Critical Analysis of Porter’s Value Chain Analysis (VCA) Framework
This post presents a critical analysis of Porter’s Value Chain Analysis (VCA) framework by considering both its benefits and its limitations. It first defines the concept of value chain, discusses the primary and support activities, illustrates how to achieve competitive advantage using value chain, analyzes differentiation and cost using value chain, and finally analyzes all the weaknesses and limitations of the framework. For a critical analysis of Porter’s Five Forces model in IT industry, kindly check out my article Critical Analysis of Porter’s Five Forces Model – Information Technology (IT) Industry.
Defining Value Chain
The concept of value chain started by Porter in 1985 to depict how activities and functions of a given organization (e.g. marketing, sales, R&D, production) enable the creation of value for customers. Value chain analysis helps organizations in determining which activities create value and which do not. The value chain is some type of a workflow or a template that defines the internal processes or activities used by a company, and the value and cost of each of these activities which altogether signify the approach used by the company to implement its business level strategy. The value chain explains step by step how a product or service is built from raw materials until it is finally delivered to the end customer.
When the value chain, used by the organization to develop a product, is capable of creating additional value but with no additional costs, a competitive advantage is realized. As shown in figure 1 below, Porter distinguishes two types of activities that constitute the value chain, primary activities and support activities.
These are line activities associated with production, transformation, delivery, and sales. They are classified into four main categories:
- Inbound Logistics: are activities involved in receiving, storing, and provisioning the inputs needed to deliver a product. They include warehousing and control of materials and inventory.
- Operations: are activities that package, maintain, and transform inbound logistics into the final product. These activities can lead to differentiation and lower costs if performed in an efficient manner.
- Outbound Logistics: are activities that pick, pack, store, and deliver the finished product to the end customers.
- Marketing and Sales: are activities involved in advertisement, promotion, distribution channel management, marketing and sales of products. They ensure all customer needs are considered in order to develop better future products.
- Service: are activities that maintain and improve the value of the product to the customers by providing installation, repair, training, and supporting services after delivery.