Who created value chain analysis?

Michael Porter introduced it in Competitive Advantage (1985) as a way to break a company into discrete activities and identify where each one creates more value than it costs.

What's the difference between primary and support activities in a value chain?

Primary activities directly create and deliver the product — inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities enable them — firm infrastructure, HR, technology development, and procurement.

Why do most value chain analyses fail to produce useful insight?

They stop at describing what each activity does instead of pricing it against cost and buyer willingness-to-pay. A diagram of nine labeled boxes with no cost or pricing data attached is a company description, not an analysis.

Can a support activity generate more margin than a primary one?

Yes, and it often does. A procurement or technology-development decision can move gross margin more than a change to sales or operations, but only if you actually look there instead of treating support activities as an afterthought.

Does value chain analysis tell you what market to compete in?

No. It tells you where margin lives inside a strategy you've already chosen. Deciding which market or segment to compete in is a separate, prior question.

Value chain analysis: where margin actually lives

Guide · frameworks · 4 min read · last verified 2026-07-21

Reviewed before publication Editorial board Independent commercial review

In shortMost value chain diagrams describe what a company does in nine boxes and stop there. The honest version prices each activity against cost and buyer willingness to pay.

Michael Porter introduced the value chain in Competitive Advantage (1985) as a way to break a company into the discrete activities that create value for a buyer, so you can ask a sharper question than "are we profitable" — namely, which specific activities create more value than they cost, and which ones don't. That's a different exercise than most teams run when they say they've "done a value chain analysis."

What Porter actually proposed

Porter split a company's activities into two groups:

Primary activities — the things directly involved in creating and delivering the product:

Inbound logistics (receiving, storing, distributing inputs)
Operations (transforming inputs into the product)
Outbound logistics (getting the product to the buyer)
Marketing and sales (creating buyer awareness and demand, and closing purchases)
Service (support after the sale — installation, repair, customer success)

Support activities — the things that make the primary activities possible:

Firm infrastructure (finance, legal, general management)
Human resource management
Technology development
Procurement

The margin is the gap between the value buyers place on the whole chain and the cost of running every activity in it. Porter's insight wasn't the taxonomy — it's that margin doesn't sit evenly across a business. Some activities are where your buyer's willingness to pay outruns your cost to deliver by a wide margin. Others are activities every competitor performs at similar cost with similar quality, and no amount of polish there earns extra margin, because the buyer isn't paying for it.

Why most value chain diagrams are a wall filled with nothing

The common execution: someone draws Porter's nine boxes, labels each with two or three bullet points describing what the company does in that box, and stops. "Operations: we build the product." "Marketing and sales: we run outbound and paid campaigns." That's a company description reformatted into nine cells. It has zero connection to cost data, pricing data, or a claim about where value is actually created versus merely produced. It looks rigorous because it fills the diagram. It teaches nothing because it never asks the one question that makes the exercise worth running: where does the money actually come from, box by box?

The fix: price each link against its cost

For every activity in the chain, ask two questions with real numbers, even rough ones pulled from your own P&L and win-loss notes:

What does this activity cost us to run (allocated headcount, tooling, time)?
What does the buyer's willingness to pay change if this activity is excellent versus merely adequate — and do you have evidence for that (deal notes, competitive losses, expansion patterns), or is it a guess?

Activities where cost is high and buyer willingness-to-pay barely moves are commoditized — do them adequately and stop over-investing. Activities where a relatively small cost increase produces a large jump in willingness-to-pay are where your margin actually lives, and they deserve disproportionate investment relative to their size on the org chart.

Worked example (hypothetical)

Say you run a mid-market B2B SaaS company. These figures are illustrative, built to show the method, not researched:

Operations (product/engineering): costs roughly $3.2M/year fully loaded. In win-loss notes, churned buyers cite reliability and depth of integrations more than any other factor.
Marketing and sales: costs roughly $2.6M/year. Win rate against the top two competitors is roughly even regardless of campaign spend, per the sales team's competitive-loss log — buyers say they chose on product fit and implementation speed, not on which vendor's content they saw first.
Service (customer success): costs roughly $900K/year. Expansion revenue from accounts with a named CSM runs meaningfully ahead of accounts without one, by the CS team's own cohort tracking.

If that pattern holds, the arithmetic says: an incremental dollar in operations and service is buying more margin than an incremental dollar in marketing spend, at current levels — not because marketing doesn't matter, but because you're already adequate there and the buyer isn't rewarding more of it. That's a real reallocation argument, built from your own data, not from the shape of Porter's diagram.

Support activities are not filler

Teams often draw the four support boxes at the bottom of the chart and never revisit them, but they're frequently where hidden margin sits. Procurement terms on your infrastructure costs, or a technology-development decision that lets one engineering team serve twice the customer base without adding headcount, can move gross margin more than a primary-activity change — and it's invisible if support activities are treated as an afterthought row instead of a place to actually look for cost-to-value gaps.

Where this breaks down

Value chain analysis assumes you can attribute cost and buyer value to discrete activities, and in practice that attribution is often blurry — a platform engineering investment might simultaneously improve operations, service, and technology development, and forcing it into one box distorts the picture. Treat the boxes as a way to organize the search for margin, not as a strict accounting partition. And it says nothing about where in the market you should compete — that's a positioning question, not a value-chain one. Porter's framework tells you where margin lives inside a chosen strategy; it doesn't choose the strategy for you.