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Value Chain

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Key takeaways: Michael Porter’s Value Chain describes the sequence of all activities a company performs to create and deliver a product or service to its customers. Its analysis is a central tool for Business Model Innovation and Digital Transformation.

Definition: What is the value chain?

The value chain is a model developed by Michael Porter in 1985 that systematically represents the totality of all value-creating activities of a company. Each activity contributes to the creation of the final product and adds value—or incurs costs.

The concept is based on a simple idea: if you understand how value is created in your company, you can strategically build competitive advantages—either through cost leadership (making activities more efficient) or differentiation (making activities better or different).

In the context of modern business model innovation, the analysis extends beyond the company itself: examining the entire value chain of an industry reveals opportunities for disruption, platform models, and digital business models.

Primary and support activities

Primary activities

Directly involved in creating and delivering the product:

  • Inbound logistics: Procurement, receiving, and warehousing of raw materials and intermediate products
  • Production/Operations: Transformation of inputs into the final product or service
  • Outbound logistics: Storage, distribution, and delivery to the customer
  • Marketing & Sales: Go-to-market, pricing, customer journey, and sales
  • Service: Customer service, maintenance, training, and after-sales support

Support activities

  • Firm infrastructure: Management, planning, finance, legal
  • Human resource management: Recruiting, development, compensation
  • Technology development: R&D, IT systems, digitalization
  • Procurement: Purchasing of resources, negotiation with suppliers

Conducting a value chain analysis

  1. Identify activities: List all primary and support activities of your company
  2. Allocate costs: Which activities incur which costs?
  3. Identify value drivers: Which activities create the most customer value? Where is your USP?
  4. Find optimization potential: Where can you reduce costs without destroying value? Where can you increase value?
  5. Analyze the industry chain: What does the entire value chain of your industry look like? Where can you skip or redefine stages?

Digital disruption of the value chain

Digital transformation fundamentally changes value chains:

  • Disintermediation: Intermediaries become obsolete—direct-to-consumer models bypass retail stages
  • Platformization: Platforms orchestrate entire value chains without producing themselves (Airbnb, Uber)
  • Automation: AI and robotics automate individual chain links
  • Servitization: From product to service—value creation shifts from production to ongoing operations
  • Data-based value creation: Data becomes an independent value creation link

Optimizing the value chain for SMEs

For SMEs, value chain analysis is particularly valuable:

  • Focus on core competencies: Identify the 2-3 activities in which you are truly better than the competition—and invest there
  • Outsourcing potential: Non-differentiating activities can often be performed more efficiently by specialists
  • Digitalization levers: Which chain links benefit most from digitalization?
  • New revenue models: Can you unlock new revenue streams by shifting positions in the chain?

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Frequently Asked Questions (FAQ)

What is a Value Chain, Simply Explained?

The value chain shows all the steps a company goes through to create a product or service and deliver it to the customer—from procurement through production and sales to customer service. Each step adds value and incurs costs.

Why is Value Chain Analysis important?

It helps companies understand exactly where competitive advantages arise and where optimization potential exists. Through analysis, you can strategically reduce costs, strengthen differentiation, and identify innovation opportunities—especially in the context of digital transformation.

How does digitalization change Value Chains?

Digitalization enables disintermediation (elimination of intermediaries), platformization (orchestration instead of in-house production), automation (AI and robotics), servitization (from product to service), and data-based value creation. Entire industries are being redefined as a result.

How can SMEs use Value Chain Analysis for competitive advantage?
SMEs can identify specific activities where they can outperform larger competitors through specialization, speed, or customer intimacy. For example, by analyzing which value chain activities customers care most about, you might discover that faster delivery or customization matters more than price, allowing you to compete against bigger players. Many successful SMEs also find opportunities to eliminate or outsource low-value activities and double down on areas where they excel, creating a lean but powerful value chain.
Should I analyze competitors' Value Chains or just my own?
Analyzing both provides maximum strategic insight. Understanding competitors' value chains reveals their cost structures, potential weaknesses, and areas where you can differentiate. For instance, if competitors rely on expensive physical retail while you can sell direct online, you've identified a structural cost advantage. Many strategic innovations come from reorganizing the value chain differently than industry norms – IKEA's self-assembly model and Zara's ultra-fast fashion supply chain both emerged from reimagining traditional value chains.

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