The concept of the value chain was first described and popularized by Michael Porter in his 1985 “Competitive Advantage: Creating and Sustaining Superior Performance.” Products pass through activities of a chain in order, and at each stop the product gains more value (there is also the idea that the chain gives more value than any one of the individual stops).¹ An example of oil refinement exemplifies how the value chain works: when refineries process crude oil, it more than doubles the value of the liquid through the value chain. This occurs because consumers are willing to pay more for the finished petroleum than crude oil. Therefore, all of the steps in processing, shipping, refining, shipping, and marketing, add value.
There are two types of value chains: a traditional value chain and a virtual value chain. A traditional value chain is all of the physical-world activities performed in order to enhance a product or service.¹ The will to earn higher profits drives employees in a traditional value chain. The second type of value chain is a virtual value chain. A virtual value chain is a computer-based business system that has led to a cyber marketplace.¹ All activities that would normally be completed in the real world are referred to as a virtual value chain.
In order to keep up to date and ensure that a company does not get stuck behind, they need to use both value chains. This is called a combined value chain. ¹ A value chain forms part of a larger system that Porter calls a value system.¹ A value system includes the actions that suppliers provide along with the company’s regular value chain. After the suppliers and company add value with the value system, distributors add additional value to products until the finished goods reach customers. In order to achieve competitive advantage, a firm needs to understand all activities in the value system.¹
1. Porter, M. E. (1996). What is strategy? Harvard Business Review, November–December.