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The Value Chain Model, Explained Simply and With Detailed ExamplesReading time 13 minutes
The value chain model comes to life at the very moment you think of a product and expires at the moment a happy customer holds the product in their hands. If you step back a little, you’ll see that the term itself comprises two keywords: value and chain. The value part stems from the fact that the product appreciates value as it goes up the chain of activities. The chain depicts the connected nature of each of the value-giving stages in a product’s lifecycle.
This post will take a swing at simplifying the value chain model. In the process, we’ll explore a comprehensive background and breakdown of its components as we shed light on the model. I’ll also give several examples to provide context.
What Is the Value Chain Model?
We may have severed the term to its components in the introduction, but that’s far from how Michael Porter defined it when he coined the “value chain model” back in 1985. The first definition came up in a book that explored the competitive advantage that corporations hold in a wide spectrum of businesses. In effect, it dispelled what may have been the prevailing perception then—that dominance was solely a function of the business’ reputation. In its stead, the value chain model hypothesized that dominance occurs through the various activities that a company standardizes when developing, producing, testing, proving, marketing, and distributing a product. Quickly applying binoculars to the theory confirms why reputable companies seem to have ritualistic processes that give the perception of high value when it comes to purchasing their goods. Take Apple for instance. Though we’re used to their year-on-year cycle of product releases, the value we attach to their product ecosystem never seems to dwindle. Instead, they confirm and compound that value with each iteration. We’ll explore exactly how in the examples section of this post—keep reading!
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A Brief History of the Value Chain Model
At the time of its publication, the value chain model was a deliberate build-up effort of the input/output perspective previously proposed by Wassily Leontief. It did not deny that some input would have to be invested into a product for there to be valuable output. In fact, it confirmed all this by specifying the activities that would incrementally give value to a product at the various stages of its lifecycle. Since then, it has become the bedrock for a majority of well-thought-out business concepts and their products. To balance the slight rewind in time we’ve just taken, a look into the future will make for a more complete explanation of the value chain model. 1985 has come and gone, and the business terrain is in constant flux. As such, we should respect the energy from which the model was conceived. Evolution and simplification. It’s wise to expect many changes in the value chain model. One thing stands out and is constant no matter what time or product you look at: a product must evolve from conception through production with the input of effort as it gains value. Both views of the value chain model, past or futuristic, can be broken down into components that further simplify what to do and how it impacts a product’s value.
Value Chain Components
When explaining the value chain model, Michael Porter singled out two classes of activities that affect a product’s value. We’ll discuss them here as primary and secondary activities. The difference is that the primary activities are core to there being a product in the first place. The secondary activities are optional; however, when invested in, they are key determinants in a company’s dominance of its industry. Let’s explore both in detail.
Primary Activities of the Value Chain Model
These are not negotiable. Your product does not escape from your idea board if you don’t take the actions listed below.
Apart from having a good idea, some raw materials must be sourced to transform an idea from paper into a tangible asset. The more detailed and deliberate a company’s inbound logistics are, the more value their products get from the very start of their journey toward intended buyers. Think of a factory floor. The quality of raw materials, inbound shipping routes, storage facilities, and supplier networks all play a qualitative role that can be felt through to the final packaging of the product.
The next stage of the value chain takes action on the raw materials sourced from logistics. A lot goes into turning materials into packaged products worth queueing for. Why some products will have record early buy-in numbers weeks before they’re released and others fail totally is a function of how much a company invests in the operations link of the value chain. Using the Apple example again, loyalists are willing to camp outside retail stores for days on end for the most expensive devices, while cheaper—and virtually equal—products get less attention. Ever wonder why? Our detailed example of Apple’s model will expose this phenomenon.
When the product has gone from a pile of scrap metal to a shiny packaged box, the set of tasks and infrastructures in place to preserve and distribute it form its outbound logistics. If the shipping method is laboriously long and expensive, the product inherits some of those attributes. For some companies, it takes a few days to take the product from the conveyor belt to the shelf, while for others, it must go through many other substages before users can pay for it. All this eventually takes effect when we consider why some companies are easier to like and buy from than others—even before any marketing lures you in.
Marketing and Sales
Then there is the product hype and selling part. People’s perceptions of a product can be conditioned, and they often are. Strategies that attract the intended type of buyer toward a product have always been used to make sure it flies off the shelf. Sometimes companies spend millions of dollars running marketing campaigns worldwide. The sole intention is to get as many people to experience the product before they buy it. On the sales side, a person may not be in the product’s intended market, but that can change thanks to the social effect of marketing today. It’s now possible to manipulate sales with various social media platforms. Owning a product because your friends say it’s cool is easily a strategy to get products off the shelf and into people’s hands. The more drivers of sales a company invests in, the more command of the market they gain over time.
Plenty of companies fail to maintain dominance and competitiveness even after their products receive massive buy-in from customers. The service part of the chain is largely to blame for this failure to maintain customer delight. How much support a company provides after sales, for instance, can have ripple effects on the success of its entire line of products. This is true for the possibilities that a refund policy opens up if a product is rushed past the other links of the chain to chase sales. We’ve seen this with phones that exploded in people’s pockets, only for the next iterations of products to go viral after the company activated a recall and refund or replace strategy.
Secondary Activities of the Value Chain Model
Although I said earlier that secondary activities are optional, they’re far from that when a company is aiming beyond just producing a product. To attain and maintain market dominance, a company should be willing to go the extra mile. These activities are those extra miles in detail:
This is a function of the first primary activity. It focuses more on the buying part of the inbound logistics than other sub activities in it. The more refined and deliberate the procurement process is, the more value you can infuse into the raw materials and the final product.
Technological Research and Development
Releasing the latest technology into a market first often commands respect and dominance. We see this clearly each time Apple brings about the best design, storage options, and camera quality with each product iteration.
Human Resources Management
This is the effect that comes from how a company handles its human capital. How much attention it pays to its staff’s skills shows up in the quality of the final product. So, too, does the amount of training that goes into keeping a workforce on the top of its game. Every stage of a product’s lifecycle has some employee in contact with it. As such, the higher that interaction’s quality, the better the product.
When you take a step back from the actual product, you realize that there are teams around each link of the value chain. The quality of these teams is a key determinant of the product’s value. These teams include the workers on the factory floor and their supervisors, the sales team, marketing creatives, all the way up to the board of directors. Now that we’ve identified the various links of a value chain, lets see them in action. Certain successful businesses have applied Porter’s model with spectacular results.
Value Chain Model Examples
Smart integration of the value chain model quickly adds value to even the simplest of business ideas. Let’s consider one special case and reflect on how its strategies for each activity end in an unforgettable product experience.
Starbucks: An Extraordinary Take on Coffee
Starbucks would never have flourished if the team behind it looked at coffee the way an ordinary person had always done. Instead, to Starbucks, coffee could change the world—one person at a time and one cup for each. To evaluate how Starbucks is effectively a genius business model in motion, let’s put some activities previously discussed side by side with their strategies.
To begin, each time Starbucks chooses the coffee grains that go into their cups of coffee, they opt for the best quality. Sparing no cost and following a standardized set of activities, they’ve managed to set up networks of suppliers loyal to the goal of making each cup memorable. In addition, they have their own raw material storage facilities and transportation systems. In this way, they’ve taken quality to high altitudes while keeping costs low.
Despite being a huge brand, Starbucks has a relatively small marketing budget. This could be due to the nature of their product—most people who drink coffee do so daily—but they focus on better ways of getting new products out on the market. For example, whenever they have a new product, they offer free samples to some of their customers.
Apart from getting new clients, they are determined to keep their loyal ones on board. Good customer service and cross-selling are key strategies they use to maximize continued loyalty. This costs less than getting new customers.
When it comes to the way they treat coffee buyers in store, Starbucks has rules that make everything predictable. They also invest in human capital as infrastructure to maintain the rules. You’ll notice that they have a service that makes it easy for customers to return for more. A lot of young entrepreneurs use their stores as office space as long as they keep refilling their coffee cups. They invest in technology as well by making sure their communications are high-tech and WiFi is free for all customers.
Bonus Use Case: Apple
We’ve been using Apple’s way of doing business throughout the course of this article. By now you should be able to apply the activities of Porter’s model to the various strategies that Apple’s famous for. Let’s look at a few that stand out.
Research and Development
To begin, whenever we hear that Apple is unveiling a new line of devices, a sense of excitement immediately activates. We’ve come to expect new, bleeding-edge gizmos each time Apple’s CEO ritualistically shows up and greets us with the company logo on a big screen behind him. Somehow, we instinctively let our wallets loose in response. Apple Park is a high-tech infrastructure that makes working there and being part of the brand feels prestigious. Apple’s employee benefits factor into the desirability matrix as well.
The relationship with Apple, and by extension the value chain’s effect, goes on long past the decision to buy their products. Each time you get a better software upgrade, they inject value above and beyond the money you parted with. So too does the repair and support service you get from the various Apple Geniuses they make available to keep your gadgets as good as new.
Introduction to Value Stream Mapping
At this point, we’ve looked at some popular companies at the value chain activities level. Logically, the next step in our journey is exploring how each link of the chain connects to the entire process. This will also reveal how the value chain fixes an entire business when tweaked—possibly mapping routes for digital transformation as well. Synonymous with actual chains, everything connects in sequence, joined across the activities at times—much like a stream of value-determining activities. When you look at the activities that form the chain, previously explained as a monogamous effort adding value to products, a value stream emerges. Fine attention is given to the information and materials as they metamorphize into a finished product. What you’ll notice is that the stream mapping ideology actually has an entire value chain model inside it. It’s a subset of the value stream and the mapping thereof. As long as you’re searching, you’ll find some trains of thought trying to weigh the value stream mapping ideology against the value chain model. More important is the fact that when placed on a set of processes, the value stream mapping is a methodology that improves said processes. In software development, a value stream would comprise the steps that infuse value for the end user. In such a scenario, a map would be the diagram showing each process and how they all link together. A good map shows areas of concentrated value all the way to the final deliverable.
Value Stream Management
We’ve recognized how a chain of processes takes place to build value for a product. What a detailed map would establish is how each product often has its own inputs and outputs. From there, you have information flowing in between each process. This information often gets lost in translation—no thanks to incompatible systems. A value stream management strategy minimizes this bleeding while providing a central portal into the entire process topography. Plutora is one such tool that integrates with popular business process applications along a value chain. The end result is a central system that allows a single login and a smoother flow of information between the processes. Quicker and earlier feedback loops would emerge, eventually leading to better products. Using a value stream management tool not only makes it easy to single out the processes that make up your value chain, but it also optimizes the impact of each process on the quality of the final product.