Value Chain

If you ever studied anything about “strategy” or “marketing”, surely you have heard about it. But what exactly is the Value Chain?

When searching through Internet, you may find different definitions that may get you confused. We recommend conceiving it as follows:

The Value Chain is a tool that allows you to analyze the overall strategy of a certain company based on its different added-value activities.

And this last “surname” is what clarifies the general misconception regarding the Value Chain, since people usually sticks to one fixed Value Chain, when different companies in different sectors should elaborate different Value Chain analysis.

There are two mainstream Value Chains largely known:

• The McKinsey Value Chain
• The Porter Value Chain.

Now, we’ll shortly explain both of them giving you then examples about how to develop a proper Value Chain for your project or business.

But first of all, let’s clarify when should you make a proper Value Chain analysis.

* You’ll find an open Excel with Value Chain Templates within the “Strategy Templates” section, with all the approaches we’ll explain further: the Porter approach as well as the McKinsey one.

Always.

This is not a joke or exaggeration. When developing a certain project or analyzing a strategy, you must always think about the activities adding value to the final product, which are the current trends and how can they affect it.

The mere analysis will make you think where is worth making efforts or not. Where can you experience future troubles, or where is useless to invest a single dollar.

Value Chain analysis is the step before you can develop a proper SWOT by linking it together with the 5 Forces and the PESTEL analysis.

* If you have not visited yet the 5 Forces and the PESTEL analysis sections, we encourage you to do it so right now.

As you can see in the graph below, it consists on different activities analysis’ describing a certain company behavior; more particularly, what characterize the operations generating value to the final product.

Sometimes this tool is employed to describe average industries/companies instead of a particular one.

McKinsey Value Chain representation

It presents a description about the most important trends/factors within each of the 6 main activities describing this company.

Pros within McKinsey approach:

• It is easy to develop.
• It is easy to understand at simple glance.
• In case there are new activities or factors to consider, they can be easily added.

Cons within McKinsey approach:

• Its unidirectional sense (or linear) doesn’t always match the reality of certain companies.
  • Some aspects may affect two or more activities at the same time that may not take place simultaneously.

Remember what we said before: This case shown above represents a generic company and the most common activities adding value to the final product or service.

Depending on your economic sector or even your company approach, you may have to change certain “aspects” or activities within this chain in order to describe better the “levers” affecting your final.

Now we’ll propose different Value Chains for different businesses so you may better understand how this analysis should not always be regarded as a rigid and static tool.

As you may expect, technological improvements play a vital role for this companies.

They could be:           

• 5G technologies.
• Wi-Fi technology.
• Battery improvements.

Check how important the blogger prestige is in the Value Chain. In other sector this would be absolutely irrelevant.

Within this factor, you could find:

• Collaborations with important websites.
• Awards received.
• Social media presence.

This is an interesting example, because new “trends” play a role itself in the “fitness” business.

Among these trends a fitness center could be specialized in:

• Crossfit.
• Paleotraining.
• Fitboxing.

As you may have noticed, there are slight differences among different sectors since it is not the same having a car-rental business than a e-commerce one.

Now we’ll explain the Porter Value Chain analysis that uses a different approach although the concept is essentially the same, but focuses on different aspects.

The famous Porter Value Chain analysis is usually more rigidly regarded with the aspect that you can see below.

Porter Value Chain representation

Its different aspects tend to be rigid and depending on the company analyzed, you may highlight some aspects or others within these factors.

Pros within Porter Value Chain:

• It is a standardized analysis so everybody knows the different aspects studied.
• It focuses strictly on internal factors, so it links perfectly with an external PESTEL analysis.
  • Not overlapping issues.

Cons within Porter Value Chain:

• It is complex to develop.
• Its “rigidity” can sometimes be counter-productive for innovative approaches.
• By focusing on internal factors exclusively, sometimes you can lose some perspective.

We highlighted how open the Value Chain analysis is (and should be) and although Porter’s Chain is a rigid framework more focused on internal factors, the analysis that must be done within each section will vary for each economic sector.

The question that follows is: ¿Which Value Chain analysis approach should I employ?

Now we’ll explain in detail which approach should you use depending on the project you are developing.

We have basically, and summarizing, one Value Chain analysis more flexible, simple and “straightforward”, and other more complex, rigid and focused on internal aspects.

Which one should you choose? That depends on the project you are developing.

We highly recommend using this approach:

• Whether it is your first time analyzing a Value Chain.
• If you have a young project.
  • You will surely need flexibility and this approach allows you to change quickly and easily its factors.
• Within “changing” economic sectors.
  • Again, the flexibility of this approach will surely be helpful.
• If the company analyzed is small.
  • If you barely have infrastructure within the company, the McKinsey approach is definitely your best option, since it doesn’t focus excessively on internal factors that may not even apply to your situation.

We highly recommend using this approach:

• Whether you have experience analyzing Value Chains.
• Whether you are developing the analysis for a consolidated company.
• For new approaches within consolidated economic sectors.
  • Some projects approach a consolidated sector with cheaper resources, better distribution chains, a better service or customer support…
  • For these projects, the Porter analysis would be the best option, since it disaggregates all the conventional internal aspects that are about to be improved in a new approach.
• Whether you are developing this analysis for a big company.
  • If the company you are analyzing has a human resources department (for example) maybe you should think about this approach since it analyzes more deeply the different departments impact on the final product.

Some of you are probably thinking:

• “Ok… I am analyzing a big company, but it is a technological changing-environment company… Which approach should I use?“.

The answer is simple and politically correct: Both approaches.

The Porter approach would help you focus on the company structure while the McKinsey approach would give you the flexibility necessary to face the continuous changes experienced within innovative sectors.

At first glance, the Porter approach seems not that attractive, and that it is maybe true, but when a company grows it is necessary to start focusing even more on internal aspects that might be sometimes the real key to success, although nobody realizes about it.

Now we’ll give you a real example that shows, how sometimes, certain ignored internal factors are the true reason of success, while the company focus on external actions.

Several years ago, we met the owner of a certain company that was trying to expand its business across Europe.

• It was during the real-state crisis and we couldn’t believe how was that possible.

We knew (due to other projects) that the sector margins were very low and the perspectives even lower, so we didn’t understand how in the world they could have that positive perspectives.

Of course, the owner told us that he was having the best quality and then everybody was crazy about their products.

We then started to analyze the numbers founding out that the prices were not really high, the markets where they were selling were the average markets expected… and the quality, although being very quite high, was not the best possible.

It was true that they had very good margins but… we found out why, and nobody had a clue about it:

• They had a very efficient distribution system where they were selling experiencing really low transportation costs and their logistics competitors in the markets they were selling were broke due to the crisis.

They were thinking about expanding into markets where they would have not had this advantage, what would have been absolutely terrible for them.

Thanks to our analysis they didn’t expand their activity in those years, what allowed them to earn good money, improving their weaknesses and few years later they bought their new competitors.

• Nowadays they are the regional furniture leaders thanks to being focus on their real Value Chain.

With this example you can understand how important is to disaggregate your Value Chain identifying the key factors adding value to the final product because:

Sometimes, even having great results you can take terribly wrong decisions by just thinking your strengths are ones when they are not.

* With this “Value Chain” tool, along with the “PESTEL” and the “Porter 5 Forces” studies, you are ready for developing a proper SWOT analysis. Check the “SWOT Analysis” page if you want to know more about it.

The Value Chain analysis is a mandatory analysis for every company whether you are a small company or a large one.

There are two main Value Chain analysis approaches that can be very useful depending on the size and economic sector you are analyzing:

The McKinsey Value Chain approach:

• Flexible and easy to develop.
• Highly recommended when it is the first time analyzing a Value Chain.
• Perfect for small businesses or changing environments.

The Porter Value Chain approach:

• Rigid but universally standardized.
• Focus on internal activities/factors.
• It is ideal for big companies with different departments.

However, it is highly recommended to develop both approaches when analyzing a Value Chain for the first time, taking the best of both perspectives.