Getting Started with Value Chains

I used to think I understood value chains, now I actually do

Photo by Sonny Ravesteijn on Unsplash

It’s generally a good idea to understand how things work together. It doesn’t matter if you’re programming, practicing martial arts, or baking delicious bread. Frameworks are useful tools. In the case of business strategy, value chains are the poster child of frameworks.

I recently read some material from Nathan Baschez and Ben Thompson on the subject. This compiles everything I learned and aims to get you from zero to one as quickly as possible.

Defining Value Chains

When Michael Porter wrote Competitive Advantage, the business world was more focused on operational efficiency than strategy. Porter showed us that strategic thinking around what you do was more important in the long run than how you do it. In explaining this phenomenon, the concept of “the value chain” was born. Porter elaborates on this in his introduction:

At this book’s core is an activity-based theory of the firm. To compete in any industry, companies must perform a wide array of discrete activities such as processing orders, calling on customers, assembling products, and training employees. Activities, narrower than traditional functions such as marketing or R&D, are what generate cost and create value for buyers; they are the basic units of competitive advantage.

Competitive advantage comes from the activities that your business participates in rather than how well you do each one. The term “activity” can be a tough one to wrap your head around. In practice, activities can be any number of things that you choose to define. They are simply units to work with. You can be as specific or vague as you please.

One important thing to remember when picking out activities is that they should tie together into a cohesive narrative. Value chain analysis is just as much about how activities interact with each other as the activities themselves. Think of it as a chain of…