The value chain was first developed as a business idea in the second chapter of “Competitive Advantage: Creating and Sustaining Performance” by Michael Porter, first published in 1985. In it he wrote:
A systematic way of examining all the activities a firm performs and how they interact is necessary for analysing the sources of competitive advantage. In this chapter, I introduce the value chain as the basic tool for doing so.
In the decade after the book was published, the idea became one of the most discussed and most misunderstood in the whole of the management arena. Each link in a value chain consists of a bundle of activities (value activities), and these bundles are performed by a firm to “design, produce, market, deliver and support its product”. “Value activities are the discrete building blocks of competitive advantage,” wrote Porter.
Rival firms may have similar chains, but they may also have very different ones. Porter quoted the example of People Express, one of the earliest of the low-cost airlines, and United Airlines, a more traditional firm. They were both in the same business, but there were significant differences in the way that, for example, they ran their boarding-gate operations, their aircraft operations and their crews. Differences such as these, claimed Porter, are a principal source of competitive advantage.
Critics of the idea focused on the difficulty in identifying the discrete building blocks. Without defining them carefully it is not possible to compare and contrast them with those of rivals and thereby to seek ways of gaining competitive advantage. Porter tried to help. He said:
“[Every value activity] employs purchased inputs, human resources (labour and management), and some form of technology to perform its function. Each value activity also uses and creates information … the appropriate degree of disaggregation depends on the economics of the activities and the purposes for which the value chain is being analysed.”
He also said a bit about what value chains were not. For instance: “Value activities and accounting classifications are rarely the same,” he explained. But still, most firms found it hard to spot a value activity when it hit their factory floor. Non-manufacturing businesses found it even harder.
Since the idea of the value chain was first introduced, it has been taken in a number of different directions. One has attempted to extend it beyond the straightforward manufacturing processes for which it was, in its early form, most suited.
In 1993, Richard Norman and Rafael Ramirez argued that the value chain was outdated, suited to a slower changing world of comparatively fixed markets. Companies in the 1990s, they said, needed not just to add value but to “reinvent” it. This they could do by reconfiguring roles and relationships between “a constellation of actors” - suppliers, partners, customers, and so on. One company they pointed to as having done this particularly well was IKEA, a Swedish-based international retailer of home furniture.
Later on, Jeffrey Rayport and John Sviokla applied the idea to the virtual world, the world of information, arguing that managers must pay attention to the way in which value chains work in both the tangible world of the marketplace and the virtual world of the market space. Just as companies take raw materials and refine them into products, so (increasingly) do they also take raw information and add value from a chain of five activities: information gathering, organising, selecting, synthesising and distributing.