Value Chain

The term value chain is used in two distinct contexts. The concept has developed into a well-known notion within global business and management theory since it was launched by Michael Porter in 1985. Meanwhile, Raphael Kaplinsky's reinterpretation of the concept is much used within developmental economics. The purpose of this entry is to explore the difference between the two potential meanings of the concept of a value chain and their different implications for understanding competition within global business.

The concept of a value chain was originally promoted by Michael Porter in the book Competitive Advantage: Creating and Sustaining Superior Performance, in which he explores the underpinnings of competitive advantage in the individual firm. A value chain describes the sequence of activities that firms perform to add value to a certain product or service. The difference between the total added value and the total costs to operate the chain results in a profit margin. The success of a company in managing a profitable value chain, maximizing value creation while minimizing costs, is an important aspect of competitive advantage.

Porter distinguishes between primary activities and support activities. Primary activities are directly concerned with the creation or supply of a product or service. They can be grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service. These primary activities are linked to support activities that help to improve efficiency such as procurement, technology development, human resource management, and strategic planning.

Porter showed that a company's competitive strategy should not be aimed at fine-tuning one activity of the chain, nor does it suffice to improve all the different activities. Although these value activities are the building blocks of competitive advantage, the value chain is more than a mere collection of independent activities. Value activities are linked within the value chain and these linkages determine competitive advantage or disadvantage. For Porter, streamlining the value chain is not enough; he puts the competitive logic of cost leadership and diversification up front.

Porter's insights on competition and the concept of the value chain have gained much attention in academia and management. Numerous empirical analyses have made use of the concept of a value chain and since 1985, the concept itself has even been reinterpreted. Raphael Kaplinksy broadened the scope of the analysis by stepping outside the individual firm. For Kaplinsky, a value chain describes the full range of activities that are required to bring a product or service from conception, through the different phases of production (involving both the primary and support activities), delivery to final consumers, and final disposal after use. Even when a primary or support activity has been outsourced by a particular firm, it still forms part of the total value chain that supports a product or service.

The big difference between Kaplinsky and Porter is that Kaplinksy reconstructs the value chain in relation to a certain product or service, not a particular firm. Only when there is full vertical integration would the two meanings of a value chain coincide. Porter saw the difference but called this network of interfirm linkages a value system, while James Womack and Daniel Jones refer to it as a value stream, adding further to the conceptual confusion.

...