What is value?

Before we get to the diagrams, let’s start with what we mean by ‘value’. Value can be understood as “something of importance, worth, or the usefulness of something”. Value can also be described as profit or stakeholder wealth. So, if organisations create value, when and where does this value come from? To visualise this value creation process we can use Porter’s value chain.

A value chain diagram shows a chain of activities for an organisation operating in a specific industry. The chain of activities gives products or services more value than the sum of the independent activities’ values. The important distinction here is between primary and support activities. The primary activities are where all the value is directly created. The support activities, while critical for sustaining the business, do not add value directly to the product that the customer ultimately buys.

While there are some legitimate criticisms of Porter’s value chain (least of all the failure of his consultancy) it still provides a straight forward framework for understanding how organisation’s might create value.