Advance Fundamentals

The Invisible Powerhouse Behind Every Product/Service

Behind every impeccable products and seamless services that enrich our lives lies complex dynamic of interactions between numerous entities that have enabled said-product and services to be delivered right to our hands.

Paired with our understanding of why business exists and where value is perceived, it is critical to understand players behind the scenes that exist to add incremental value in each stage of any product/services, collectively named “value chain”.

Only by understanding the complexity of the system and its continuous evolution would you be able to envision where your venture’s value lies within the broader landscape.

The Backbone of Business: Unpacking Porter’s Value Chain

Trade Beyond. (2021). CBX value chain explained [Image]. Retrieved from https://i0.wp.com/tradebeyond.com/wp-content/uploads/2021/02/CBX_value_chain_explained-1.jpeg

Coined by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance, the value chain concept illustrates the process through which a product or service transitions from inception to consumption. This framework underscores the essential skills and knowledge required across various functions throughout this creation process.

Porter categorizes these functions into primary and support activities, each playing a pivotal role in enhancing value.

Primary activities are directly involved in the creation and delivery of the product or service.
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• Inbound logistics: Management of the receipt, storage, and dissemination of inputs like materials from suppliers
• Operations: Transformation of inputs into the final product through manufacturing or service creation processes
• Outbound logistics: Distribution of the finished product to consumers
• Marketing & sales: Promotion and sales of the product and services to the end user
• Service: After-sales support to maintain the product’s quality and ensure customer satisfaction

Support activities bolster the efficiency and effectiveness of primary activities through:
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• Infrastructure: Foundational infrastructure of an organization including accounting, finance, legal, quality assurance, and strategic management
• Technological development: Hardware, software, and technical knowledge required to operate a business
• Human resources: Recruitment, training, and retention of employees
• Procurement: Acquisition of the resources needed to operate the business

While the diversity and complexity of these functions might seem daunting, they are integral to understanding the holistic operation of a business. Rather than viewing these elements as isolated silos, it’s beneficial to see them as interconnected components of a single, cohesive system.

Next, let’s demystify the value chain with a straightforward example, showing how these concepts apply to everyday business scenarios.

A Simplest Example of a Value Chain

Imagine a hot, sunny afternoon in the peak of summer. After a long walk, you’re thirsting for a cold drink to cool off. Out of the corner of your eye, you spot a small, cheerful yellow stand hosted by enthusiastic young entrepreneurs. Approaching, you exchange a quarter for a refreshing glass of liquid, instantly feeling revitalized.

This scene is more than just a summer staple; it is a perfect, straightforward example of a value chain in action, commonly seen in lemonade stands across western societies.

Making Memories with My Minis. (2021). Lemonade stand [Image]. Retrieved from https://makingmemorieswithmyminis.com/wp-content/uploads/2021/07/lemonade-stand-feature.jpg

Suppose you decide to start your own lemonade stand, anticipating the hottest summer on record. Applying the value chain framework, you may consider the following questions at each stage to ensure a delightful lemonade experience for your customers.

Primary Activities

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• Inbound logistics: What are your inputs ? (e.g. lemon, sugar) How are you sourcing them?
• Operations: What is your recipe for lemonade? What is the process for the production of the lemonade?
• Outbound logistics: How do you deliver the lemonade to your customer? (e.g. cups, bottles)
• Marketing & sales: What methods do you use to attract customers to your lemonade stand?
• Service: What post-purchase services do you offer (e.g., satisfaction guarantees, refunds)?

Support Activities

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• Infrastructure: How are you keeping track of your sales?
• Technological development: Are you using any technologies or apps to track your sales/operation?
• Human resources: Who are you hiring to work with you? What incentives do you offer them? 
• Procurement: How do you select suppliers for your ingredients? 

Answering these questions helps piece together your business model, prompting further reflection on how to distinguish your stand and determine the best time for sales.

While a lemonade stand offers a straightforward depiction of a business’s value chain, it lays the groundwork for understanding more complex scenarios. For example, a large company like
Tropicana, generating over $1 billion in revenue, faces far more complex challenges across its value chain, though the fundamental questions remain similar.

Service Value Chain: A Visual Exploration

The Professional Massage Academy. (2019). ORT FBLIVE 5 [Image]. Retrieved from https://theprofessionalmassageacademy.com/wp-content/uploads/2019/11/05.10-ORT-FBLIVE-5-1024×675.png

The concept of the value chain, widely recognized in the context of physical products, is equally applicable and insightful when examining service-oriented businesses. The primary distinction lies in the exchange of value: services exchange intangible benefits for financial compensation, contrasting with the tangible product transactions.

For example, running a sole proprietorship as a massage therapist offers an excellent case study for the service value chain. Given the intangible nature of services, the questions driving each stage of the value chain might differ from those in product-based businesses.

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• Service Development and Design: How do you determine which types of massage services to offer?
• Marketing and Client Acquisition: What strategies do you use to attract new clients?
• Client Relationship Management: How do you gather and utilize client feedback to improve your services? How do you ensure client retention and encourage repeat bookings?
• Service Delivery and Operations: What processes and standards do you follow to ensure high-quality service delivery for every client?
• Financial Management: How do you budget for business expenses, including supplies, rent, and marketing?
• Compliance and Legal: What licenses and certifications are required to legally operate your massage therapy business? What insurance do you need to protect your business and clients?
  
• Technology and Infrastructure: What tools or software do you use for appointment scheduling and client management? What equipment and supplies are essential for delivering your services?

As with product-based businesses, the complexity of service-based value chains can vary significantly. An example of a more complex service environment is a full-service hospital, where a multitude of personnel offer a wide range of services for various purposes.

So, What Now?

Still having trouble visualizing what a value chain is? An easy method is to observe your surroundings and pick the first item that catches your eye. Whether it’s a pencil, a piece of paper, or the shirt you’re wearing, it has likely, directly or indirectly, passed through the hands of countless individuals. Each one has added their incremental value to its journey to you. Milton Friedman illustrates this concept eloquently in one of his discussions, showcasing the intricate web of contributions that bring everyday items to our hands.

On your entrepreneurial journey, as you aspire to offer a product or service, take a moment to appreciate the complex web of exchanges and the value added by many parties. It’s a chance to recognize the role you’ll play in this chain, contributing as a vital link that provides value to your customers.

“Try not to become a person of success, but rather try to become a person of value.” 

Albert Einstein

This perspective is crucial as you navigate the business world. It’s easy to get caught up in the pursuit of profit or personal gain, asking, “How do I maximize my earnings?” or “What’s in it for me?” However, the essence of starting a business should revolve around the value you aim to deliver to your customers.

This fundamental principle—not just the pursuit of success or financial reward—should guide your entrepreneurial endeavors.

Disclaimer: This article aims to provide a concise overview of Business based on the information available at the time of writing. Due to the inherent complexities and the dynamic nature of the business world, it may not capture every facet or the latest developments. Readers are encouraged to conduct further research for the most current insights and to consider this piece as a starting point rather than an exhaustive analysis. The views expressed are based on the author’s interpretation and do not necessarily reflect the full scope of the business’s strategies or outcomes.