# Value Chain | Value Chain Analysis

**Creator/Source**: Michael Porter, 1985
**Core Value**: Decompose internal enterprise activities to identify value creation segments and cost drivers
**One-liner**: Competitive advantage doesn't come from the whole — it comes from optimizing specific segments of the value chain

---

> **Case Boundary**: Company/industry cases in this file are illustrative examples for framework structure and reasoning, not current factual claims by Alpha Insights. Before reusing any numbers, shares, dates, or conclusions in a live study, re-check sources and record them in the Evidence Claim Ledger.

## Overview

Value Chain analysis decomposes an enterprise or industry chain into a series of value-creating activities, identifying which segments create the most value and which are strategic control points. It is the core tool for cost optimization and competitive advantage positioning.

**Core Design Principles**:
- **Value Decomposition**: Break down the enterprise/industry chain into a series of value-creating activities
- **Value Distribution**: Different segments create and capture different amounts of value
- **Control Point Identification**: Identify strategic control points and profit pools in the industry chain

**Best Use Cases**:
- Industry chain value distribution analysis
- Internal enterprise value creation process diagnostic
- Strategic control point and profit pool identification
- Vertical integration decision support

**Output Value**:
- Industry chain/enterprise value chain visualization map
- Value distribution and profitability analysis per segment
- Strategic control point identification and entry recommendations

---

## I. Framework Overview

### 1.1 Value Chain Basic Structure

```
┌─────────────────────────────────────────────────────────────┐
│                  Porter Value Chain Model                     │
├─────────────────────────────────────────────────────────────┤
│                                                             │
│  Primary Activities                                          │
│  ──────────────────                                         │
│  Inbound    →  Operations  →  Outbound   → Marketing  → Service  │
│  Logistics                    Logistics     & Sales          │
│                                                             │
│  Support Activities                                          │
│  ──────────────────                                         │
│  Firm Infrastructure                                         │
│  Human Resource Management                                   │
│  Technology Development                                      │
│  Procurement                                                 │
│                                                             │
│  ─────────────────────────────────────────────────────────  │
│                        Margin                                │
│                                                             │
└─────────────────────────────────────────────────────────────┘
```

### 1.2 Value Chain vs Five Forces

| Dimension | Value Chain | Five Forces |
|-----------|-----------|-------------|
| Analysis perspective | Internal to the firm | External to the industry |
| Analysis purpose | Identify sources of competitive advantage | Assess industry attractiveness |
| Core question | "Which segments create our value" | "Who captures industry profits" |
| Focus | Internal capabilities | External structure |

**Positioning in This Skill**:
- **Value Chain**: Used to analyze internal capabilities, cost structure, differentiation sources
- **Five Forces/SCP**: Used to analyze industry competitive structure
- **Synergistic use**: Value Chain (internal) + SCP/Five Forces (external) = Complete strategic analysis

### 1.3 Value Chain Analysis Core Logic

```
Value Chain Analysis ──→ Competitive Advantage

1. Decompose activities
   • Break the enterprise into distinct activities

2. Allocate value/cost
   • How much value does each activity create
   • How much cost does each activity consume

3. Identify advantage segments
   • Which segments do we perform better than competitors
   • Which segments can be outsourced

4. Optimize configuration
   • Strengthen advantage segments
   • Outsource non-core segments
```

---

## II. Value Chain Detailed Analysis

### 2.1 Primary Activities

**Definition**: Activities directly involved in creating, selling, and delivering products/services.

#### (1) Inbound Logistics

**Activity Content**:
- Raw material receiving, storage
- Inventory management
- Supplier coordination
- Material scheduling

**Key Metrics**:
| Metric | Formula | Industry Benchmark |
|--------|---------|-------------------|
| Inventory turnover | COGS / Average inventory | Varies widely by industry |
| Receiving timeliness | On-time receipts / Total receipts | >95% |
| Inventory accuracy | Accurate SKU count / Total SKU count | >98% |

**Typical Cases**:
| Company | Inbound Logistics Advantage | Specific Approach |
|---------|---------------------------|-------------------|
| Toyota | JIT just-in-time | Zero-inventory management |
| Zara | Quick response | 2-week new product cycle |
| JD.com | Self-operated warehousing | Intelligent warehouse systems |

#### (2) Operations

**Activity Content**:
- Product processing, assembly
- Service delivery
- Quality control
- Equipment maintenance

**Key Metrics**:
| Metric | Formula | Industry Benchmark |
|--------|---------|-------------------|
| Capacity utilization | Actual output / Design capacity | >80% |
| Yield rate | Good units / Total output | >99% |
| Unit cost | Total cost / Output | Continuously declining |

**Typical Cases**:
| Company | Operations Advantage | Specific Approach |
|---------|---------------------|-------------------|
| Foxconn | Scale + efficiency | Precision manufacturing, rapid ramp-up |
| TSMC | Process leadership | Advanced nodes, high yield |
| Haidilao | Service standardization | Central kitchen, standardized processes |

#### (3) Outbound Logistics

**Activity Content**:
- Finished goods storage
- Order processing
- Delivery and transportation
- Export management

**Key Metrics**:
| Metric | Formula | Industry Benchmark |
|--------|---------|-------------------|
| Order fulfillment cycle | Order to delivery time | Shorter is better |
| Delivery on-time rate | On-time deliveries / Total deliveries | >95% |
| Logistics cost ratio | Logistics cost / Sales revenue | <5% |

**Typical Cases**:
| Company | Outbound Logistics Advantage | Specific Approach |
|---------|-----------------------------|-------------------|
| Amazon | FBA logistics | Global warehouse network |
| JD.com | Same-day delivery | Forward warehouses + delivery stations |
| SF Express | Speed leadership | Aviation network + direct operations |

#### (4) Marketing & Sales

**Activity Content**:
- Market research
- Brand promotion
- Channel management
- Sales execution

**Key Metrics**:
| Metric | Formula | Industry Benchmark |
|--------|---------|-------------------|
| CAC | Marketing spend / New customers | Continuously declining |
| Conversion rate | Converted customers / Potential customers | Varies widely by industry |
| Brand awareness | Survey data | Higher is better |

**Typical Cases**:
| Company | Marketing & Sales Advantage | Specific Approach |
|---------|-----------------------------|-------------------|
| Perfect Diary | Private domain traffic | Xiaohongshu + WeChat ecosystem |
| Genki Forest | Channel innovation | Convenience stores + online |
| Douyin | Algorithm-driven acquisition | Precision recommendations |

#### (5) Service

**Activity Content**:
- Installation and training
- Repair and maintenance
- Customer support
- Complaint handling

**Key Metrics**:
| Metric | Formula | Industry Benchmark |
|--------|---------|-------------------|
| Customer satisfaction (CSAT) | Satisfied customers / Total customers | >90% |
| Net Promoter Score (NPS) | Promoters% - Detractors% | >50 |
| First response time | Customer inquiry to response time | <1 hour |

**Typical Cases**:
| Company | Service Advantage | Specific Approach |
|---------|------------------|-------------------|
| Haidilao | Extreme service | Exceeds-expectation experience |
| NIO | User operations | NIO House, user community |
| Haier | Rapid response | 24-hour in-home service |

### 2.2 Support Activities

**Definition**: Activities that support effective execution of primary activities.

#### (1) Firm Infrastructure

**Activity Content**:
- Strategic planning
- Financial management
- Legal and compliance
- Public relations

**Key Capabilities**:
- Strategic clarity
- Capital operations capability
- Risk management capability
- Government relations

#### (2) Human Resource Management

**Activity Content**:
- Recruitment and staffing
- Training and development
- Performance evaluation
- Compensation and incentives

**Key Metrics**:
| Metric | Formula | Industry Benchmark |
|--------|---------|-------------------|
| Revenue per employee | Revenue / Employee count | Continuously growing |
| Employee satisfaction | Survey data | >80% |
| Core talent attrition rate | Departing core talent / Total core talent | <10% |

#### (3) Technology Development

**Activity Content**:
- Product R&D
- Process improvement
- IT systems
- Intellectual property

**Key Metrics**:
| Metric | Formula | Industry Benchmark |
|--------|---------|-------------------|
| R&D spend ratio | R&D expense / Revenue | Tech >10% |
| Patent count | Active patents | More is better |
| New product revenue share | New product revenue / Total revenue | >30% |

#### (4) Procurement

**Activity Content**:
- Supplier selection
- Price negotiation
- Contract management
- Procurement execution

**Key Metrics**:
| Metric | Formula | Industry Benchmark |
|--------|---------|-------------------|
| Procurement cost savings rate | Savings / Total procurement | >5% |
| Supplier concentration | Top 5 supplier share | <50% |
| Procurement cycle | Demand to delivery time | Shorter is better |

---

## External Research Supplement: Value Chain Best Practices

### 1. Value Chain Analysis Levels

| Level | Analysis Object | Core Question |
|-------|----------------|--------------|
| **Industry value chain** | Upstream → Midstream → Downstream full chain | Where is value distributed? |
| **Enterprise value chain** | Internal enterprise activities | Which activities create value? |
| **Competitor value chain** | Competitor value activities | Where do competitive advantages originate? |

### 2. Industry Value Chain Template

```
Upstream → Midstream → Downstream → End User
 │          │          │
 │          │          └─ Channel/Distribution: Scale, concentration, margin
 │          └─ Manufacturing/Assembly: Capacity, process, gross margin
 └─ Raw materials/Core components: Resource endowment, technology barriers

Key Analysis:
1. How large is each segment?
2. What are gross/net margins per segment?
3. Which segment is most valuable?
4. Which is the strategic control point?
```

### 3. Enterprise Value Chain Template (Porter Original)

```
Primary Activities:
- Inbound Logistics → Operations → Outbound Logistics → Marketing & Sales → Service

Support Activities:
- Firm Infrastructure → Human Resources → Technology Development → Procurement

Analysis Focus:
- Which activities create the most value?
- Which activities are cost centers?
- Which activities have competitive advantage?
```

### 4. Data Source Recommendations

| Data | Source |
|------|--------|
| Segment scale | Industry reports, industry chain maps, expert interviews |
| Gross margin comparison | Public company filings, prospectuses |
| Concentration | Market share reports, industry associations |
| Key companies | Industry research, supplier/customer interviews |

### 5. Strategic Control Point Identification

Strategic control points typically have these characteristics:
- **Scarcity**: Limited supply, hard to replicate
- **Criticality**: High impact on downstream performance
- **High barriers**: Technology/qualification/scale barriers
- **Pricing power**: Ability to set prices for upstream/downstream

Typical Cases:
- Smartphones: Chip design (Qualcomm/Apple) + Operating systems (iOS/Android)
- EVs: Batteries (CATL) + Autonomous driving
- SaaS: Customer data + Switching costs

---

## III. Value Chain Analysis Execution Steps

### Step 1: Decompose Value Chain Activities

**Goal**: Break the enterprise into distinct value activities.

**Decomposition Principles**:
```
1. Independence
   • Activities can exist independently
   • Clear boundaries between activities

2. Completeness
   • Cover all value activities
   • Don't miss key segments

3. Measurability
   • Costs can be allocated to activities
   • Value can be measured for activities
```

**Decomposition Example (E-commerce Platform)**:
```
Primary Activities:
• Inbound Logistics: Merchandise procurement, warehousing
• Operations: Platform operations, content moderation
• Outbound Logistics: Order fulfillment, delivery
• Marketing & Sales: Traffic acquisition, conversion
• Service: Customer support, returns/exchanges

Support Activities:
• Infrastructure: Strategy, finance, legal
• Human Resources: Recruitment, training, performance
• Technology: Product R&D, algorithms
• Procurement: Supplier management
```

### Step 2: Allocate Costs and Value

**Goal**: Quantify each activity's cost and value contribution.

**Cost Allocation Methods**:
```
1. Direct costs
   • Directly attributable to corresponding activities
   • E.g.: Logistics staff wages → Logistics activity

2. Indirect costs
   • Allocated by reasonable standards
   • E.g.: Rent allocated by floor area

3. Opportunity costs
   • Revenue from using resources for other purposes
   • Used for optimization decisions
```

**Value Assessment Methods**:
| Method | Description | Applicable Scenarios |
|--------|-----------|---------------------|
| Revenue contribution | Activity's contribution to revenue | Marketing, sales |
| Cost savings | Costs saved by the activity | Logistics, procurement |
| Differentiation value | Price premium from the activity | Brand, service |
| Strategic value | Activity's strategic significance | R&D, talent |

### Step 3: Identify Advantage Segments

**Goal**: Find segments where you outperform competitors.

**Identification Methods**:
```
1. Benchmarking analysis
   • Select industry benchmarks
   • Compare each segment item by item

2. Customer research
   • What do customers think we do well
   • What are customers willing to pay for

3. Financial analysis
   • Which segments have higher margins
   • Which segments have lower costs
```

**Advantage Assessment Matrix**:
```
            Competitor Level
            Low          High
       ┌─────────────────────────┐
  Low  │  Weakness    │ Follower │
       │  (Improve)   │  (Keep)  │
Our    ├─────────────────────────┤
Level  │ Opportunity  │ Strength │
  High │ (Breakthru)  │ (Defend) │
       └─────────────────────────┘
           Customer Importance
```

### Step 4: Design Optimization Strategy

**Goal**: Design optimization plans for each segment.

**Optimization Directions**:
| Segment Type | Optimization Direction | Strategy |
|-------------|----------------------|----------|
| High value + High cost | Improve efficiency | Process optimization, automation |
| High value + Low cost | Continue investing | Allocate resources, expand advantage |
| Low value + High cost | Outsource/cut | Outsource, automate, reduce |
| Low value + Low cost | Maintain | Maintain status quo, monitor changes |

**Strategy Selection Framework**:
```
┌─────────────────────────────────────────────┐
│       Value Chain Optimization Strategy     │
├─────────────────────────────────────────────┤
│                                             │
│  1. Build vs Outsource                      │
│     • Core capabilities → Build             │
│     • Non-core → Outsource                  │
│                                             │
│  2. Differentiation vs Cost Leadership      │
│     • Customer-sensitive → Differentiate    │
│     • Customer-insensitive → Cost leadership│
│                                             │
│  3. Technology Enablement                   │
│     • Digital transformation                │
│     • Automation upgrades                   │
│                                             │
└─────────────────────────────────────────────┘
```

---

## IV. Output Format

### 4.1 Value Chain Analysis Report

```markdown
## Value Chain Analysis - [Company/Business Name]

### Value Chain Decomposition
| Activity Type | Activity Name | Main Content | Cost Share | Value Contribution |
|--------------|--------------|-------------|-----------|-------------------|
| Primary | ... | ... | ...% | High/Medium/Low |
| Support | ... | ... | ...% | High/Medium/Low |

### Advantage Segment Identification
| Segment | Advantage | vs Competitors | Sustainability |
|---------|-----------|---------------|---------------|
| ... | ... | Leading/Par/Lagging | High/Medium/Low |

### Weakness Segment Identification
| Segment | Weakness | Impact Level | Improvement Priority |
|---------|---------|-------------|---------------------|
| ... | ... | High/Medium/Low | P0/P1/P2 |

### Optimization Strategy
| Segment | Strategy | Expected Impact | Investment | Timeline |
|---------|----------|----------------|-----------|----------|
| ... | Build/Outsource/Optimize | ... | ... | ... |
```

### 4.2 Cost-Value Analysis

```markdown
## Cost-Value Analysis

### Cost Distribution
| Activity | Cost | Share | Industry Comparison |
|----------|------|-------|-------------------|
| ... | ... | ...% | High/Medium/Low |

### Value Contribution
| Activity | Value Contribution | Contribution Type | Replaceability |
|----------|-------------------|-------------------|---------------|
| ... | ... | Revenue/Cost/Differentiation | High/Medium/Low |

### Optimization Priority
| Priority | Activity | Issue | Strategy |
|---------|---------|-------|----------|
| P0 | ... | ... | ... |
| P1 | ... | ... | ... |
```

---

## V. Case Study

### NEV Industry Chain Value Analysis (2024)

| Segment | Representative Companies | Key Data | Value Distribution Characteristics |
|---------|------------------------|---------|-----------------------------------|
| **Upstream (Raw Materials)** | Lithium carbonate | Price crashed from ¥600K/ton in 2022 to ~¥80K/ton in 2024; gross margin compressed from >60% to ~15% | Highly cyclical; windfall profit window has closed |
| **Midstream (Batteries)** | CATL | Global share ~37%, gross margin ~22%; second-tier battery makers gross margin <10% | Winner takes more; scale effects + technology barriers |
| **Midstream (Vehicles)** | BYD | Gross margin ~22% (vertical integration advantage); new forces generally 10-15% | Vertically integrated players earn significantly more than those relying on external sourcing |
| **Downstream (Sales/Service)** | Dealers, charging station operators | Dealer gross margin ~5%; charging station operators not yet profitable | Thinnest margins; limited scale effects |

**Value Distribution**: Batteries account for ~40% of vehicle cost — the industry chain's core control point.

**S→C→P Causal Chain**: Upstream raw material de-bubbling (lithium price crash) → Midstream battery leaders' bargaining power strengthened → Profits concentrated in midstream (battery + vehicle leaders); upstream windfall era ended; downstream remains a tough business.

**So What**: For industry chain entrants, the **battery segment** is where value is thickest, but CATL's scale barriers are extremely high. **Vehicle segment** profit depends on vertical integration depth (BYD model vs external sourcing model gap >10pp). Downstream dealer/service segments have thin margins and low certainty — not suitable as strategic focus.

---

## VI. Common Mistakes

| Mistake Type | Manifestation | Correction |
|-------------|--------------|-----------|
| Activities too coarse | Unable to analyze precisely | Refine to independently measurable activities |
| Inaccurate cost allocation | Arbitrary indirect cost spreading | Choose reasonable allocation standards |
| Ignoring support activities | Only focusing on primary activities | Support activities are equally important |
| Static analysis | Only looking at current state | Analyze dynamic changes |
| Ignoring synergies | Analyzing each segment in isolation | Consider cross-segment synergies |
| Excessive outsourcing | Outsourcing even core capabilities | Core capabilities must be built in-house |

---

## VII. Integration with Other Frameworks

| Upstream Framework | Input Content | This Framework's Output | Downstream Framework |
|-------------------|--------------|------------------------|---------------------|
| Three-Layer Analysis | Business data | Segment-level diagnostic | Unit Economics |
| Competitive analysis | Competitor information | Advantage segment comparison | SWOT |
| Business model | Value proposition | Value creation segments | Flywheel |
| SCP | Industry structure | Internal capability matching | Playing to Win |

**Typical Combinations**:
- **Business model analysis**: BMC → Value Chain → Unit Economics
- **Competitive analysis**: Value Chain comparison (segment-level benchmarking)
- **Focused topics**: Value Chain → Process optimization → Cost savings

---

## VIII. China Market Specifics

| Dimension | China Characteristics | Case |
|-----------|----------------------|------|
| High digitization | Deep online-offline integration; digital enablement across the value chain | Freshippo (Hema) new retail model restructured the fresh grocery value chain |
| Supply chain advantages | China manufacturing clusters support rapid response and low cost | SHEIN leverages Pearl River Delta small-batch quick-response supply chain |
| Traffic-driven | Traffic acquisition is one of the most critical value chain segments | Perfect Diary used Xiaohongshu/Douyin to replace traditional channels |
| Service-centric | Service segment becomes an important differentiation source | Haidilao extreme service, NIO Fellow system |
| Digital enablement platforms | Alibaba/Tencent/ByteDance provide SaaS tools empowering SMEs | Youzan/Weimob help merchants digitize operations |
| Supply chain clusters | Industrial belt agglomeration effects reduce coordination costs | Yangtze Delta garment belt, Putian footwear belt |
| Instant delivery networks | Instant fulfillment capability becomes a key value chain segment | Meituan/Ele.me/Dada building 30-minute delivery networks |
