International Encyclopedia of Organization Studies

International Encyclopedia of Organization
Value Chains
Contributors: David Seidl
Edited by: Stewart R. Clegg & James R. Bailey
Book Title: International Encyclopedia of Organization Studies
Chapter Title: “Value Chains”
Pub. Date: 2008
Access Date: February 24, 2020
Publishing Company: SAGE Publications, Inc.
City: Thousand Oaks
Print ISBN: 9781412915151
Online ISBN: 9781412956246
Print pages: 1627-1601
© 2008 SAGE Publications, Inc. All Rights Reserved.
This PDF has been generated from SAGE Knowledge. Please note that the pagination of the online
version will vary from the pagination of the print book.
The concept of the value chain is a heuristic for analyzing the activities within and around a firm that together
create a product or service. On this basis, each activity is evaluated with regard to the value it adds to creating the product or service and the cost it incurs. It is used in strategic management to identify the potential of
the different organizational activities for constituting sources of competitive advantage.
Conceptual Overview
The concept of the value chain is a central tool in strategic planning. McKinsey was the first to develop an
early version of it under the label “business system concept” in 1980. Michael Porter elaborated the concept
in his seminal book on competitive advantage in 1985. According to Porter, the competitive advantage of a
company can be better analyzed if one does not assess an organization as a whole but decomposes its various processes into different value activities. Each activity can then be analyzed with regard to the value it
adds to the final product or service (measured in terms of what the customer is prepared to pay for it) and the
costs it incurs. If the created value is higher than the cost, the company will realize a profit margin.
Porter distinguishes between so-called primary activities and support activities (Figure 1). While primary activities contribute directly to the creation of the final product or service, the support activities merely increase
the effectiveness or efficiency of those primary activities. Porter’s basic model identifies five types of primary
• Inbound Logistics: activities concerned with receiving, storing, and distributing various inputs to the
product or service.
• Operations: activities concerned with transforming the inputs into the final product or service.
• Outbound Logistics: activities related to the collection, storage, and distribution of finished products
or aimed at bringing service and customer together.
• Marketing and Sales: activities associated with getting buyers to purchase a product or service.
• Service: activities concerned with the maintenance and enhancement of the value of a product or
service; for example, installation, repair, or training.
The support activities are grouped into four main areas:
• Procurement: activities related to the purchase of goods and services that are needed for the primary
• Technology Development: activities associated with the development of technologies directed at the
product, the processes, or particular resources.
• Human Resource Management: activities associated with the recruitment, training, development,
and compensation of employees.
• Infrastructure: activities associated with all types of management systems and with the structuring
and routines that sustain the organizational culture.
Figure 1 Porter’s Basic Value Chain Model
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M. E. Porter. Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985.
While the first three support activities are usually linked directly to particular primary activities, the infrastructure cuts across all primary activities.
Characteristically, different industries tend to put different emphases on the various groups of activities. In retail companies, for example, the main activities are typically those associated with the inbound and outbound
activities, while in manufacturing companies the emphasis is usually put on operations. Despite such industry
specificities, every company has its particular profile in terms of where its main activities lie and how they are
linked together. The particular profile may have emerged over time, or it might be the result of design. On
the basis of an analysis of one’s particular value chain in comparison with that of one’s competitors, companies can identify their potential sources of competitive advantage (in terms of cost advantage or in terms of
differentiation) and consequently decide how to develop their value chain further. This includes particularly
decisions on outsourcing or insourcing of activities.
The value chain of an individual company is typically just one element of a larger chain of value-creating
activities that includes the value chains of all upstream and downstream companies. Such larger interorganizational links and relationships that are necessary for creating a final product or service are usually referred
to as value systems (synonymously: supply chains, industry value chains). Beyond their own value chains,
companies often try to optimize the value system as a whole by taking into account the interdependencies
between elements of their own and those of other value chains on other levels in the value-creation process.
Under labels such as “deconstruction of the value chain,” companies have also started to break up and reconfigure established structures of the value system. For example, some levels of the value-creation process are
removed (so-called disintermediation), so a manufacturer might deliver directly to the retailer, squeezing out
the wholesaler. Or companies create entirely new value systems by integrating elements of previously distinct
value systems: For example, gas stations may also become food retailers. Or they dissolve links between different value chains creating a fluid value network whose member companies are selectively coordinated on
a case-by-case basis. Such reconfigurations of the value-creation architecture have been supported by the
advent of new information and communication technologies.
Critical Commentary and Future Directions
The concept of the value chain is a useful heuristic for analyzing the strategic significance of organizational
activities. Its advantage lies in its simplicity and abstractness, which allow it to be applied to any kind of comSAGE
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pany independent of the specific product or service. As with many such concepts, however, it provides little
operative guidance on its practical use. For example, it has been noted by several commentators that conducting a proper analysis of one’s value chain often requires information that is either unavailable or costly to
obtain. This is the case both for information regarding one’s own company (e.g., it might require changing the
system of accounting) and—even more so—for information on the activities of one’s competitors, suppliers,
or customers. (For example, the information might be very sensitive.)
More important, however, there are some conceptual limitations to the value-chain idea. Underlying this kind
of thinking is the classical assumption that one can understand a process or system (here: the valuecreation
process) by splitting it up into, and analyzing, its different components (here: the different value activities).
Yet, as systems theory in particular has pointed out, a systemic whole often possesses socalled emergent
characteristics that result from the interaction of its components and that thus cannot be studied by analyzing
the individual elements. As a consequence, the value-chain heuristic tends to obscure such emergent properties. By reconfiguring the value chain, for example, by outsourcing certain activities, companies thus risk
destroying particular competencies that are based on such emergent phenomena.
A further critical point concerns the mechanistic concept of the organization behind the value-chain concept,
according to which, elements of the value chain can simply be reconfigured according to a particular design.
This, however, overlooks the particular social dimension of organizations. Not only do structures and activities often possess latent (social) functions that are not captured by the value-chain heuristic, but some social
functions also resist intentional design (e.g., the organizational culture). Reconfigurations of the value chain
might thus destroy social capital that is often difficult to rebuild.
• value chains
• porters
• value creation
• competitive advantage
• logistics
• outsourcing
• systems structure
David Seidl
See also
• Competitive Advantage
• Networks
• Organizational Capabilities
• Outsourcing
• Strategic Management
Further Readings
Bresser, R. K. F., Heuskel, D., & Nixon, R. D. (2000). The deconstruction of integrated value chains: Practical
and conceptual challenges. In R. K. F.Bresser, M. A.Hitt, R. D.Nixon, & D.Heuskel (Eds.), Winning strategies
in a deconstructing world (pp. 1–21). Chichester, UK: Wiley.
Gluck, F.Strategic choice and resource allocation. McKinsey Quarterly(1980, Winter)22–33.
Porter, M. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free
Rappaport, A. (1986). Shareholder value: A guide for managers and investors. London: Free Press.
© 2008 by SAGE Publications, Inc.
SAGE Reference
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Shepherd, A. (1998). Understanding and using value chain analysis. In V.Ambrosini with G.Johnson & K.Scholes (Eds.), Exploring techniques of analysis and evaluation in strategic management (pp. 20–44). London:
Prentice Hall Europe.
© 2008 by SAGE Publications, Inc.
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