Discussions About The Value Chain
Some influential business thinkers, most notably Michael Porter at Harvard Business School, have introduced the concepts of value chains that we discuss here.
When a company enters and competes in any industry it performs a number of discrete but interconnected value-creating activities. Examples are engineering and designing, producing and marketing, warehousing and shipping, and servicing and supporting.
These activities are connected with the activities of suppliers, internally with marketing channels, and ultimately to the end-users. Linked together, they must include a markup, which is also called a profit margin, over the cost of performing these value-creating activities. The value chain is the sum of all these business activities—even if all the activities add up to producing just a pencil. For fun, we suggest that readers take a look at Milton Friedman’s thoughts on the “infinitesimal amount of services that each of the thousands contributed toward producing the pencil.”
Porter separated all these services into two groups of business activities: primary and support.
Primary Business Activities
- Purchasing includes activities, costs, and assets related to buying the inputs and supplies, and inbound logistics like receiving, storing, and distributing.
- Operations include activities, costs, and assets associated with converting inputs into final product form, such as production, assembly, packaging, equipment maintenance, and quality assurance.
- Outbound logistics include activities, costs, and assets dealing with physically distributing the product to buyers like warehousing, order processing, order picking, packing, shipping, and delivery vehicle operations.
- Marketing and sales are related to sales force efforts, advertising and promotion, market research and planning, and dealer/distributor support.
- Service is associated with providing assistance to buyers, such as installation, spare parts delivery, maintenance and repair, technical assistance, buyer inquiries, and handling complaints.
- Research, technology, and systems development includes all activities, costs, and assets related to product R&D, process R&D, equipment design, data-basing, and computerized support systems.
- Human resource management includes all activities, costs, and assets associated with the recruitment, hiring, training, development, and compensation of all types of personnel and development of knowledge-based skills.
- General administration relates to general management, accounting and finance, legal and regulatory affairs, safety and security, management information systems, and all other overhead functions.
Untangling the Value Web in Your Industry
For your start-up to survive, you must find a defensible market not dominated by any major players. In the years prior to and during the Perfect Storm, many entrepreneurs ignored Gause’s Principle of Competitive Exclusion, named after Professor G.F. Gause of Moscow University. Today known as the “father of mathematical biology,” Gause simply deduced in 1934, after observing protozoans fight it out in the same bottle, that “No two species can coexist that make their living the same way.”
This fact is clear: An entrepreneurial strategy aimed at exploiting an innovation must achieve leadership within a given environment. Otherwise, the venture will simply create an opportunity for the competition.