What is Value Chain Analysis?
Value chain analysis is a strategic framework that examines how a company creates value through its sequence of business activities, from raw material inputs to final customer delivery. Developed by Michael Porter in 1985, the model divides activities into primary activities (directly creating the product) and support activities (enabling functions). In consulting, value chain analysis helps identify cost drivers, sources of differentiation, and optimization opportunities.
| Created by | Michael Porter (1985) |
| Source | "Competitive Advantage: Creating and Sustaining Superior Performance" |
| Primary activities | Inbound logistics, Operations, Outbound logistics, Marketing & Sales, Service |
| Support activities | Infrastructure, HR, Technology, Procurement |
| Case interview use | Operations, cost reduction, competitive analysis cases |
Definition
A value chain represents the full range of activities a company performs to bring a product or service from conception to delivery and beyond. The key insight: not all activities create equal value. By analyzing each activity, companies can identify where they excel, where costs accumulate, and where improvements would have the greatest impact.
The margin at the end of the value chain represents the value created minus the costs of performing all activities. A company with competitive advantage either performs activities at lower cost than competitors (cost leadership) or performs them in a way that creates superior customer value (differentiation).
Value chain analysis is particularly powerful when comparing against competitors: which activities do they perform differently? Where are they stronger or weaker? This reveals opportunities for competitive advantage.
Primary Activities
Primary activities are directly involved in creating and delivering the product to customers:
1. Inbound Logistics
Receiving, storing, and distributing inputs. Includes material handling, warehousing, inventory control, and supplier relationships. Example: Amazon's network of fulfillment centers strategically located near demand.
2. Operations
Transforming inputs into the final product. Includes manufacturing, assembly, packaging, equipment maintenance, and quality control. Example: Toyota's lean manufacturing system minimizing waste.
3. Outbound Logistics
Storing and distributing the finished product to customers. Includes warehousing, order processing, transportation, and delivery scheduling. Example: FedEx's hub-and-spoke distribution model.
4. Marketing & Sales
Activities that induce customers to buy. Includes advertising, promotion, sales force, channel selection, pricing, and quoting. Example: Apple's retail stores creating a premium brand experience.
5. Service
Activities that maintain and enhance product value after sale. Includes installation, repair, training, parts supply, and customer support. Example: Salesforce's customer success team driving retention.
Support Activities
Support activities enable the primary activities to function effectively:
| Activity | Description | Examples |
|---|---|---|
| Firm Infrastructure | General management, planning, finance, legal, quality management | CFO function, legal team, strategic planning |
| Human Resource Management | Recruiting, hiring, training, development, compensation | Google's talent acquisition, McKinsey's training programs |
| Technology Development | R&D, process automation, IT systems, product design | Tesla's battery R&D, Netflix's recommendation algorithm |
| Procurement | Purchasing inputs used across all activities | Walmart's supplier negotiations, strategic sourcing |
How to Use Value Chain in Case Interviews
- Map the client's value chain - Identify which activities the company performs. Not all industries have all activities; a software company may skip physical logistics.
- Analyze cost distribution - Which activities consume the most resources? Where are costs higher than industry benchmarks?
- Identify value drivers - Which activities create the most customer value? Where does differentiation come from?
- Compare to competitors - How do competitors perform each activity differently? What can we learn from their approach?
- Recommend optimizations - Which activities should be improved, outsourced, or eliminated? Prioritize by impact and feasibility.
Pro tip: Value chain analysis works especially well for operations and cost reduction cases. If asked "How can we reduce costs by 15%?" - systematically walk through each value chain activity looking for inefficiencies.
Example: Coffee Retailer Value Chain Analysis
Prompt: "A premium coffee retailer has higher costs than competitors despite similar prices. Where should they focus?"
Value chain analysis:
- • Inbound logistics: Direct trade relationships = 15% higher bean costs but better quality
- • Operations: Manual roasting process = 2x labor vs. automated competitors
- • Outbound logistics: Next-day delivery promise = higher shipping costs
- • Marketing: In line with competitors
- • Service: Premium customer support = 20% higher cost but higher retention
Recommendation: Operations has the biggest gap without clear value justification. Invest in semi-automated roasting equipment - maintain quality while reducing labor costs 40%.
Related Concepts
- Profit Equation - Complements value chain by quantifying the cost side
- Case Interview Framework - How value chain fits with other frameworks
- MECE - The structuring principle underlying good frameworks
Frequently Asked Questions
What is value chain analysis?
Value chain analysis is a framework for examining how a company creates value through its business activities. It breaks activities into primary activities (creating the product) and support activities (enabling functions), helping identify cost drivers and sources of competitive advantage.
What's the difference between value chain and supply chain?
Supply chain focuses on the flow of materials from suppliers through to customers - logistics and coordination. Value chain is broader, covering all activities that create value including marketing, operations, HR, and technology. Supply chain is essentially two components (inbound/outbound logistics) within the value chain.
When should I use value chain in a case?
Use value chain when the case involves: (1) Operations improvement - "How can we be more efficient?" (2) Cost reduction - "Where should we cut costs?" (3) Competitive analysis - "Why is competitor X more profitable?" (4) Strategic decisions - "Should we outsource this activity?"
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Start PracticingLast updated: January 15, 2026