Value Chain – Why So Many Strategies Fail to Deliver

As many businesses are now implementing a return to active trading and want to “build back better”, we are continuing to focus in on how we can reset future strategy. 

In the two most recent of our “Rescue, Recovery, Reinvent” series, article 6 and 7, we covered – the “Generic Strategies” (Cost Leadership or Differentiation) and the Customer Value Proposition. 

The third element of competitive strategy is the “value chain”, which details the internal or operational aspects of our strategy. 

In the diagram above we can see the connection between the two frameworks – Value Created.  Looking into the value chain helps us to realise that the activities and configuration of our business should be focused on delivering the value we promise, to our target customer, at the relative price we promise. In short, on delivering our competitive strategy. 

Nothing else. Just that. Anything else is extraneous and potentially unnecessary cost. 

So, our focus is on what are the key activities that are needed to deliver the value you promise to your prospective customers? In every business there are thousands of things that need to be done. This exercise is about clarifying those that really create the value for our customers. Or those activities which really fulfil our competitive strategy.

The Value Chain is essentially an overview of the components of a business. A map of the activities all businesses need in order to operate. Support activities in the top half and production activities in the bottom half. Together delivering a result – the value we promised to customers.

In the template below you would add the essential activities that create the value promised at the required relative price for the target customer. 

Let’s look at the case of a Leeds based company that applies specialist coatings to the fire doors. Their Generic Strategy is “Differentiation”. They are relatively expensive, but they provide a highly specialist service to a tightly defined customer – Fire Door manufacturers with no or limited coating facilities of their own. 

The essential activities are in 1) the operational box, where specialist technology and infrastructure is needed to apply and cure the coatings. 2) The coatings themselves are critical and are supplied by large powerful chemical companies, so the inbound and procurement activities are key to securing this vital supply. 3) The turnaround time is critical to customers so the speed of production, production planning systems, outbound logistics and infrastructure (type and location of sites) activities also require careful thought. Then 4) the certification is critical to customers so the systems activities in this business are key to provide this important aspect to customers. Finally, 5) The specialist knowledge of personnel involved in ensuring the correct coatings are specified and applied within the many rigorous standards and testing accreditations. 

So, there are five key activities within this company’s value chain which are essential in delivering the value promised, to the target customer at the relative price promised. Just five! 

Of course, there are many more things this company needs to do to operate. However, these activities are less critical to creating customer value and so should be approached as lower priorities and areas where OK performance is good enough. Poor performance is not our target but a higher level of performance in these areas may not be a good investment. 

The ability to now focus on five key activities within the business, which carry through our competitive strategy, is the benefit of value chain thinking. If we can excel in these areas the strategy will work. If we fail to excel in these areas our customer will not stay with us and will seek alternative suppliers or bring this service in house. Our strategy will fail. The reason so many strategies fail to even gain traction within the business let alone gain traction with customers is the lack of alignment of the business towards delivering the value proposition. 

Try completing a value chain exercise for your business, being clear that the value you promise to customers is the result the value chain must deliver. Any activity which does not directly and significantly contribute to this value should be left out. 

If your selected Generic Strategy, is Cost Leadership, the role of the Value Chain remains the same – clarifying which activities will deliver this value (low prices) to my target customers. 

It is important to be clear here that a low-price promise to customers does not mean accepting low margins. So, the job of the Value Chain model is to show us how our business will achieve low prices to customers at an acceptable margin to you?

This ability is often related to large scale businesses which can leverage scales of economy to achieve low prices at acceptable margins. I have previously used ASDA as an example and here the size of their global supply chain and their leverage of this through their procurement activities are key. But the Value Chain can deliver low prices in many other ways. 

Take an example of a small Leeds based business focused on legal translation services. They convert business contracts that started out in Chinese into English for business clients. Making sure that the intent is not lost along the way. They complete with the larger law firms for this work and decided to use a competitive strategy of low price as they are competing themselves with free on-line translation services. 

Their value chain contains as essential element of technology which has been developed for them which in seconds, reads, translates, and verifies legal documents through a patented process and algorithm. 

Instead of employing large numbers of qualified lawyers to translate and some senior lawyers to oversee the process they employ a technology solution with one expert senior lawyer in an oversight role. 

This approach means their cost base is very low compared to the traditional competitors and even at their relatively low prices their margins are healthy. In addition to the crucial technology of their solution, their value chain includes, 1) activities to market the services to target law firms and businesses. There is very low awareness and high scepticism as an alternative to using a law firm. 3) Specialist quality control to track the contracts in operation and to improve the algorithm, and 4) a specialist team focused on policing the patent world-wide and defending it against any infringement. Then finally there is 5) the HR activities to ensure the company always has the expertise it needs in terms of legal oversight in Chinese and other East Asian legal systems. 

So again, this business is clear about what is driving their strategy and more importantly, what to invest in as they continue to rapidly scale up. Everything else they allow to be a lower priority and to be delivered as a professional but just OK level. 

The rigour of this Value Chain process can be very challenging. If you are pursuing a Differentiation strategy but have no distinctive activities in your value chain, then it is highly likely that you are not different at all. 

If you are pursuing a Cost Leadership strategy but have no activities in your value chain which leverage scale, technology or know-how in some way to deliver low prices but maintain margins, then it’s likely that you will suffer ongoing poor profitability. 

If either of these are the case, then you must revisit the stages of competitive strategy development that we have outlined over this series of articles. 

If however, your Value Chain aligns well with your Customer Value proposition then you are ready for the biggest challenge yet. Turning your thinking to delivery. 

It’s this gulf, into which many great strategies disappear into, that we will focus on next.