PORTER, M (1985), The value chain and competitive advantage, Chapter 2
in Competitive Advantage: Creating and Sustaining Superior Performance,
Free Press, New York, 33-61.
As firms are faced with slower growth and stronger competition, competitive advantage
becomes crucial to the maintenance of superior performance. Competitive advantage grows
fundamentally out of the value a firm is able to create for its buyers. In competitive terms,
value is the amount buyers are willing to pay for what a firm provides them. Porter uses
the concept of a value chain to disaggregate buyers, suppliers and a firm into the discrete
but interrelated activities from which value stems. Such a process is necessary in order to
understand the behaviour of costs and the sources of differentiation.
Every firm’s value chain is composed of nine generic activities which are linked to each
other and to the activities of its suppliers, channels and buyers. They can be divided into
two broad types: primary activities, which involve the physical creation of the product, its
sale and transfer to the buyer, and after sales service; and support activities, which support
the primary activities by providing purchased inputs, technology, human resources, and
various firmwide functions. To diagnose a firm’s competitive advantage, it is necessary to
isolate activities with discrete technologies and economics. Broad functions, such as
manufacturing or marketing, must be subdivided into activities. Everything a firm does
must be captured in a primary or support activity, a process which often requires some
degree of judgement. Comparing the value chains of competitors then highlights
differences which form the basis of competitive advantage.
However, while discrete value activities are the building blocks of competitive advantage,
they are not independent. They are related by linkages within the chain which reflect
relationships between the way one value activity is performed and the cost or performance
of another. Linkages within the value chain are crucial for competitive advantage, but are
often subtle and go unrecognised. Exploiting linkages usually requires information flows
that allow optimization or coordination to take place. Linkages not only exist within a
firm’s value chain, but between a firm’s chain and the value chains of suppliers and
channels (vertical linkages), thus providing additional opportunities to enhance competitive
advantage. By highlighting the role of these vertical linkages, the value chain approach also
allows a firm to identify more clearly the potential benefits of integration.
Buyers also have value chains, and a firm’s differentiation stems from how its value chain
relates to its buyer’s chain. Points of contact between buyers and the firm are potential
sources of competitive advantage, where value for the buyer (in the form of lower costs or
improved performance) is created through a firm’s impact on the buyer’s value chain.
The competitive scope of a firm is also important in creating competitive advantage.
Broad scope, for example, may allow a firm to exploit interrelationships between the
value chains that serve a number of different product or buyer segments, geographic areas
or related industries, while narrow scope can allow the tailoring of its chain to serve a
particular target segment, geographic area or industry, resulting in lower costs or
differentiation compared to competitors. This relationship between competitive scope and
the value chain provides the basis for defining more relevant business unit boundaries and
allows a firm to establish organisational structure more in line with its sources of