The Value Chain
It has become common knowledge to know that the value chain is “a company’s internal processes for creating value,” and the person who coined the term is none other than Michael Porter.
In his book Competitive Advantage (1985), Porter categorized and organized corporate activities into five processes, or primary activities, and four secondary activities. The value chain may have become a term commonly used nowadays, but how did the concept first come to be?
Porter has always been a brilliant mind, mostly recognized since his college days; in fact, he presented the famous Five Forces Analysis as his doctoral thesis. This Five Forces Analysis model analyzes a given industrial structure based on the observation of five components and is created to determine the profitable market.
Porter, who emphasized the importance of determining the profitable market and profitable location, came up with the concept of a value chain when he realized that, to keep making a profit in a profitable market, a company must organize its internal activities as well.
Thus, the birth of the Five Forces Analysis for the analysis of the external environment and the value chain for the internal environment.
The New Value Chain: Connecting Across Company Borders
By the end of the twentieth century, developed countries are facing a saturating economy, and conventional business models are soon approaching their limits. Moreover, after the computer and the internet came together to bring forth the development of the information network, numerous companies producing different merchandise started joining hands. The classic example of this trend is Microsoft and Intel, and both have enjoyed great success from their partnership. This matter of value brought about by an external network is a factor not included in Porter’s Five Forces Analysis, and some have suggested adding this to the model as the sixth force: complementors.
The introduction of complementors greatly altered the industrial structure. At the same time, the more companies cooperate with other companies, the more blurred the line between outside and inside becomes.
As the value chain serves to organize a company’s internal processes, it is natural that the chain itself undergoes changes as well.
Even in Industry 4.0, last year’s buzzword, the value chain’s evolution into a network is picking up speed.
The trend is also evident in the platform businesses of recent years, where the ecosystem created by the participation of various networks marks the changing value chain. It seems that the value chain of now is expected to not be limited within the confines of its own company. Instead, it must connect the company to the outside world one after another, evolving into a new value-creating process.
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