Value Chains – Part 1
I’m always curious on what makes a specific business operate, whether it is a paper mill, bank, university or the bookstore on the chic cafe street. All these business have one thing in common, they all need to generate revenue in excess of their operating costs or they will become a footnote in history.
Looking at these companies I then start to think about how they can generate that revenue:
- The paper mill takes in wood products (or secondary fibers) and processes them into paper products.
- The bank uses fractional reserving techniques plus interest and fees to provide us with the capital to invest in our businesses, buy property or purchase a new car.
- The university produces a set of courses taught by compelling instructors to which students pay a fee to learn the material.
- The bookstore takes in book inventory (new or used), marks up the price then sells to the consumer.
All of these businesses provide some value to their customers. I would like to present this definition of Value Chain for our discussion:
A value chain contains all of the work activities required to produce products or services that satisfy the desires of a specific set of customers, as well as the processes needed to guide and enable these work activities.
Let’s take an example of a simple restaurant business named Thai Express. (Note: This is an example and it not intended to model any existing business)
The customer expectation coming into Thai Express is that they will be able to eat a Thai Food meal. At this point in the exercise, I’m not going to qualify all of the specific needs of the customer or outline the vision of the restaurant.
(The Thai Express Product Vision can be viewed with this link)
Conceptualizing the Value Chain
I’ll break the Value Chain conceptualization into three parts:
- Focus on the need of the customer rather than the product.
- All products (or services) that service the same market belong to the same value chain.
- Establish the flow of the business processes from end to end. Capture the essence (What) rather than the specific implementation (How).
Value Chain Processes
The business processes for the value chain fall into 3 categories:
- Core Processes: These link directly to the external stakeholders and are responsible for delivering the product or service to the customer. If these are missing then no value will be delivered to the customer.
- Guiding Processes: These are the rules, policies and practices shared by all internal processes in the Value Chain. If these are missing then there can be large variances in the quality of delivery, diminishing the value provided to the customer.
- Enabling Processes: These provide the resources to help move the core processes forward. If these are missing then the provider may struggle to deliver timely value to the customer due to lack of production capacity or inability to scale processes.