Friday, September 10, 2010

Innovation and Porter's Value Chain

I'm reviewing the relationship between a number of tried and true strategic management models and innovation, to see if those models and concepts hold up under the increasing importance of innovation.  A few days ago I reviewed Porter's Five Forces model and concluded that while Porter didn't explicitly call out innovation, it was clear that the Five Forces model embraced innovation.  Today, we'll look quickly at another Porter model - the Value Chain Analysis - and investigate how it holds up innovation.

In the 1980s, Michael Porter wrote a number of books about corporate strategy that became the basis for much of the education of MBAs, at least where strategy was concerned.  Few MBAs in the 80s and 90s failed to study Porter's Five Forces or Value Chain Analysis. Since many of those MBAs minted in that period are now in leadership positions in their firms, it behooves us to understand the models they carry around with them, and whether or not those models are open and extensible where innovation is concerned, or whether they ignore or resist innovation.

First, let's remind ourselves of the Value Chain Model.   Portner's insight  was to identify all the primary functions of a business and all the support functions of a business and seek to understand what the firm did exceptionally well, and what it must do at least moderately well.  While other strategists had thought and written about the linkages between internal operations, Porter was one of the first to create the concept of the Value Chain.  Today we often think of the value chain as extending "upstream" to suppliers and "downstream" to distribution channels and even to customers or consumers.  The tool is a powerful metaphor when thinking about where and how a firm adds value.

Primary activities are the ones we usually think of as distinct operations or departments and are the "direct" costs in a business - inbound and outbound logistics, "operations" which could be manufacturing or development, marketing and sales, and service.  Support activities are those that we traditionally think of as "overhead" - Human Resources, Information Technology, Procurement, and what Porter called Firm Infrastructure - legal, financial, management and so forth. 

The model, once again, does not explicitly call out innovation, and in this breakdown of the organization it is hard to decide where and how innovation should add value.  Clearly innovation can play a role in any of the primary functions.  Innovation can improve the way we make things, or the way we distribute products and services, or the customer support and service we offer.  Conversely, innovation could be considered a "supporting" capability that improves all functions from an enabling perspective.  It's possible that innovation exists in both locations.  However, there are two other items to consider when thinking about innovation and the Value Chain analysis.

First, the model describes a business operating at peak efficiency turning out products and services, but doesn't do such a great job describing where in the business new ideas, new products and services are originating.  It's hard to pinpoint where the "R&D" function is within this model, and whether that is a primary function or a support function.  Second, as we've already noted, when Porter built the model it reflected the operations within the context of the business.  Given the integrated nature of most organizations and their upstream suppliers and downstream partners, we typically think of the "value chain" as reaching from the companies and individuals that provide raw materials and inputs, to the end consumer on the "downstream" side.  The same is true for innovation.  Good ideas may come from anywhere, not just within the context of the firm.

Like many organizations today, the concept of innovation is important, but as in the Value Chain model it is not clear where it should reside, or how it should be considered, as a primary function or a support function.  In almost 30 years we've yet to answer that question successfully.  Perhaps the Value Chain Model and our existing corporate hierarchies need to be rethought in the context of innovation.
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posted by Jeffrey Phillips at 5:45 AM


Anonymous David Locke said...

A successful discontinuous innovation leaves a new value chain in its wake. Capabilities position firms and products in that value chain.

It is the building of that value chain that characterizes adoption. Adoption is not sales. That would be too slow. That doesn't scale. Scale comes from the value chain. Market poser comes from the value chain.

Creating a value chain creates economic wealth by creating a category and its companies; by creating careers, rather than just jobs; and by doing more than just capturing cash.

Discontinuous innovation and the value chains it creates is the cure for globalism-driven job losses. So let's get to it.

1:08 PM  
Anonymous Anonymous said...

Hello, Mr. Phillips,

On behalf of SAGE Publications in Thousand Oaks, CA, I would like to request permission to use an excerpt from your September, 2010, blog article “Innovation and Porter’s Value Chain” in author Mark Hill’s upcoming textbook, Marketing Strategy, which we will publish in February 2012.

We would like to request non-exclusive print and electronic distribution rights to use this material in the text and in future revisions, editions, and in all media thereof throughout the world. These rights in no way restrict republication of your material in any form by you or others authorized by you. SAGE Publications, Inc. will include a credit line unless you specify otherwise.

Do you grant permission for the use of the material as cited above?

Please feel free to contact me by email at katie.guarino(at) with any questions you may have.

I look forward to hearing from you soon!

Best regards,

Katie Guarino

Editorial Assistant
Business and Management
SAGE Publications, Inc.
2455 Teller Road
Thousand Oaks, CA 91320

4:38 PM  
Anonymous Anonymous said...

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