In a 2006 issue of Strategy & Leadership, authors Wayne McPhee and David Wheeler suggested that strategists should use Porter's concept to consider value-chain operations beyond the boundaries of the firm (see Exhibit 2).[5] (The figure shows Porter's original concept of an internal value chain as well as several ˜ ˜external'' additions suggested by the McPhee and Wheeler.) Since its introduction, value-chain analysis has proven immensely valuable in three principal ways " cost analysis and reduction, differentiation, and product development " but the standard practice was for firms to analyze only their own value chain.
Step 2: How to construct a customer's value chain.
First, recognize that you need to construct both internal and external value chains for a particular customer. The internal value chain follows Porter's original concept, which includes value-added steps from purchasing to distribution as well as support functions such as R&D and human resources. It's tempting to let this generic diagram serve as the customer's value chain, but it must be tailored to the particular customer. To produce a useful value-chain analysis, members of your engineering or sales team should ask the customer.
Exhibit 1 The oil industry value chain showing vertical upstream and down stream segments.
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Exhibit 2 Porter's original value chain extended in upstream and downstream directions (bold font).
how its business processes add value and whether any have unique best-practice features. To perform the external value-chain analysis, team members should ask the customer a set of getting-to-know-you questions. What does your supply chain (the upstream value chain) look like? What role does your company play in it? How do your products reach their customers (the downstream value chain)? Your final diagram models only this single customer's value chain and it represents virtually everything the customer does to add significant value.
