This note is an adaptation for classroom use of Chapter 2 of “The Services Shift” by R.E. Kennedy (2009). It introduces students to Michael Porter’s 1985 value chain approach to strategically analyzing firms, which says that a firm is a system of interconnected activities with both physical and information linkages. It takes students through the basic steps of analyzing a firm’s value chain, explaining that to truly understand how a firm can create and capture value, it is important to explore how activities within the firm are organized and coordinated. The note concludes with some general insights to take away from the value chain framework. To apply this framework to specific companies, this note can be taught in conjunction with “Note on Exploring the Value Chain of Branded Fashion Goods”, which profiles Gap Inc. and Deckers Outdoor Corp., and gives students a context in which to use the value chain framework. This case is included in Module 1 of the course Business Thought
Note on the Value Chain: A Framework for Analyzing Firm Activities
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After reading and discussing the material, students should:
- This short (3 page) note introduces Porter's Value Chain framework and discusses its implications for how firms compete. Key ideas include:
- That firms can be described as a series of interconnected activities
- That competitive advantage results from superior performance in specific activities
- That there are two generic sources of competitive advantage: low cost and differentiation. One key to strategy is to identify one strategy and to align all key activities to pursue this end.
- That firms should focus on a few key activities, not all activities equally. Which activities are key is determined by industry structure and competitive dynamics.