Analyzing the value chain
A prevalent challenge I often notice is that within a business or an industry, one (or more) of the activities might need to be adjusted to ensure the entire chain creates value for the producer and the customer.
For instance, if you're involved in maize production, transportation hurdles may arise along the maize production’s value chain. Similarly, if your focus is on children's education, the entrance fee to the school could be a concern in the education value chain.
When faced with challenges in a particular business or industry, it is beneficial to map the value chain and pinpoint its challenging activities.
This section will help you to do that so that the business or the industry delivers more value for everyone.
Mapping the value chain
The value chain is the list of activities done from the beginning of the process to the end.
You can distinguish two value chains, the one of the producer and the one of the customer. You may think that they are the same. They are slightly different because we don’t view the activities from the same viewpoint.
We will first focus on the value chain of the producer, and then we will look at the value chain of the customer.
The value chain from the producer’s viewpoint
For the topic you are struggling with, please list the activities performed at a very high level. Let me share an example:
This is a high-level view of the value chain from the farmer’s perspective (producer). It’s helpful, but we will need to go into more detail.
Go one level lower. Let’s use the same example:
Ideally, you want to keep all the activities in one row. Here i don’t have enough space, so i use two rows.
The value chain is more detailed, making it easier to understand the activities the farmer needs to go through. I am using an example, and i am not an expert at planting maize, so it could be that i am missing some activities. The example helps you to understand how to map a value chain.
Once you have mapped the activities, i need you to do the following. For each activity, i want you to write where you are charged for value and how much you are charged. Let’s do the exercise together with the above example.
This helps you to understand where you are losing value. In the above example, you can see that transportation is the activity where you are charged the most. You may want to do something about it. For instance, if transportation is costly, could farmers harvest simultaneously to share the cost of transportation?
Describing value chains helps you to understand:
Where value is created.
In our example, growing maize and processing the maize creates value.
Where value is charged.
Sometimes, you will have to go into more detail if you want to understand the challenge of an activity.
To do this exercise, bring People who know the topic well, such as those who do the work, supervise the work, and audit the work. It could be that a map of the process already exists. In this case, ensure it is accurate. I have seen many situations where the value chain map wasn’t aligning with reality, yet no one updated the map. If something is not accurate, it’s important you say it.
The value chain from the customer’s viewpoint
The customer is the reason why you are in business. No customer, no business. This is why looking at a business from your customer's viewpoint is crucial. I know that we usually look at business from your business's viewpoint (producer), which is natural and logical. The thing is that when you adopt the viewpoint of your customers (imagine you are your own customer!), you will see things that you do not usually see.
Note that you can also do the exercise if you look at a product or a service from the users' perspective. Sometimes, the customer is not the user. For example, kids may use education services as they go to school but may not pay for them. They are the user but not the customer.
To build the value chain from the customer’s viewpoint, i want you to sit down with a few of your customers and ask them to tell you, step-by-step, the activities they go through to consume the product or service. Please listen attentively to them.
We will use the example of a hairdresser for instance.
At a high level, let's map the activities the customer goes through to consume the service.
Doing this gives you a brand-new perspective on what your customers must go through to reach the outcome they are after.
Next, you want to understand better where value is created for the customer and where value is taken away or eroded from them.
We will simply use a color code: green for value creation, red for value taken away, and orange for value erosion.
Using the color code, you can easily visualize if an activity the customer has to go through creates, charges, or erodes value.
Going to the hairdresser erodes value for me as it takes me time, energy, and potentially money if i need to use private or public transportation.
You may have noticed that i did not use any color for "Get a haircut" yet. The reason is that i hesitated between value creation and value erosion.
What do you think? When you go to the hairdresser, do you perceive the time you spend getting a haircut as value creation or value erosion? If you need to wait your turn, it may be a value erosion activity, but sitting comfortably and chatting with the hairdresser while getting your hair cut may be a value-creation activity. Why don't we detail the magic chain to find out?
Below is a more granular view of the activities customers must go through to reach the outcome(s) they seek.
The color code is the same. Green for an activity that creates value. Red for an activity that takes value away. Orange for an activity that erodes value. I added a blue color for the outcome(s) the customer is after. I invite you to include outcomes inside the magic chain so that you understand when the customer starts experiencing the outcome.
You can see that there are now multiple rows. It helps to capture different paths. For instance, some of the customers may need to wait for their turn, but some of them may not need to.
How do i keep my existing customers, control my costs, and get new customers with this information?
Please realize that the customer may have to go through multiple value erosion activities to reach the outcome they are after. Many business owners know their business very well yet do not realize it. Use some empathy for your customers. Realize the pain your customers may have to endure to reach the outcomes they are after. Can you…
Remove activities that erode value. An activity may not be required for the customer to reach the outcome they are after. It could be an opportunity to reduce your costs.
Help your customer with a value-eroding activity. Imagine you run a hair salon and realize that your customers have to go through a value-eroding activity to go to the hair salon. What can you do?
Can you offer a new activity that will remove the value-eroding activity?
For example, they offer customers to go to their place to cut hair.
It could be an opportunity to keep your existing customers and get new customers.
Can you create a new activity that will counterbalance the value-eroding activity?
For example, they provide free Wi-Fi or offer drinks, cakes, or advice on hairstyle while they are waiting for their turn.
It could be an opportunity to keep your existing customers.
Optimize the value charging activity.
Value charging is not a fun part. It’s where you take money from your customers. Can you:
Find the best time for your customer to pay.
Create a subscription mechanism to reduce the value-erosion activity.
Adjust payment methods.
Offer a discount for paying cash—a cheaper price for the customer and no credit card fee for you.
It is an opportunity to keep your existing customers by increasing convenience and value creation.
Ask yourself if there is a better way to get the customers to reach the outcome.
Sometimes, we are so stuck in our business that we don’t take the time to step back and realize that we could help customers to reach the same outcome in a much simpler manner. All along, it was right in front of us, yet we missed it because we were so focused on our products/services and not on the outcome we help the customers reach.
It’s an opportunity to keep your existing customers, reduce costs, and get new customers.
