Understanding Value Chains

Every business has a value chain - the sequence of activities that create value for your customers. Understanding this chain is the foundation of strategic thinking.

This passage from Simon Wardley's book emphasizes the fundamental importance of value chains in strategic thinking. It's not enough to just list what your business does - you need to understand how each component creates value and how everything fits together.

The Value Chain Foundation

Value chains are the building blocks of strategic thinking. They show you:

1. How Value is Created

Every component in your value chain contributes to creating value for your customers. Understanding this flow helps you see where your competitive advantages lie and where you might be vulnerable.

2. Component Relationships

Components don't exist in isolation. They depend on each other and influence each other. A change in one component can affect the entire chain.

3. Strategic Opportunities

By mapping your value chain, you can identify:

• Where you're creating unique value
• Where you're just doing what everyone else does
• Where new opportunities might emerge
• Where threats might come from

Mapping Your Value Chain

Start with the User Need

Every value chain begins with understanding what your customer wants to achieve. This is the foundation that everything else builds on.

Example: Instead of thinking "we sell software," think "we help teams collaborate more effectively."

Work Backwards

Once you understand the user need, work backwards to identify all the components needed to deliver that value:

1. User Need - What the customer wants to achieve
2. User - Who has this need
3. Channel - How you reach and interact with users
4. Value Proposition - What you offer to meet the need
5. Revenue Stream - How you capture value
6. Key Resources - What you need to deliver value
7. Key Activities - What you do to create value
8. Key Partners - Who helps you deliver value
9. Cost Structure - What it costs to operate

See the Big Picture

The key insight is seeing how everything connects. A change in one component can ripple through the entire chain, creating opportunities or threats.

Strategic Implications

1. Competitive Positioning

Your value chain shows where you're positioned relative to competitors. Are you competing on the same components, or have you found unique ways to create value?

2. Investment Decisions

Understanding your value chain helps you decide where to invest. Focus on components where you can create competitive advantage, not just on what you're already good at.

3. Risk Assessment

Value chains help you identify vulnerabilities. If a key component becomes commoditized or disrupted, how does that affect your entire business?

4. Innovation Opportunities

By understanding your value chain, you can spot opportunities to innovate. Maybe you can eliminate a component, combine components, or create new value in unexpected ways.

Common Value Chain Patterns

Technology Companies

• Heavy investment in R&D and product development
• Focus on scalable platforms and ecosystems
• Emphasis on user experience and data

Service Companies

• Investment in people and processes
• Focus on customer relationships and quality
• Emphasis on consistency and reliability

Manufacturing Companies

• Investment in production efficiency and quality
• Focus on supply chain optimization
• Emphasis on cost control and scale

Key Insights

1. Value chains exist everywhere - Every business, every industry, every organization has a value chain
2. Components evolve - Each component in your chain is evolving through predictable stages
3. Relationships matter - How components connect and influence each other is crucial
4. Context is everything - The same component can be strategic in one context and commoditized in another
5. Maps reveal insights - Visualizing your value chain reveals opportunities and threats that aren't obvious otherwise

Application to Strategy

When you understand your value chain, you can:

• Identify competitive advantages - See where you're creating unique value
• Spot strategic opportunities - Find areas where you can differentiate
• Assess competitive threats - Understand where you might be vulnerable
• Guide investment decisions - Focus resources on high-impact areas
• Communicate strategy - Help others understand your strategic position

Conclusion

Value chains are the foundation of strategic thinking. They help you see not just what you do, but how you create value and how everything fits together. By understanding your value chain, you can make better strategic decisions, identify opportunities, and avoid threats.

The key is to map your value chain, understand how components evolve, and use these insights to guide your strategic thinking. This understanding is what separates strategic thinkers from tactical operators.

This passage is from Simon Wardley's book "Wardley Maps: Topographical intelligence in business." For more insights on value chains, explore our glossary entry on value chains or learn about evolution stages and how they relate to value chains.