25 Aug The Value Chain
Yuuki IEYASU (Consultant)
Consulting Headquarters (LiB Consulting Co., Ltd.)
As many of us know well, the value chain is “a company’s internal processes for creating value”, and the person who gave birth to the term is none other than Michael Porter. In his book Competitive Advantage (1985), Porter has categorized and organized corporate activities into five processes, or primary activities, and four secondary activities. Value chain may have become a term so commonly used nowadays, but how did the concept first came to be?.
Porter has been a brilliant mind since his college days; that famous Five Forces Analysis of his was presented 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 has emphasized the importance of determining the profitable market and profitable location, came up with the value chain when he realized that, in order to keep making profit in a profitable market, a company must organize its internal activities as well. And thus, thanks to Porter, we now have 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.
Back in 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 which produce different merchandises 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 being 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 line between outside and inside becomes more blurred the more companies cooperates with other companies. And 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 is a mark of the changing value chain. It seems 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.