Value Chain and The Creation Of Value

By Armand Cacacho, FICD

Value chain is a subject that business model designers need to study thoroughly and decide

which part of the value chain the business wants to be part of. Another important topic in the

analysis of value chain is a term called “value chain coordination”. It is one of the types of value-creation models that are found across many industries; the other three being product

excellence, product/service innovation, and customer intimacy. This article is about value chain only.

After analyzing the entire value chain, businesses have to choose which part or parts of the

value chain they would like to participate in. For example, a technology company may choose to license its technology to an established company and not be involved in production and distribution of the product. Or the company may choose to manufacture the product in-house and sell it to other companies as a component of products with that other company’s brand. The company may also choose to manufacture the product and sell it under the company’s own brand name. Each of these alternatives reflects a different choice of what part or parts of the value chain the business will be engaged in and entails different set of challenges. For example, Intel chose to manufacture its semiconductor microchips and sell them to computer system manufacturers such as Acer, Lenovo, HP, and Dell with its famous “Intel Inside” trademark. In this case, Intel decided to focus just on the design and production of the microchip instead of manufacturing and selling the entire computer system.

As mentioned above, another important topic regarding value chain is the role of value chain

coordination in the entire value chain. Value chain coordinators create value by coordinating the elements of the value chain. A value chain coordinator may decide to participate on major activities along the entire value chain or may decide to just focus on a narrow part of the chain. In the e-commerce industry, value chain coordinators are often marketplace platforms. They facilitate transactions or interactions among the users of the platforms. An important feature of marketplace platforms is that it allows direct value creation to participants in the value chain. For example, a seller (one platform participant) is able to sell to a buyer (another platform participant) thereby creating direct value. The platform itself facilitates value creation by coordinating activities, improving business processes and making them more efficient, or reducing search time and transaction costs.

eBay, for example, is a marketplace platform that enables buyers and seller to trade with each other. It started as a platform for trading Beanie Babies and when the company went public, about 10% of its revenue still came from trading Beanie Babies. eBay grew into a global online trading platform in almost any product category. The users shoulder the burden and also benefit from direct value creation as eBay does not hold inventories nor sell products (only the sellers do). It only matches buyers and sellers and facilitates transactions between them. Another example of a marketplace platform is Airbnb for lodging, primarily homestays for vacation rentals, and tourism activities. Airbnb does not own any of the listed properties; it simply facilitates searches and transactions for lodging. Airbnb benefits from the platform by receiving commission from each booking.

It is my hope that the discussions above provide you with a framework and examples that you can use to evaluate and decide what part or parts of the entire value chain you want your

business to be part of and ensure that there’s alignment of those options with your company’s competencies.

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1 M.E. Porter, On Competition, Harvard Business School Press, 2008

2 “Beanie Babies” are stuffed animals, each lined with special metal threads and stuffed with plastic “beans”, which together, gives them a steady pose and a flexible feel. They were produced in limited series which made them scarce and were collected and exchanged by hobbyists. - From Haim Mendelson, Stanford Graduate School of Business, 2007 - 2015

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About the Author

Armand Cacacho is an international management consultant who has served as a board member of both for-profit and non-profit organizations in the U.S.A. and in the Philippines. He has been on the Advisory Boards of technology startups in the U.S.A. and Australia.

In addition, he was an entrepreneur for 17 years in California with successful exit and an executive of Fortune 200 global engineering companies for many years.

He has lectured at the Asian Institute of Management (AIM) Executive Masters Program, California State University East Bay College of Business MBA Program, ASEAN Science Diplomats Lecture Series Program, U.S. federal agency lecture series program, and has been serving as Mentor to Stanford University engineering and management graduate students since 2015. He specialized in Business Strategy and Innovation at Stanford Graduate School of Business and completed additional postgraduate program in Disruptive Strategy and Innovation at Harvard Business School.

A graduate of B.S. Civil Engineering at U.S.T. and licensed Professional Engineer in the U.S.A., he is a Fellow and Teaching Faculty member of the Institute of Corporate Directors PH, and a member of the National Association of Corporate Directors U.S.A., and Singapore Institute of Directors.

He can be reached at armandcacacho@gmail.com. https://www.linkedin.com/in/armand-cacacho-a128a515/