Primary activities
Five activities, from bringing inputs in to servicing the product after the sale.
- In
- Inbound logistics
- Make
- Operations
- Out
- Outbound logistics
- Sell
- Marketing and sales, after-sales service
Value chain analysis, Porter's value chain, worked
Value chain analysis breaks a company into the activities it performs to deliver value to customers, then asks which ones lead to a higher price or a lower cost. Michael Porter's value chain has five primary activities (inbound logistics, operations, outbound logistics, marketing and sales, after-sales service) and four support activities (procurement, technology development, human resource management, firm infrastructure). In a case, compare cost per activity with a rival. Soreno, an AI voice interview practice app for consulting, investment banking and other finance candidates, runs a free profitability case with no sign-up, where you find where a company's margin went, and full mock cases with scored feedback.
Updated
- What it looks at
- One company, activity by activity
- Five primary and four support activities
- Origin
- Michael Porter
- Harvard Business School
- Worked case
- 6 cost lines, 1 rival
- Invented by us, every number shown
- Free practice
- No sign-up
- A full profitability case with a timer
What is value chain analysis?
Harvard Business School's Institute for Strategy and Competitiveness describes the value chain, developed by Michael Porter, as a tool for breaking a company into its strategically relevant activities, to find the specific activities that result in higher prices or lower costs. It asks you to see each activity not just as a cost but as a step that has to add value to the finished product. Porter's diagram splits the activities into two groups.
Support activities
The work that runs across every primary activity.
- 1
- Procurement
- 2
- Technology development
- 3
- Human resource management
- 4
- Firm infrastructure
Worked example: Alder Cycles (ours)5 steps
Alder Cycles, an invented bike maker, sells 100,000 bikes a year at an average of $900. Its operating margin is now 4%, while its main rival makes 12.8%. Where is the margin going? This case and every number in it are invented by Soreno for practice.
Pick the comparison
Cost per bike against one rival
A total cost of $864 a bike against the rival's $750 tells you there is a $114 gap, not where it is. Ask for cost per bike by activity for Alder and its main rival, and group the four support activities into one line to start.
Lay out the chain
Six lines, side by side
Inbound logistics: $60 for Alder, $40 for the rival. Operations: $330 for Alder, $320 for the rival. Outbound logistics: $70 for Alder, $50 for the rival. Marketing and sales: $180 for Alder, $120 for the rival. After-sales service: $40 for Alder, $45 for the rival. Support activities: $184 for Alder, $175 for the rival.
Find the gap
Marketing and sales: 53% of the gap
Marketing and sales costs Alder $60 more a bike, 53% of the $114 gap. Inbound and outbound logistics add $20 each. Ask why: in this case, Alder pays dealer commissions and runs more promotions than the rival.
Check the value side
A $40 price premium
Alder charges $40 more a bike and spends less on after-sales service ($40 against $45). Before cutting marketing, ask what earns the premium. If buyers pay it for the dealer network, cutting dealer support could cost more than it saves.
Recommend
Close half the sales gap first
Closing half the marketing and sales gap saves $30 a bike, $3 million a year, and lifts the margin from 4% to 7.3%. Start with promotions, keep the dealer support that holds the price, then look at the two logistics lines. The main risk: the premium falls if dealers push other brands.
What each activity coversFrom Porter's diagram
The examples after each colon are the ones on the Institute for Strategy and Competitiveness diagram. The short line before each colon is ours.
Primary
Inbound logistics
Getting inputs in: customer access, data collection, incoming material storage, service.
Primary
Operations
Turning inputs into the product: branch operations, assembly, component fabrication.
Primary
Outbound logistics
Getting the product out: order processing, warehousing, report preparation.
Primary
Marketing and sales
Getting buyers to choose it: sales force, promotion, advertising, proposal writing, website.
Primary
After-sales service
Keeping it working for the buyer: installation, customer support, complaint resolution, repair.
Support
Procurement, technology, people, infrastructure
Procurement buys services, machines, advertising and data. Technology development covers product design, process design and market research. Human resource management covers recruiting, training and pay. Firm infrastructure covers financing, planning and investor relations.
What the value chain is forHBS's own account
From the Institute for Strategy and Competitiveness page on the value chain.
The unit
Activities are where advantage lives
The Institute says the activities, and the overall value chain they sit in, are the basic units of competitive advantage.
Strategy
How the activities fit together
It describes strategy as the set of choices about how the activities in the chain are configured and linked together.
The wider system
Suppliers and channels too
A company's value chain is usually part of a larger value system that includes suppliers upstream and distribution channels downstream.
Best practice
Doing it well is not doing it differently
The Institute says copying best practices into the chain is essential, but doing things effectively is not the same as doing things differently.
From Harvard Business School ISC: The Value Chain, HBS: Porter, Competitive Advantage (1985) and Harvard Business School ISC: The Five Forces.
How do you use value chain analysis in a case interview?
In our experience, interviewers rarely want the nine boxes recited. They want the chain's logic when a cost or margin problem sits somewhere inside one company. These are the four things we listen for.
Compare, don't just list
Cost per unit by activity means little alone. Put it next to a rival, last year or a target, and the gap shows where to dig.
Use the client's own steps
A hospital's chain is intake, treatment and discharge, not inbound logistics. Name the activities in the client's words.
Check the value side
An activity that costs more may be why buyers pay more. Ask what each expensive activity earns before you cut it.
Leave it out for industry questions
Skip it when the question is about an industry, a new market or several businesses. Use five forces, a market entry structure or the BCG matrix there.
6 case questions where value chain analysis helps
Each of these has a cost, margin or delivery problem inside one company. Under each is what a strong answer does.
Where did the margin go?
Costs up, profit down.
A packaging manufacturer's cost per unit has risen 15% in two years. How would you find the cause?
Splits cost per unit by activity, compares each with two years ago and digs into the lines that grew fastest. Practice it, see a model answer
A clothing retailer needs to cut costs by 10% without hurting sales. Where would you look?
Walks the chain from buying to stores to returns, and protects the activities customers pay for. Practice it, see a model answer
Your client is a regional grocery chain. Profits are down 20% over two years. How would you structure the problem?
Starts with the profit tree, then uses the chain to find which costs grew: buying, distribution or stores. Practice it, see a model answer
An airline's profits are falling even though it is carrying more passengers. What is going on?
Splits revenue and cost per passenger, then walks the chain from fuel and crews to airports and sales to find the cost that grew faster than traffic. Practice it, see a model answer
Operations
One step in the chain is breaking.
A carmaker is deciding whether to keep making a key component in-house or buy it from a supplier. How would you approach it?
Treats the component as one activity: its cost against the supplier's price, how much it shapes quality and the risk of depending on one supplier. Practice it, see a model answer
A manufacturer's on-time delivery rate has dropped from 95% to 80%. How would you find out why?
Follows an order through the chain, from incoming parts to production to shipping, and finds the step where the delays start. Practice it, see a model answer
What mistakes do candidates make with the value chain?
From the cost and margin cases we run, these come up most.
Reciting all nine activities
Naming every box before you have a number wastes the first two minutes. Start with the cost gap, then open the activities that matter.
Treating every activity as a cost to cut
Harvard Business School's page asks you to see each activity as a step that adds value, not just a cost. Cut where the spend earns nothing.
Forcing manufacturing words onto a service business
A bank or a software company still has a chain, but its steps look different. Rename them so the interviewer can follow.
Stopping at the company's walls
Some of the cost sits with suppliers or channels, part of what the Institute calls the value system. Dealer margins and freight count.
Using it for the wrong question
Value chain analysis looks inside one company. If the case asks whether an industry is attractive, the chain answers the wrong question.
Find where the margin went out loud
Soreno's AI interviewer runs a full case, hands you cost data by activity when you ask, pushes back on where you dig and scores the session. Start your free week.
Questions people ask
What is value chain analysis?
A way to break a company into the activities it performs to deliver value to customers, then find which ones lead to a higher price or a lower cost than rivals. It comes from Michael Porter of Harvard Business School.
What are the primary and support activities?
Primary: inbound logistics, operations, outbound logistics, marketing and sales, and after-sales service. Support: procurement, technology development, human resource management and firm infrastructure. Those are the nine boxes on Porter's diagram as Harvard Business School shows it.
Who created the value chain?
Michael Porter of Harvard Business School, author of the 1985 book Competitive Advantage: Creating and Sustaining Superior Performance.
What is the difference between the value chain and Porter's five forces?
Harvard Business School's Institute for Strategy and Competitiveness says the five forces determine an industry's competitive structure and its profitability. The value chain looks inside one company to see which activities make it cheaper or worth more than rivals. The Institute lists both under business strategy. Our five forces guide covers the industry side.
What is the difference between a value chain and a value system?
The value chain is one company's activities. The value system is the larger set it sits in, with suppliers upstream and distribution channels downstream.
Should I use the value chain in a case interview?
Use its logic when the problem is a cost, margin or delivery issue inside one company. Skip it for market entry, industry attractiveness or portfolio questions, where five forces, a market entry structure or the BCG matrix fit better.
Is value chain analysis the same as SWOT?
No. A SWOT sorts what you know about a company into four lists. The value chain tests where a strength or weakness actually sits, activity by activity, with numbers.
Is the value chain the same as the supply chain?
No. In Porter's diagram, the activities that buy and move goods (procurement, inbound logistics and outbound logistics) are three of the nine. The value chain also covers operations, marketing and sales, service, technology, people and firm infrastructure, and asks which of them raise the price or lower the cost.