leadership. Example: An effective management team quickly adapts to market changes.
• Human resource management: Responsible for recruiting and training employees. Example: A tech company invests in training programs to continuously develop its staff.
• Research and development (R&D): Drives innovation and product improvement. Example: A pharmaceutical company invests in R&D to develop new drugs and maintain a competitive edge.
• Technology: Involves using modern tech to support primary activities. Example: A retailer uses data analytics to understand customer behavior and create targeted offers.

The nature of primary and supporting activities varies by industry and needs to be adjusted accordingly. By analyzing these activities, companies can identify where improvements can be made to increase value. 🚀

Applying Value Chain Analysis

Value chain analysis can be used at both the company and market level.

At the company level:

• When facing general quality issues or rising costs, examine the primary and supporting activities to find the root cause.
• To assess a business model, conduct a value chain analysis to identify key processes that drive the most value and profit. This involves defining core and secondary activities, and using tools like a SWOT analysis to make detailed recommendations.
• For logistical issues, analyze all parts of the supply chain.
• When redesigning a business model, a value chain analysis can reveal which steps might be outsourced.

At the market level:

Value chain analysis provides an overview of key players and power dynamics within a market. When trying to understand how a product is made and its unique characteristics, follow its production through the value chain.

It's also essential for a profit pool analysis in an industry, offering transparency about which steps in the value chain are most attractive, helping shape a market strategy.

The Value Chain in Case Interviews

The value chain is frequently used not just in practice but also in case interviews to analyze business activities in detail. When asked to evaluate a company or market strategy in a case interview, the value chain helps systematically map out the value-creating steps. It allows you to clearly structure both primary and supporting activities, identify weaknesses, and make recommendations for improvements.

In solving a case, a well-thought-out value chain analysis can make all the difference — whether it's identifying logistical bottlenecks or uncovering strategic competitive advantages. Here, the MECE principle (mutually exclusive, collectively exhaustive) is crucial, as it plays a central role in structuring case solutions, making your argumentation clearer and easier to follow.

💡Tip for your case interview: Try to apply value chain activities to the specific challenges of the case. Grab one of our Valuation Cases from the Case Library and give it a try! This framework works particularly well for those types of cases. ✨

👉 In addition: Don't miss our article on Valuation – it's a must-read at this point!

Key Takeaways on the Value Chain

• The value chain is useful for structured analysis of value-creating processes in both companies and industries, and it follows the MECE principle.
• It distinguishes between primary activities (e.g., production, marketing) and supporting activities (e.g., HR), which are crucial for efficiency.
• The analysis helps identify areas for improvement, resolve quality issues, or evaluate business models.
• It offers an overview of key players and power dynamics within a market.
• In case interviews, the value chain helps you analyze complex business activities, identify weaknesses, and make strategic recommendations.