The ‘Value Chain’ is a strategic management concept, originally introduced by Michael Porter back in the early 1980s. In its original form, it was used to provide a systemic way of examining all the activities a firm performs and their interaction; as the basis for identifying sources of competitive advantage. Today, as a concept, it is much more broadly applied, used to describe chains of value creation, viewed from an internal (revenue) perspective, but more frequently, from a customer perspective; as the basis of various forms of business modelling and strategic analysis.
The basic concept is that all organisations are a collection of activities that are performed to design, produce, market, deliver and support it’s products or services, to create value for the organisation and its customers. These activities can be represented as a ‘Value Chain’. A Value Chain can be constructed either at an individual product and/or service level, or product/service group, or in relation to the delivery of a given “Value Proposition”.
The concept is best illustrated through three applications – Porter Value Chain Analysis, “Wardley Maps” and “Value Mapping”.
Porter Value Chain Analysis
In Porter Value Chain Analysis, the Value Chain dis-aggregates a firm into its strategically relevant activities in order to understand the relationship between revenue and costs; and the existing and potential sources of competitive advantage.
Value activities are divided into two broad types, primary (or core) activities and support (or enabling) activities. The primary activities are the activities involved in the physical creation and delivery of the product and/or service. The support activities are those activities required to support the primary activities.
Porter built his approach around the use of a Generic Value Chain Model, against which individual value chain activities are identified for the particular organisation.
The organisation’s Value Chain is embedded in a larger set of activities, the ‘Value System’. This consists of the individual Value Chains of the organisation’s strategic partners, suppliers, distributors, or other organisations involved in the supply chain. Gaining and sustaining competitive advantage involves understanding not only the organisation’s Value Chain, but this overall Value System.
A further important element of the approach is to identify the links between the activities within the Value System, i.e. the relationship between how one activity is performed and the cost and performance of another.
Both the activities and linkages identified, form the basis for subsequent competitive analysis.
Wardley Value Chain Analysis
“Wardley Maps” are a strategic planning and communication technique. Central to the development of a Wardley Map is the construction of a Value Chain, or group of Value Chains, for a given product and/or service.
The form of Value Chain produced here is very different from that of Porter, but the basic concept is the same. The chain is represented vertically. At the top of the Value Chain you start with the customer need that you are trying to meet and below this, you identify the ‘components’ that you require to meet the customer need. As you proceed down the Value Chain, the components become less visible to the customer and their value decreases.
The process is recursive, i.e. as you identify each component, you then identify what you need for this component and so on, until you have identified everything you need, that is strategically significant.
A component can be an Activity (what we do), a Practice (how we do it), Knowledge, or Data/Information. Or it can be an “aggregated” component, an assembly, that requires some combination of the other four.
The primary Value Chain, addressing the main customer need, is typically broken down to further Value Chains, addressing a particular aggregated component.
Having constructed the Value Chain, this then forms the basis for developing the Wardley Map.
“Value Mapping” is a technique to map the value exchanged between an organisation and it’s various stakeholders, e.g. customers and partners, to identify how a ‘Value Proposition’, or set of desired outcome/s, for a given stakeholder, will be achieved, or in the case of an existing delivery, improved.
A visual depiction of the value creation is produced for a stakeholder, or stakeholders. This consists of “Value Items” (those very specific things that create the value), that accrue left to right, ending at the point at which the Value Proposition, or desired outcome/s, have been met. Value Items may be decomposed, where the item is an aggregate of several lower order value items.
The Value Map is often used in combination with the creation of a Business Capability Model, to identify the Business Capabilities required to deliver the Value Propositions and associated Value Items.
Note that Value Mapping is also referred to as “Value Stream Mapping” and the visual depictions as “Value Streams”. Unfortunately this can lead to some confusion with the Lean operational improvement technique of the same name.
You will also see hybrid approaches, part Porter Value Chain, part Value Mapping; and high level processes used in place of value items. The trouble with the use of high level processes is that it tends to shift the focus from the ‘what’ to the ‘how’; and they are not specific enough, in terms of value creation, so you then find yourself getting into a lot of process decomposition. The key is to stay focused on the value item, which can take many forms.
If interested in Porter Value Chain Analysis, then the essential read is his book “Competitive Advantage, Creating and Sustaining Superior Performance”. As an approach, it’s become rather outdated, but it is still important in terms of having a rounded knowledge around business strategy and design.
Wardley Maps are a great strategic planning and communication technique; and there is a good open community of practice around their use. This article, by Simon Wardley, provides a good introduction. There is also the on-line book. And I can also recommend the on-line training course.
For more on Value Mapping, The Open Group has produced a useful guide.
First Published: 17/07/2018 Last Updated: 21/07/2018