Porter’s Value Chain Method
If you want to know what strategy is you need to know Harvard Business School Professor Michael Porter. He is the foremost strategy scholar. His work is by far the most cited among all strategy experts with almost five times as many citations as the second-ranked.
But here is the question: why does everybody keep using the same old examples? Can Porter's framework explain the strategy of the exciting start-ups of our time? The answer is a resounding yes.
In fact, the Value Chain (VC) method is the best tool to connect value proposition design and the business model of a company. In addition, it remains one of the most important strategy tools in business management.
Some precautions & myth-busting
Before we start let me call out a few things that I see done wrong all the time. You can go literally through most VCs you can find online and they will almost all have these shortcomings:
Taken too literally: most people use the original steps and try to shoehorn the company’s steps into it
Not adapted to Digital Business Models: Following on from the former, the Value Chains you typically find are not tailored to digital business models. Just to mention one example: they are not tailored to the revolutionary platform business model that the biggest and fastest-scaling digital tech companies have leveraged
Significantly oversimplified: The examples you find elsewhere are “Mickey Mouse” examples from which you will learn nothing and worse yet that may give you the false belief that you did.
You’ll see throughout this article what I mean by the above. Because it’s obviously the starting point of what’s different in this article and in all our products.
What we're doing differently is that we tailor everything on our pages to digital business models. And that makes all the difference.
We are using the underlying idea of the Value Chain and looking at each step in the context of the respective digital business
We are tailoring the Value Chain to the type of digital biz model. Our platform biz model Value Chains (e.g. Google & Facebook) look completely differently than those for linear biz models (e.g. Netflix & Amazon)
We are going into great & valuable depth which makes all the difference between a learning outcome and feeling smart without any foundation
So, let’s get started.
What is the Value Chain?
The Value Chain (VC) is a concept that helps us to understand a company’s most important activities and process steps in a consecutive flow. But it also requires extensive explanations beyond the chart as business models are something complex that you can’t describe in a few words in a chart.
Porter’s generic value chain [source: ISC webpages]
The primary steps are the ones at the bottom and the secondary ones up the top. Our focus is always on the primary ones. Should any of the secondary ones be of significant importance, then we weave them into the primary ones.
As mentioned, you see too many people taking these steps too literally and regurgitating them without further thinking. Hence let us first elaborate on the original steps:
Inbound Logistics was very important in the 80s because just-in-time (JIT) deliveries in the auto industry made a major competitive difference. These days near-JIT is normal and of lesser competitive difference (in fact, during the pandemic an overreliance on JIT has turned out to be a weak link & risk factor that gets factored into strategic supply chain considerations post-pandemic). Unbeknownst of all of this, not many seem to realise the major shift that has occurred in this step over the last 40 years. In today’s business models, inbound logistics shall be replaced with a holistic view of the supply chain with a clear focus on sourcing key inputs to our business model and the commercial sides thereof. We will see in the examples how this works in the digital space.
Operations: here we really need to go into more details. Operations was big in the 80s, 90s and early 2000s. Methods like Lean Manufacturing and Six Sigma were designed to optimise operations. A lot of the competitive advantage was seen here. Once again things have changed over the last few decades. The big difference here is no longer focussing on Operational Excellence but the actual Intellectual Property involved in this step. We will discuss this in the examples below.
Then we have outbound logistics - not a happy term but depending on the digital business more or less relevant as we will see in the examples section.
Marketing is still relevant but it depends! Quite often firms have very similar activities in this space, in which case there’s no point to dedicate a step to this. Example: if a company does a great job in say organic marketing, then it’s really worth calling this out. Equally, if they are doing something different (as in our Booking.com example below), then it’s relevant. But if all competitors are doing the same type of marketing it’s not a distinguishing factor that requires to be covered in the Value Chain.
Same with after Sales & Service. If Service is based on help pages and chatbots, we’re not going to waste your time because everyone does this. In many cases we are using the last step as: experiment, measure & improve which is in the DNA of digital businesses. But it depends…
So now let’s go into actual examples.
Value Chain Examples
(1) Value chain example: Booking.com
Booking.com is an online travel agency. Like brick-and-mortar travel agencies, they sell hotel rooms for a commission (note that in 2023, Booking.com has generated more revenue from the merchant model than from the agency model in a historic biz model shift). Hotels would much prefer to sell all their rooms through their own websites. They have to use Booking.com to sell rooms that otherwise would stay empty (to varying degrees depending on season and strength of their own channels). They also have to use Booking.com as otherwise they would encounter a share shift to competitors.
This is Booking.com’s value proposition to the hotels (probably a somewhat questionable one in the case of the latter). And to the travellers, the value proposition is variety / choice, comparison in one place, guaranteed cheap prices and a convenient way of booking.
Value Chain Booking.com
Thus, Booking.com’s value chain looks like this:
Sourcing of hotel inventory: Unlike Google, Booking.com doesn't just crawl hotel pages and put them up for sale. They have contracts with all hotels and accommodations that sell via Booking. In some cases (smaller hotels), these are relatively standard contracts with terms largely “dictated” by Booking. In the case of larger hotel chains there are extensive contracts in place with terms on all aspects being negotiated over a long period of time. The relevance of this step is of a commercial nature rather than of a logistics nature.
Data sourcing: This is probably the closest that we get to the term “inbound logistics”. What many don't know is that there is a very complex digital infrastructure of intermediaries / aggregators, hotel reservation systems, flight distribution systems, etc through which real-time data (e.g. availability and pricing) is exchanged continuously. In addition there is the relatively static data of room information, amenities, etc.
Data aggregation, organisation, matching & presentation: yes, we have moved several steps into one. We could split the internal organisation from the search/discovery & matching but let’s keep it simple here (btw, you are also not bound to 5 steps you can have 3, 5 , 10 or however many you deem appropriate though having more than 7 should indicate that you should have a 2nd-level Value Chain embedded). This step is at the heart of their value creation. A lot of Intellectual Property is behind how the collected data is organised, ranked and matched with the search. In addition, I think it’s fair to say that the Booking.com pages are some of the best (if not the very best) sales pages on the planet. Recent innovations also include conversational AI interfaces through which the discovery process is eased & bookings able to be made.
Conquering all digital entry points & digital marketing: Booking.com is an example where it makes sense to call out paid marketing. For a long time they have been the biggest advertiser on Google. The relevance to the business model is that no hotel / hotel chain has the financial means to match these investments. And that helps Booking.com not only to sell rooms that otherwise would have stayed empty but also those that the hotel would have sold directly had it not been for Booking.com ranking first on Google via paid advertising. This is real powerplay. Hotels like genuine incremental sales but there’s also a share shift that hotels don't like to see. Aside from this, Booking is also generating very big amounts of organic traffic through brand advertising (TV, etc).
Sales (incl after sales): The Booking.com platform is built in a way that it delivers on the customer value proposition of: convenience of the booking process, cheap prices, choice, research, decision support. To the hotels it delivers on the proposition of selling incremental rooms. Well … and those that would have stayed empty if they were not on Booking.com (fear of missing out is a big driver in all platform biz models). We include the after sales & service into this step which is to the extent possible automated though they do have large customer service departments. They have also seen that their Priceline end-of-funnel conversational AI has reduced the call volumes.
(2) Value chain example: Google
So we have seen that it’s not just about the Value Chain diagram. The explanations provided are the actual value. But this was still a small example (though already far more extensive than you’ll find elsewhere).
At DigitalBizModels.com we are all about high-value real-world examples.
We have found that the Value Chain concept is by far the most powerful tool to explain the key value creating activities of a firm in conjunction with the business model. We have developed the B-MAPS (Business Model on A Page) that are based on the Value Chain tool and tailored it to the specifics of digital business models!
Google B-MAP (get the full B-MAP with a walkthrough video here)
Here is an abridged version of our Google B-MAP. Even with many of the details removed you will see the big picture of how we can use this tool in a complex real-world setting.
Here are the explanations that match the numbers in the image:
This is the Value Chain of Google’s core value creating activities. The rest of the B-MAP should be read inline with these steps. So everything that is in the same column as “Obtain organisable data & information” has to do with this step.
Here we have the key activities conducted by Google with more detail (obviously abridged). For example, they crawl all websites that they can find in this step (and analyse them in the next step). Another way of sourcing data is via data connections (e.g. stock prices). Everything in the “Google” row pertains to what Google does in relation to the steps shown in the Value Chain step (1)
Here is where it gets interesting. Google is based on the platform business model and therefore it's really important to take into account what the participant types of the platform do. A key participant type are Search Users.
In 3a we are showing the important ways in which Google tries to conquer all search entry points. In the non-abridged version you also see listed the items that were elaborated in their recent FTC proceedings
3b: The subsequent steps in this participant type align with the concept of reduction of Search/Transaction & Post-transaction cost that is so important for digital business models, esp platform biz models. Without going into more details in the article, you can see some examples in the image and all details in the full B-MAP (and walk-through video)
This is another crucial participant type to the platform biz model: Website Owners. They create and own the content that gets organised and linked to by Google. There is a hugely dynamic interplay between Website owners, Search User and Google, based on indirect Network Effects created by Google. For most Website Owners, Google is the main organic source of traffic. So, they install Google’s tools through which Google and website owners gain insights into the traffic.
Then we have the Advertisers. They are a subset of all Website Owners and the main revenue generator of Google’s business model. Google needs to think about acquisition, segmentation, channels to them value propositions and retention factors for advertisers. See some examples for these in the image below and more in the full B-MAP & video.
Then we have the pink parts with the red font which pertains to the gigantic improvement loop across all participants in this business model which is Google’s biggest and most astounding achievement of the last 2 decades and the reason why they are so dominant (irrespective of what some regulators seem to think their reason for dominance is)
They all have a 15-25 minute walkthrough video and are your best way to learn a business model in 30 mins at a super-affordable price. It’s our contribution to get those kick-started who appreciate high-quality knowledge.
Was this different?
If you have read any value chain articles before, you will have noticed how different our discussion was.
At DigitalBizModels.com our focus is on providing the highest value for our students by tailoring every aspect to digital business models.