Porter’s five forces and value-chain analysis

Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.

The five forces of competition according to Porter are:

– Threat of substitutes

– Rivalry

– Supplier power

– Buyer Power

– Barriers to entry

Porter has contributed the value-chain analysis model, which is:

Value Chain Analysis helps you identify ways you can create the best value for your customers. Value Chain Analysis is a three step process:

1. Activity Analysis – identify all the activities involved to deliver your product or service.

2. Value Analysis – identify what to be done for each of the activity to add the greatest value to your customer.

3. Evaluating and Planning – Evaluate if it is worth implementing it and then plan for action.

Porter has contributed immensely to marketing and strategy. Someof his major contributions are:

– Five Force framework

– Diamond Model

– Value Chain Analysis

Although there are some critics like the Blue Ocean Strategy, Porter is regarded as one of the best management thinkers in the world.

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Value Chain Analysis

Achieving Excellence in the
Things that Really Matter

Value Chain Analysis is a useful tool for working out how you can create the greatest possible value for your customers.

In business, we’re paid to take raw inputs, and to “add value” to them by turning them into something of worth to other people. This is easy to see in manufacturing, where the manufacturer “adds value” by taking a raw material of little use to the end-user (for example, wood pulp) and converting it into something that people are prepared to pay money for (e.g. paper). But this idea is just as important in service industries, where people use inputs of time, knowledge, equipment and systems to create services of real value to the person being served – the customer.

And remember that your customers aren’t necessarily outside your organization: they can be your bosses, your co-workers, or the people who depend on you for what you do.

Now, this is really important: In most cases, the more value you create, the more people will be prepared to pay a good price for your product or service, and the more they will they keep on buying from you. On a personal level, if you add a lot of value to your team, you will excel in what you do. You should then expect to be rewarded in line with your contribution.

So how do you find out where you, your team or your company can create value?

This is where the “Value Chain Analysis” tool is useful. Value Chain Analysis helps you identify the ways in which you create value for your customers, and then helps you think through how you can maximize this value: whether through superb products, great services, or jobs well done.

This article looks at a simple approach to using value chains. A more structured approach was developed by Harvard Business School professor Michael Porter (also creator of the 5 Forces tool) in his book “Competitive Advantage“. You can find out more about this version by clicking here.

How to use the tool:

Value Chain Analysis is a three-step process:

  1. Activity Analysis: First, you identify the activities you undertake to deliver your product or service;

  2. Value Analysis: Second, for each activity, you think through what you would do to add the greatest value for your customer; and
  3. Evaluation and Planning: Thirdly, you evaluate whether it is worth making changes, and then plan for action.

We follow these through one-by-one:-

Step 1 – Activity Analysis
The first step to take is to brainstorm the activities that you, your team or your company undertakes that in some way contribute towards your customer’s experience.

At an organizational level, this will include the step-by-step business processes that you use to serve the customer. These will include marketing of your products or services; sales and order-taking; operational processes; delivery; support; and so on (this may also involve many other steps or processes specific to your industry).

At a personal or team level, it will involve the step-by-step flow of work that you carry out.

But this will also involve other things as well. For example:

  • How you recruit people with the skills to give the best service.

  • How you motivate yourself or your team to perform well.
  • How you keep up-to-date with the most efficient and effective techniques.
  • How you select and develop the technologies that give you the edge.
  • How you get feedback from your customer on how you’re doing, and how you can improve further.

If you carry out the brainstorming behind the Activity Analysis and Value Analysis with your team, you’ll almost certainly get a richer answer than if you do it on your own. You may also find that your team is more likely to “buy into” any conclusions you draw from the exercise. After all, the conclusions will be as much theirs as yours.

Once you’ve brainstormed the activities which add value for your company, list them. A useful way of doing this is to lay them out as a simplified flow chart running down the page – this gives a good visual representation of your “value chain”. You can see an example of this in Figure 1 below.

Step 2 – Value Analysis
Now, for each activity you’ve identified, list the “Value Factors” – the things that your customers’ value in the way that each activity is conducted.

For example, if you’re thinking about a telephone order-taking process, your customer will value a quick answer to his or her call; a polite manner; efficient taking of order details; fast and knowledgeable answering of questions; and an efficient and quick resolution to any problems that arise.

If you’re thinking about delivery of a professional service, your customer will most likely value an accurate and correct solution; a solution based on completely up-to-date information; a solution that is clearly expressed and easily actionable; and so on.

Next to each activity you’ve identified, write down these Value Factors.

And next to these, write down what needs to be done or changed to provide great value for each Value Factor.

Step 3 – Evaluate Changes and Plan for Action
By the time you’ve completed your Value Analysis, you’ll probably be fired up for action: you’ll have generated plenty of ideas for increasing the value you deliver to customers. And if you could deliver all of these, your service could be fabulous!

Now be a bit careful at this stage: you could easily fritter your energy away on a hundred different jobs, and never really complete any of them.

So firstly, pick out the quick, easy, cheap wins – go for some of these, as this will improve your team’s spirits no end.

Then screen the more difficult changes. Some may be impractical. Others will deliver only marginal improvements, but at great cost. Drop these.

And then prioritize the remaining tasks and plan to tackle them in an achievable, step-by-step way that delivers steady improvement at the same time that it keeps your team’s enthusiasm going.

If you have a strong enough relationship with one or more of your customers, it may be worth presenting your conclusions to them and getting their feedback – this is a good way of either confirming that you’re right or of getting a better understanding of what they really want.


Lakshmi is a software development manager for a software house. She and her team handle short software enhancements for many clients. As part of a team development day, she and her team use Value Chain Analysis to think about how they can deliver excellent service to their clients.

During the Activity Analysis part of the session, they identify the following activities that create value for clients:

  • Order taking

  • Enhancement specification
  • Scheduling
  • Software development
  • Programmer testing
  • Secondary testing
  • Delivery
  • Support

Lakshmi also identifies the following non-client-facing activities as being important:

  • Recruitment: Choosing people who will work well with the team

  • Training: Helping new team members become effective as quickly as possible, and helping team members learn about new software, techniques and technologies as they are developed.

Lakshmi marks these out in a vertical value chain on her whiteboard (you can see the first three client-facing activities shown in the “Step 1: Activity Analysis” box in Figure 1 below):

Value Chain Diagram

Drawn using SmartDraw. Click for free download.

Next, she and her team focus on the Order Taking process, and identify the factors that will give the greatest value to customers as part of this process. They identify the following Value Factors:

  • Giving a quick answer to incoming phone calls;

  • Having a good knowledge of the customer’s business, situation and system, so that they do not waste the customer’s time with unnecessary explanation.
  • Asking all the right questions, and getting a full and accurate understanding of the customer’s needs.
  • Explaining the development process to the customer and managing his or her expectations as to the likely timetable for delivery.

You can see these in the “Value Factors” column of figure 1.

They then look at what they need to do to deliver the maximum value to the customer. These things are shown in the Figure 1’s “Changes Needed” column.

They then look at what they need to do to deliver the maximum value to the customer. These things are shown in the Figure 1’s “Changes Needed” column.

They then do the same for all other processes.

Once all brainstorming is complete, Lakshmi and her team may be able to identify quick wins, reject low yield or high cost options, and agree their priorities for implementation.

Key points:

Value Chain Analysis is a useful way of thinking through the ways in which you deliver value to your customers, and reviewing all of the things you can do to maximize that value.

It takes place as a three stage process:

  • Activity Analysis, where you identify the activities that contribute to the delivery of your product or service.

  • Value Analysis, where you identify the things that your customers value in the way you conduct each activity, and then work out the changes that are needed.
  • Evaluation and Planning, where you decide what changes to make and plan how you will make them.

By using Value Chain Analysis and by following it through to action, you can achieve excellence in the things that really matter to your customers.

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3 thoughts on “Porter’s five forces and value-chain analysis

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