Your Value Chain

Business Operations

Business operations consist of all of the activities, systems, and processes that a business utilizes to keep it running on a daily basis.

The definition, like the term, must ultimately be vague.

The operations required to keep a hospital running, for example, are quite different from the processes an auto mechanic relies on to keep their shop in running order.

Although you can be as granular as you’d like when defining operational roles and responsibilities, ultimately operations revolve around the delivery of value to customers.

Value is the reason any company—big or small—exists.

It is also the economy of how and why of a venture’s success.

We know that the amount of money a company is left with once they have collected their revenues and deducted their costs is the company’s margin of profit.

This is the amount that “goes in the bank,” so to speak.

In his 1985 book Competitive Advantage, Michael Porter suggested a different, value-centric way to describe a firm’s profit margin:

profit-margin-formula

This high-level formula is foundational to understanding the concept of a value chain, and to mapping and interpreting your own venture’s value chain.

Additionally, because value and profit are so closely aligned, it behooves entrepreneurs to study their ventures from a value-centric viewpoint.

The Value Chain

All organizations have a value chain regardless of whether or not they take the time to identify and explore it.

Simply put, a value chain is the journey that your “raw materials” take through your operational systems and processes to become something that your customers will buy.

What constitutes your raw materials depends entirely on the nature of your business—in the case of a manufacturer, their raw materials really are raw materials.

Value Chain Example

At a high level, the value chain for a manufacturer is easy to understand.

For example, a company that produces classic furniture takes in raw materials in the form of wood, fastening hardware, and upholstering fabrics.

Individually, those components don’t have much value for someone who needs a chair.

The manufacturer processes the wood, joins the parts, upholsters the chair, and finishes it into a useful piece of furniture.

value-chain-what

At each stage of this process—shaping the wood, fastening the components, etc.—value is added to the finished product.

A chair isn’t finished if it isn’t upholstered, in the same way, that it isn’t valuable without having the legs fastened to the seat.

Individually these activities don’t produce a valuable finished chair, but without them, a chair isn’t finished (or valuable).

A coffee shop uses the inputs of coffee beans and cups to brew cups of coffee.

A grocery store receives products as inputs. By unloading, stocking, and displaying these items, they are delivering value to their shoppers.

When those shoppers purchase, they represent outputs.

  • What about businesses that are built around less tangible products?
  • Or businesses that don’t manufacture goods?

These businesses have value chains as well, but they are not directly analogous to the manufacturing model.

What they do have in common are raw materials—inputs—that are transformed into valuable finished goods—outputs—by processes that add value every step of the way.

Take the popular food-ordering app Grubhub.

While it may seem as though the app’s users are its customers, in truth the app’s revenue-generating customers are the restaurants it partners with—Grubhub charges partner restaurants a transaction fee.

In the case of Grubhub, the app takes hungry diners looking to order ahead or take their food to go (inputs) and delivers them to their customers—the partner restaurants—as outputs.

Here, the design and functionality of the app is the “process” that converts inputs to outputs.

Grubhub’s partner restaurants are the revenue-generating customers of the business, but the hungry people who use the app are also Grubhub’s customers.

If Grubhub can’t offer app users a variety of choices, the restaurant they were looking for, fast results, or a smooth experience, then those users will look elsewhere.

For a business like Grubhub this threat is additionally real:

  • how were users placing orders with their favorite restaurants before Grubhub?

If Grubhub fails to deliver an excellent experience for users, those users can simply place their order via a quick phone call (and Grubhub will lose their transaction fee).

This is also the case with similar app products that have become household names.

Uber, Airbnb, and Lyft are all working to cater to two sets of customers.

On one hand, Uber has to deliver value to commuters and travelers looking for a ride. On the other, they have to make driving for Uber a lucrative and desirable profession.

The app’s value chain has two sets of inputs and two sets of outputs to deliver.

I often see startups billing themselves as “the Uber of [insert industry here].

What they mean is that they are using a similar model and that the person to whom they are speaking is supposed to think only about the success that Uber has seen.

Instead, the first question that should spring to mind is “How are you going to deliver value to two sets of customers?

Not all apps or tech-enabled services juggle two sets of customers.

Music-streaming service Spotify, for example, uses the input of streaming contracts with artists and music labels to deliver the output of an extensive on-demand streaming library.

SaaS (software-as-a-service) providers with businesses as customers use engineering, coding, and data maintenance as inputs to produce their various services as outputs.

value-chain-saas

The bottom line is that no matter what your venture sells, your organization can be expressed in terms of a value chain.

Like so many of the other core aspects of your business, managing and improving your value chain is not only essential, it is an ongoing process.

Think of it this way:

in the case of the furniture manufacturer, the process of assembling and producing a finished chair isn’t just the way the company delivers value to customers—it is the company.

Evaluating Your Value Chain

In any given market there is, of course, more than just one coffee shop, grocery store, or music streaming app.

Simply delivering a cup of coffee, stocking an assortment of produce, or constructing a chair is not enough to build or maintain a competitive advantage.

A venture’s value chain is an expression of the overarching how and why that venture is in business, to begin with—the value proposition.

As I already mentioned in this article, a startup’s value proposition can be summarized as the answer to two questions:

  1. Who is your target customer?
  2. How are you different from your competition?

The execution of your value chain is the day-to-day way that your venture makes that value proposition a reality for your customers.

The importance of your value proposition cannot be overstated.

If it is built on shaky ground, no amount of process optimization or innovation within your value chain will result in long-term success.

The process of analyzing and evaluating an existing value chain mirrors the process of creating one from scratch—in both cases it is helpful to visually map the process.

analyzing-a-value-chain

Value chain mapping and analysis consist of three steps:

Activity Analysis #1

Start by identifying the scope of activities needed to deliver your product or service.

Value Analysis #2

For each activity uncovered in the previous step, identify the ways in which it contributes to the value you provide for your target customers. Look for connections between different activities.

Evaluation and Planning #3

If you are analyzing an existing value chain, examine each activity and look for ways to increase the impact that activity has on the value you deliver. Look for ways to leverage the connections that exist between different activities and identify inefficiencies that can be eliminated due to these connections.

Let’s explore the value chain mapping process by analyzing the value chains of an example business—a fast-casual coffee shop with multiple locations in a single region.

value-chain-example

This figure demonstrates the ways in which a coffee shop may deliver value to its customers, from

  • the inputs of coffee beans, dairy products, and cups
  • to the point where the output of fresh coffee is put in the customer’s hands (distribution)
  • along with the activities that produce less-tangible results such as service and marketing.

Value Chain Example

01. Primary and Secondary Activities

The major activities outlined in the figure above are considered primary activities, or the activities fundamental to the creation of value to customers.

Support activities are those that exist at the organizational level, such as procurement, human resources, and research and development.

Support activities may not be customer-facing, but that doesn’t mean they don’t contribute positively to the value that your venture provides.

Added to our example coffee shop’s primary activities, the support activities are represented horizontally—they are connected to each other through the support they provide.

02. What to Look For

A value chain analysis is a deep dive into the inner workings of what makes your business tick.

Or, if your business hasn’t been created yet, a value chain analysis is a way to plan operations with a value-forward approach.

The visual tool that the analysis and evaluation process yields is helpful, but the true value of the analysis process is that it forces you to examine which operational components create value and—this is critical—which components don’t contribute to customer value.

With each activity thoroughly explored, search for connections or common threads between them.

These common threads are known as “linkages” and they represent areas where optimization and efficiencies can be exploited.

A linkage arises when a value activity that is currently being performed (primary or support) can be performed in a different or new way based on the connection that activity has to another.

When examining these linkages with the objective of creating more value for customers, decision-makers can focus on one of two areas:

  • creating a cost advantage
  • or creating a differentiation advantage.

In either case, the choice your venture makes must reflect your overarching strategy for success.

Back to our example…

Going back to the example of our coffee shop, one of the ways customers receive value is through the offering of ready-to-eat baked goods which are purchased from local suppliers.

These inputs are linked to the procurement support activity—contract management with local suppliers is a process step that facilitates the inputs of pastries and baked goods for sale in the shop.

To pursue a cost advantage strategy, decision-makers could explore more cost-effective sourcing, such as frozen, bulk items.

If the coffee shop is pursuing a differentiation advantage strategy, a local baker may be a better choice despite being more expensive.

When business leaders talk about innovation, they are describing methods and tools like the value chain analysis.

Through rigorous inspection, creative interpretation, and an eye for detail, entrepreneurs along with their management teams can make informed, strategic decisions to propel their venture forward.

If you followed the article about the competitive advantage you learned.

Exploiting linkages that become apparent in a value chain analysis is one of the sources of competitive advantage that allows firms to improve their differentiation or cost strategy.

Final Words…

Every value chain is different, even for firms in the same industry.

When you start to sketch yours out, just focus on the chain of activities that your company undertakes to turn its raw materials into finished products. Don’t worry about applying business terms like “operations” and “marketing” until later.