1. Introduction
Strategic management seeks to explain why some organisations outperform others and how they can sustain competitive advantage over time. While external analysis tools such as PESTEL and Porter’s Five Forces focus on environmental and industry-level factors, internal analysis examines how organisations create value through their activities and resources. One of the most influential frameworks for this purpose is Value Chain Analysis.
Value Chain Analysis was introduced by Porter (1985) as a method for decomposing an organisation into a series of value-creating activities. By analysing these activities individually and in relation to each other, organisations can identify sources of cost advantage and differentiation. The value chain perspective shifts attention from the organisation as a whole to the processes and routines that generate customer value.
In modern business environments characterised by digitalisation, global supply chains, and sustainability pressures, understanding how value is created has become increasingly important. Organisations must not only compete on price and quality but also on speed, innovation, and social responsibility. Value Chain Analysis provides a structured approach to examining these dimensions and linking operational performance to strategic objectives (Johnson et al., 2017).
This article explores Value Chain Analysis as a central tool of internal strategic analysis. It examines its theoretical foundations, explains the structure of the value chain, and discusses its role in strategic decision-making. The article also considers its application in startups and small and medium-sized enterprises (SMEs), its integration with other strategy tools such as SWOT and VRIO, and its limitations and criticisms. The article positions Value Chain Analysis as a bridge between resources, capabilities, and competitive strategy.
2. Conceptual Foundations of Value Chain Analysis
Value Chain Analysis is rooted in Porter’s (1985) theory of competitive advantage, which argues that firms gain advantage by performing activities more efficiently or differently from competitors. According to Porter, value is the amount customers are willing to pay for what a firm provides, and competitive advantage arises when a firm creates more value than its rivals or creates the same value at lower cost.
The value chain framework reflects ideas from industrial organisation economics and systems thinking. It views the firm as a system of interrelated activities rather than a single production unit. Each activity contributes to overall value creation and cost structure.
Value Chain Analysis also complements the Resource-Based View (RBV) of the firm. While RBV focuses on resources and capabilities, the value chain focuses on how those resources are deployed through organisational processes (Barney, 1991). In this sense, Value Chain Analysis operationalises RBV by linking resources to activities and performance.
In strategic management, Value Chain Analysis serves three main purposes:
- identifying sources of cost advantage,
- identifying sources of differentiation,
- supporting strategic positioning decisions.
3. Structure of the Value Chain
Porter (1985) divides organisational activities into primary activities and support activities. Together, these form the value chain.
3.1 Primary Activities
Primary activities are directly involved in the creation, sale, and service of a product or service. They include:
3.1.1 Inbound Logistics
Inbound logistics involves receiving, storing, and handling inputs such as raw materials and components. Efficient inbound logistics reduce costs and ensure timely production.
3.1.2 Operations
Operations transform inputs into finished products or services. This includes manufacturing, assembly, packaging, and quality control. Operational efficiency and innovation are major sources of competitive advantage.
3.1.3 Outbound Logistics
Outbound logistics concerns the distribution of products to customers, including warehousing, transportation, and order processing. Speed and reliability in delivery enhance customer satisfaction.
3.1.4 Marketing and Sales
Marketing and sales activities communicate value to customers and stimulate demand. This includes advertising, pricing strategies, sales force management, and brand development.
3.1.5 Service
Service activities maintain or enhance product value after sale, such as customer support, repairs, and warranties. High-quality service strengthens customer loyalty and differentiation.
3.2 Support Activities
Support activities enable and enhance the performance of primary activities:
3.2.1 Procurement
Procurement involves sourcing inputs such as materials, technology, and services. Strategic procurement can reduce costs and improve quality.
3.2.2 Technology Development
Technology development includes research and development, process automation, and information systems. Innovation in this area supports differentiation and efficiency.
3.2.3 Human Resource Management
HR management includes recruitment, training, and performance management. Skilled and motivated employees are critical to value creation.
3.2.4 Firm Infrastructure
Infrastructure includes management systems, finance, legal structures, and corporate governance. These provide organisational stability and coordination.
4. Value Chain and Competitive Advantage
Value Chain Analysis explains competitive advantage through two main strategies: cost leadership and differentiation (Porter, 1985).
4.1 Cost Advantage
Cost advantage arises when an organisation performs activities more efficiently than competitors. This may involve:
- economies of scale
- process optimisation
- automation
- supply chain integration
For example, retailers such as Walmart achieve cost advantage through efficient logistics and procurement systems.
4.2 Differentiation Advantage
Differentiation advantage occurs when an organisation performs activities in unique ways that customers value, such as superior design, innovation, or service. Luxury brands differentiate through branding and customer experience rather than low cost.
Value Chain Analysis enables organisations to identify which activities contribute most to cost or differentiation and to invest strategically in those areas.
5. Value Chain and Linkages
An important feature of Value Chain Analysis is the concept of linkages between activities. Linkages refer to relationships between different activities that affect cost and performance (Porter, 1985).
For example, improved procurement may reduce defects in operations, which in turn reduces service costs. Similarly, strong HR practices may enhance innovation and productivity across the value chain.
Understanding linkages encourages a holistic approach to strategy rather than isolated optimisation of individual functions.
6. Value Chain and Industry Value Systems
The value chain extends beyond the boundaries of the firm to include suppliers and customers. This broader perspective is known as the value system (Porter, 1985).
Suppliers’ value chains affect the cost and quality of inputs, while customers’ value chains determine how products are used and perceived. Strategic collaboration with suppliers and distributors can therefore enhance overall value creation.
Globalisation and outsourcing have increased the importance of managing value systems rather than just internal value chains.
7. Value Chain Analysis in Startups and SMEs
For startups and SMEs, Value Chain Analysis provides insight into where value is created and how limited resources can be deployed effectively. These organisations often lack scale advantages and must rely on differentiation and innovation (Blank and Dorf, 2012).
Value Chain Analysis helps startups:
- identify core activities
- outsource non-core functions
- focus on customer value
- design business models
Lean Startup theory emphasises experimentation (Ries, 2011), but Value Chain Analysis provides strategic structure by clarifying which activities are critical to delivering value.
SMEs also use Value Chain Analysis to improve efficiency and compete against larger firms by specialising in niche activities.
8. Integration with Other Strategy Tools
Value Chain Analysis is most powerful when combined with other frameworks:
- SWOT identifies strengths and weaknesses within value chain activities.
- VRIO evaluates whether activities are supported by strategic resources.
- PESTEL explains external pressures affecting activities.
- Porter’s Five Forces clarifies competitive dynamics shaping value creation.
Together, these tools form a comprehensive strategic analysis system (Johnson et al., 2017).
9. Digital Transformation and the Value Chain
Digital technologies have transformed traditional value chains. Automation, artificial intelligence, and data analytics reshape operations, marketing, and service activities (Teece et al., 1997).
Platform-based business models blur boundaries between firms and customers, creating new forms of value creation. For example, e-commerce firms integrate logistics, marketing, and technology into unified digital value chains.
However, digitalisation also introduces risks such as cybersecurity threats and data privacy concerns, requiring integration with corporate governance and CSR strategies.
10. Limitations and Criticisms of Value Chain Analysis
Despite its usefulness, Value Chain Analysis has limitations. First, it assumes relatively stable activities and processes, which may not hold in dynamic industries (Mintzberg, 1994).
Second, it focuses primarily on internal efficiency and may underemphasise external collaboration and networks. Third, measuring value and cost at the activity level can be complex and subjective.
Finally, the model was originally developed for manufacturing firms and may require adaptation for service and digital industries.
Thus, Value Chain Analysis should be applied flexibly and in conjunction with other strategy tools.
11. Strategic Implications
Value Chain Analysis encourages organisations to focus on how value is created and captured. It supports decisions about outsourcing, investment, innovation, and differentiation.
By understanding activity-level performance, managers can design strategies that enhance efficiency and customer value while reducing unnecessary costs.
Value Chain thinking also promotes continuous improvement and strategic coherence across organisational functions.
12. Conclusion
Value Chain Analysis is a central tool of internal strategic management that enables organisations to understand how their activities contribute to competitive advantage. By decomposing the organisation into primary and support activities, it reveals sources of cost efficiency and differentiation.
This article has explored the theoretical foundations, structure, and strategic applications of Value Chain Analysis. It has shown that the framework remains relevant in contemporary environments characterised by digital transformation and global value systems.
As part of the Internal Analysis section of the Strategy Tools series, Value Chain Analysis complements SWOT and VRIO by providing a detailed examination of organisational processes. When integrated with external analysis tools, it supports informed, coherent, and sustainable strategy development.
Executive Summary
Value Chain Analysis is a strategic management framework that examines how organisations create value through a sequence of activities. Introduced by Porter (1985), it divides organisational activities into primary and support functions and identifies how each contributes to cost advantage and differentiation.
This article explains how Value Chain Analysis supports strategic decision-making by revealing sources of competitive advantage at the activity level. It highlights the importance of linkages between activities and the broader value system that includes suppliers and customers.
The article also discusses the relevance of Value Chain Analysis for startups and SMEs, which use the framework to focus on core activities and differentiate through innovation rather than scale. Digital transformation has reshaped traditional value chains, creating new opportunities and risks.
Despite limitations such as subjectivity and changing industry conditions, Value Chain Analysis remains a valuable tool when combined with frameworks such as SWOT, VRIO, and Porter’s Five Forces. It enables organisations to align operations with strategic objectives and enhance long-term performance.
Overall, Value Chain Analysis provides a structured approach to understanding how resources and capabilities are transformed into customer value and competitive advantage.
References (OBU Harvard Style)
Barney, J.B. (1991) ‘Firm resources and sustained competitive advantage’, Journal of Management, 17(1), pp. 99–120.
Blank, S. and Dorf, B. (2012) The Startup Owner’s Manual. Pescadero, CA: K&S Ranch.
Johnson, G., Scholes, K. and Whittington, R. (2017) Exploring Strategy. 11th edn. Harlow: Pearson Education.
Mintzberg, H. (1994) The Rise and Fall of Strategic Planning. New York: Free Press.
Porter, M.E. (1985) Competitive Advantage. New York: Free Press.
Ries, E. (2011) The Lean Startup. New York: Crown Publishing.
Teece, D.J., Pisano, G. and Shuen, A. (1997) ‘Dynamic capabilities and strategic management’, Strategic Management Journal, 18(7), pp. 509–533.
Wernerfelt, B. (1984) ‘A resource-based view of the firm’, Strategic Management Journal, 5(2), pp. 171–180.