What is the Value Chain?
From raw materials, through to happy customers, your business engages a lot of people to do a wide variety of activities.
If everyone does their job well, then we’ll create something remarkable. However, we’ll also have to charge a high price, because we need to make sure that all the contributors are well compensated.
It’s one of the biggest strategic challenges your business will face – when is it worth outsourcing a task to a specialist, and when should you do it yourself?
In other words, when should a task be done adequately, and when should it be done brilliantly?
This is important - getting this wrong can destroy a brand, and getting it right can cement a reputation.
To answer this question, we can map out our Value Chain – a breakdown of who does what at each step of the journey.
It explains who is responsible for each activity, and demonstrates how our raw ingredients become more and more valuable with each step of the process.
I find the formal diagrams really clunky. Here are some straightforward categories worth thinking about:
Inputs: The base materials that you use.
It might be flour, plastic, talented staff, paper, or intellectual property.
Production: What you then do to those inputs.
It might be turning water, hops, malt and barley into beer, or having your team turn their knowledge into a plan for your clients.
Distribution: How you get your product or service to a warehouse/your customer.
Does it arrive via truck, mailbox, inbox or an in-person meeting?
Marketing: How does a customer encounter your offering?
Did you find them via targeted advertising, or were you well positioned in someone else’s store, e.g. Myer or Amazon?
Were you recommended via word-of-mouth, or did an agency promote your brand?
After Sales Service: What happens after someone uses your product/service?
What else will they need?
Who provides those additional services?
Think of a mechanic who repairs cars – they don’t need to manufacture cars in order to have a profitable business and delighted customers.
For example, let’s think about a T-Shirt company:
· Cotton is grown, processed and turned into fabric
· Fabric is then sewn, dyed and printed
· Shirts are then transported to a warehouse
· Shirts are marketed to customers – either in a retail store, on an aggregator site like Etsy, or on the brand’s own website.
· Once purchased, the shirt arrives at the customer’s home and goes in their wardrobe.
· After the sale, some companies (online) will keep in contact with the customer, with newsletters and special offers. Other brands have no record of who purchases the shirt, and therefore there is no further engagement.
Say you wanted to be in the T-Shirt business.
You can pick and choose as to which parts of the value chain you’d like to operate.
You probably don’t need to grow your own cotton. Leave that for a specialist.
(Interestingly, at B4D we have a cotton production centre in Kenya that supplies raw materials for Cotton On in Australia.)
You may not need to sew and dye the shirts either. You might buy a semi-finished product like Fruit of the Loom, then screen print your own unique designs.
You may not need to sell them yourself, instead paying a fee to a wholesaler.
Vice versa, you could be the wholesaler, and sell other designer’s products in exchange for a commission.
It really depends on your skillset.
Kmart sell plain white shirts for $4. Kanye West sells plain white shirts for $120.
These two have very, very different approaches.
Kmart specialise in efficiencies, enabling them to be the cheapest.
Kanye West specialises in building a brand, enabling himself to be the most expensive.
Some companies will focus on customisation, enabling buyers to upload their own designs and have them drop-shipped to their door.
Others like The Fabric Social have a uniquely ethical approach, with a large portion of their energy dedication to empowering women in the developing world.
Therefore, The Fabric Social makes choices about their value chain that give them full control over their supply chain, and the ability to engage directly with their customers, who are interested in the story behind the garment.
Choosing our spot
So where do we want to play?
Which parts of the chain do we feel are “our territory”?
Jim Collins talks about the Hedgehog principle in Good to Great – the idea that a hedgehog survives because it does one thing really well - turning itself into a ball of spikes.
Collins argues that it’s worth being a specialist in one area; at the intersection of three factors – what you’re passionate about, what you’re the best at, and what you can get paid for.
You can’t drop any of them.
No revenue? You’ll go bankrupt delivering a service your customer doesn’t care about.
No expertise? Someone will come in and take your market share.
No passion? The task will become a chore, and you’ll do a poor job.
With those three ideas in mind, which parts of the chain feel like they should be yours?
What are you willing to sacrifice in order to defend them?
Outsourcing has had a bad reputation in the last twenty years, because it was code for “We’re sacking everyone and giving their jobs to cheaper workers in developing countries”.
Whilst that’s one use of the word, outsourcing can also be your friend.
This is the decision to stop doing something that you’re not great at, or something that creates a headache.
Outsourcing is why we order UberEats for dinner after a big day, or why families hire removalists when they move house.
Sure, you can do it cheaper yourself, but it’s really unpleasant.
Some enterprises like Thank You outsource almost everything – packaging, running a retail store, even the delivery of aid.
They focus on what they do best: branding and storytelling, to change people’s minds and habits.
At The Difference Incubator, we don’t have a coffee machine.
Instead, we have an account with the café downstairs, who do an excellent job.
We buy coffee for our workshop participants, and don’t have to spend hours cleaning and maintaining our own machine.
It also feels like a treat, a vast step up over a pod machine, which would still be too slow for making 10-15 beverages at once.
Sometimes it’s right to do things yourself – either because it’s substantially cheaper or because it allows you to do things the right way.
STREAT roast their own coffee, and now they bake their own bread and pastries.
Instead of growing through a tonne of coffee carts and cafes, STREAT grew by opting to do these jobs themselves, because they get a better result.
This also allows a brand to sell its excess capacity – solving a problem for someone else.
Netflix integrated content creation, and Amazon are following them.
This gets around the problematic TV stations, who previously had the ability to set prices or deny access.
By going upstream, companies can make the exact content their customers would like, and avoid bidding wars for licenses.
There are no hard and fast rules here, it’s instead a question of what fits your core competencies, and how much attention you have.
Websites are a great example.
I’ve worked with many social enterprises who are over a barrel with their site, paying a developer $900 every time they want to make a change.
Others go too far the other way, building their own site and doing a terrible job.
I have never heard a positive “Homemade website” story.
Try it for yourself; draw your own value chain, and ask yourself why you are where you are.
It might prompt something great, or save you from a disaster.