I used to have a very hard time understanding the question “What is your value proposition?” And rightfully so, because it’s such a loaded question that requires a deeper level of operations that is glossed over by many people. Some people do have an answer for the questions and many of those people have done the work of understanding how what their business does, translates into something valuable a customer is willing to spend money to buy. However, to really answer that question, we must understand a few key things:

1. How do we define value?
2. How do we create that value?
3. How do we transfer that value from the business to the Customer’s life?

Quick Guide: What You Need to Know

We know you’re busy running a business, so here’s the essential framework upfront. Then dive into whatever section helps you most right now.

The Big Idea: Your value chain is every single thing your business does to create something customers find valuable. It’s your complete journey from raw idea to happy customer.

What is “Value” Anyway? Value isn’t just money. Value is the degree to which someone finds something (a service or product) important, beneficial or useful to them. For your customers, value might be:

• Time saved (making their life easier or faster)
• Money saved (helping them spend less)
• Problems solved (removing pain points)
• Emotions created (making them feel good, confident, or secure)
• Status provided (helping them look good to others)

Two Types of Business Activities:

1. Direct Value (Primary) Activities: (The main activities that make the business money – these directly touch customer value)
2. In-Direct Value (Secondary) Activities: (The behind-the-Scenes Activities that allow the main activities to operate without interruption – these are important too):

The Secret: The most important thing about a value chain is not the individual activities—it’s how they connect. When everything flows together smoothly, you create something competitors can’t copy.

Two Ways to Win: Your value chain depends on your business strategy and all business strategies boil down to two basic paths.

1. Do it cheaper – Deliver the same value for less money
2. Do it better – Deliver special value worth paying more for

Why Care Now?: Understanding this helps you:

• Build something competitors can’t easily copy (whether it’s a method to produce good value for less cost, or customized value that’s worth paying extra for)
• Find where you’re wasting time, money, or effort/energy
• Decide what activities make sense to do inhouse or to outsource

Create a business that runs smoothly that adds value to customers, employees and suppliers

First Step: Draw out how work flows through your business today and ask the following questions: 

1. If something isn’t going well, why isn’t it going well and what’s one thing that we can do today to increase the value for your customers, by one “notch”?
2. If something is going well, why is it going well?
   1. Is it the best it can be right now? If not,  what’s one thing that we can do today to increase the value for our customers, by one “notch”? 

Answering these two questions will help you understand how the value chain works. Implementing the ideas you listed to make things better will improve the value that you deliver to your customers.

What Is a Value Chain, Really?

Your value chain is simply every step your business takes to create something customers want. Michael Porter introduced this concept in his book Competitive Advantage, but let’s make it practical for your business.

Think about your favorite local coffee shop. Their value chain isn’t just making coffee. It starts when they research and select coffee farmers who share their quality standards. They build relationships with these suppliers, sometimes visiting farms to ensure sustainable practices. They carefully manage how beans are shipped and stored to preserve quality.

But the value creation goes deeper. They hire baristas who are passionate about coffee, not just looking for any job. They train these baristas not just on making drinks but on creating experiences. They design their space to be welcoming, curate music that fits their brand, and maintain WiFi that actually works. They remember regular customers’ names and orders. They clean bathrooms frequently because they know it matters.

When all these pieces work together seamlessly, they create an experience customers happily pay $6 for, even though the coffee itself costs them 50 cents to make. That’s the power of a well-designed value creation system. It’s not about one thing done perfectly—it’s about many things done well that reinforce each other.

Your Business in the Broader Value System

A critical insight often overlooked is that your business operates within a larger ecosystem. You have suppliers upstream delivering inputs (supplies, equipment, material and information/data to you), your business transforming those inputs into value, and customers downstream receiving that value from your business. Understanding this broader system reveals opportunities most businesses miss.

This interconnected system functions like a network where each part affects the others. When coffee suppliers experience harvest challenges, quality impacts ripple through roasters to cafes to consumers. 

Adopting this system’s perspective transforms how you approach business relationships. When you help suppliers improve their operations, you get better inputs, more reliable delivery, and often better prices. When you understand how customers use what you provide, you discover opportunities to add value you hadn’t imagined.

Consider how a packaging manufacturer discovered opportunity through customer observation. They noticed restaurant clients struggling with limited storage space for empty containers. By engineering boxes that nested efficiently when empty, they addressed a customer pain point competitors had overlooked. This innovation emerged not from packaging technology but from understanding the complete customer context.

The Direct Path: Activities That Create Customer Value

Let’s explore the five activities that directly create what customers pay for. These form the spine of your business, though their relative importance varies by business model.

Inbound Logistics – Getting What You Need 

This first activity encompasses everything about gathering inputs for your business. It’s tempting to think of this as just receiving shipments, but it’s much richer than that.

For a restaurant, it includes selecting suppliers who share your quality standards, negotiating contracts that ensure consistent pricing, managing inventory so ingredients are fresh but you’re not wasteful, and maintaining relationships that get you first access to the best products. It’s knowing which local farmer has the best tomatoes and building a relationship that ensures you get them even when supply is tight.

For service businesses, inputs look different but matter just as much. A consulting firm’s inputs include information, methodologies, talent, and industry connections. A software company gathers user feedback, technical requirements, and third-party services. Even if your inputs are intangible, how you gather, organize, and prepare them directly impacts the value you create.

Southwest Airlines revolutionized their inbound logistics by standardizing on Boeing 737s. This wasn’t just about plane preference—it simplified parts inventory, maintenance training, and crew scheduling. One smart decision about inputs cascaded through their entire value chain, enabling faster turnarounds, more flights, and lower costs that they passed to customers.

Operations – Creating Your Magic

This is where you transform inputs into something valuable—your core work. For manufacturers, it’s production. For restaurants, it’s cooking. For consultants, it’s problem-solving. For software companies, it’s coding. This is often what you think of as your “real work.”

But here’s what matters: doing it consistently well, not just efficiently. We’ve seen too many businesses optimize their operations for speed or cost, only to lose what made them special. Your operations should reinforce what makes you unique.

In-N-Out Burger could make operations more efficient with frozen ingredients, expanded menus, and pre-cooking. Instead, they keep a simple menu, use fresh ingredients, and cook to order. Their operations are designed for quality and freshness, not maximum efficiency. This operational choice directly supports their value proposition and creates customer loyalty that transcends price.

The best operations balance multiple factors. 

• Quality ensures customers get what they expect. 
• Flexibility allows adaptation to special requests. 
• Efficiency keeps costs manageable. 
• Innovation enables improvement. 

The right balance depends on your strategy and what customers value most.

Smart operations also build in learning loops. How do you capture lessons learned from each project, product, or customer interaction? The best businesses systematically improve based on real experience, not theoretical optimization.

Outbound Logistics – Getting It to Customers

How your value reaches customers matters more than most realize. This includes physical delivery but extends to how you present services, package ideas, and demonstrate value.

Amazon transformed expectations not by selling different products but by revolutionizing delivery. Prime’s two-day (then one-day, then same-day) delivery became part of their value proposition. They made “when you get it” as important as “what you get.”

But outbound logistics isn’t just about speed. It’s the complete delivery experience. How products are packaged communicates quality. How services are presented affects perceived value. How software is deployed impacts adoption. How consulting recommendations are delivered determines implementation.

Consider a high-end furniture maker. They don’t just ship a couch. They schedule delivery, bring it inside, position it perfectly, and remove all packaging. They might include a note from the craftsperson. This delivery experience reinforces premium positioning and justifies higher prices.

Marketing and Sales – Attracting the Right Customers 

Marketing, at its core, understands what customers need, communicates how you solve their problems, and makes it easy for the right customers to choose you.

Marketing attracts customers whose needs align with what you do best. When marketing overpromises, operations struggles, service suffers, and customers leave disappointed. When marketing understands operational capabilities, it can make bold but realistic promises that operations delight in fulfilling. Great marketing makes accurate promises. 

Patagonia doesn’t just advertise product features. They tell stories about their supply chain, environmental practices, and repair program. They attract customers who value these things—customers willing to pay more for products aligning with their values. Their marketing reinforces every other part of their value chain.

Sales, at its best, helps customers make good decisions, not just buy your product or service. From a value position, sometimes the best value for the customer is not provided by your business. The best salespeople understand the complete value chain so they can explain not just what you do but how you do it. They explain to the customer how value is produced through every step of the process from supplier relationships to specific customer benefits. 

Service – Keeping Customers Happy 

Service isn’t just fixing problems—it’s maximizing the value customers receive over time. This includes traditional support but extends to everything post-sale.

The best service creates learning loops that improve your entire value chain. When service teams truly listen, they learn how products are actually used, what features matter, what causes frustration, and what creates delight. This information should flow back through your organization.

Top enterprise software companies exemplify comprehensive service. They don’t just provide technical support—they offer implementation help, training programs, user communities, and success monitoring. They take responsibility for customer outcomes, not just product functionality. This approach creates switching costs through value, not contracts.

Behind-the-Scenes Excellence – The Hidden Foundation

While direct value activities get attention, support activities often determine long-term success. They’re harder for competitors to see and copy, making them sources of sustainable advantage.

Procurement – Smart Buying

Procurement sounds boring—just buying stuff, right? The transaction is one piece of the process. I would argue that although it is critical, it is not where the most meaningful value is created. It’s about the relationships that provide advantages beyond price.

Excellent companies don’t just buy components. They invest in supplier capabilities, sometimes funding new factories or software under development. They lock in multi-year supplies of critical components to get favorable and fixed pricing. They collaborate on technologies unavailable to competitors for years. These approaches to procurement enable product innovations competitors can’t match.

For service businesses, procurement might focus on talent, technology, or partnerships. A consulting firm’s procurement includes recruiting top talent, licensing analytical tools, and building specialist relationships.

The best procurement balances relationship, values alignment, quality, reliability, flexibility and cost. As an example a coffee shop might choose a more expensive supplier because they treat farmers better, deliver consistently, or offer unique varieties. That decision supports positioning as a premium, ethical choice.

Technology Development (Process Improvement) – Making Things Better 

Don’t think of this as just Information Technology (IT); think of overall business process improvement. Technology development includes any systematic improvement to how you work—developing proprietary methods, implementing tools, documenting practices, or creating systems that multiply capabilities.

The well known example of Ray Kroc who transformed McDonalds from a local small business into a global franchise comes to mind. McDonald’s technology development revolutionized fast food through kitchen design, cooking procedures, and training systems. These weren’t high-tech innovations but systematic improvements that transformed an industry.

In service businesses, technology development might focus on methodologies and frameworks such as DMAIC or other process improvement frameworks. Consulting firms develop analytical approaches. Dental offices implement procedure checklists. These improvements compound over time.

The best technology development aligns with strategy. If you compete on customization, develop technologies enabling flexibility. If you compete on consistency, create systems that produce repeatable results. Technology should amplify your advantages.

Human Capital Development – Building Your Team 

People are the most important part of your business because your people bring everything to life. You can have the best systems, product, service or vision, but without people who can run, manage or deliver, you won’t be successful. Human Resources isn’t just hiring and payroll—it’s ensuring you have the right people with the right skills in the right roles, all aligned with your mission.

In the book, The Ideal Team Player by _____, the process of building a successful team begins by attracting and retaining employees with three key qualities: Hungry, Humble and Smart. And in ______ book, good to great, he emphasizes the importance of first getting the right people on the bus, before heading to your destination. 

The best companies hire for values alignment and potential, not just skills. They design interviews revealing how candidates think. Training connects individual roles to company strategy. Retention strategies go beyond compensation to include development, recognition, and purpose.

Essential Infrastructure

Infrastructure—leadership, finance, compliance & risk management, quality control, compliance, and culture—underpins everything else. Good infrastructure supports value creation without getting in the way.

Leadership creates clarity about direction while empowering others. Financial management provides visibility into what creates or destroys value. Compliance & Risk Management functions protect the business while enabling growth. Quality control builds consistency into processes.

Culture might be the most elusive but highly important infrastructure element. It determines how decisions get made when you’re not in the room. Strong cultures make it easier to make necessary changes when you find weak areas in your value chain.

The Magic of Connections

Individual activities matter, but how they integrate with one another matters more. These linkages create multiplier effects that build your true competitive advantage because they are unique to your business and very difficult for competitors to replicate–without insider knowledge.

Internal Connections

The best businesses create positive feedback loops where different activities reinforce each other. 

As an example better quality in operations generally means fewer service problems, which reduces costs to redo work, which then increases customer satisfaction, which then enables you to charge a premium price from which you can use the extra profits to fund further quality improvements.

Another example is between marketing and operations. When marketing understands operational capabilities, they make promises operations can confidently fulfill. When operations understand how much it actually costs marketing to acquire a customer, they prioritize features that attract more profitable customers.

Human Resources connects to everything. When you hire people aligned with values, they naturally support strategy. When people understand the complete value chain, they spot improvements everywhere.

External Connections

Earlier in the article we discussed that your value chain is part of a larger system of value chains that includes the customer’s, your partners, and suppliers. Your value chain connects with supplier and customer chains at critical interfaces. These connection points often hold the biggest opportunities.

“Adopting this system’s perspective transforms how you approach business relationships. When you help suppliers improve their operations, you get better inputs, more reliable delivery, and often better prices. When you understand how customers use what you provide, you discover opportunities to add value you hadn’t imagined.” – From above (Your Business in the Broader Value System).

As an example, rather than squeezing for the lowest price from suppliers, help them improve, share expertise, provide long-term contracts, and collaborate on innovations. This can create a network providing quality, flexibility, and innovation advantages competitors can’t match.

Customer connections offer similar opportunities. Understanding how customers use your products in their own value chains reveals ways to create more value. The best companies make themselves integral to customer success and make it harder for the customer to want to leave because of how much value they will lose. 

Building Your Competitive Edge

The simplest recipe to determine the success of your business is to deliver more value for customers relative to the cost you are asking them to pay. Value is Greater than Cost. Your value chain determines both sides of this equation. It’s your mechanism to transfer points from one side to the other. Ideally maintaining more points of the value side than the cost side. Your value chain 

Your value chain depends on your business strategy. Your business strategy in its simplest form is how you plan to become a successful business.  Business strategies boil down to two basic paths. 

One option is to deliver the same or more value to our customers, while asking them to pay the same amount of money, or less, than your competition is asking them to pay. 

Another option is to differentiate yourself from the competition by delivering a unique and customized value to the customer that no one else can deliver, that the customer is willing to pay more money for. However the value is still more than the cost. 

Competing on Cost

This is traditionally referred to as Cost leadership (sometimes cost advantage) and it means delivering value more efficiently than competitors—and being able to provide this value at a lower cost position for the customer. As an example Walmart’s value chain focuses on efficiency through sophisticated logistics, supplier power, and technology. But they maintain their value proposition of selection and availability.

Cost advantages can be found in scale economies, maximizing capacity utilization, and unique integration of technology. The key is finding advantages that don’t compromise your value proposition. Sometimes cost advantages come from doing less. Southwest doesn’t offer meals or assigned seats, but these “missing” features strengthen their simple, affordable travel proposition.

Competing Through Differentiation

Differentiation means creating unique value customers happily pay more for. Apple’s value chain creates differentiation at every step: unique designs, proprietary technologies, controlled retail experience, integrated ecosystem. Customers pay for the complete experience these connected activities create. 

Choose differentiation that matters to target customers and design your entire chain to deliver it. Sustainable differentiation requires you to create barriers that prevent others from  imitating your product or service—proprietary technology, exclusive relationships, accumulated expertise, or a very complex value chain system.

Strategic Choices: Build, Buy, or Partner?

Most of the article has focused on what needs to be done, not so much how or who needs to do it, and this could give the impression that you have to do everything in-house. This is not the case. Understanding your value chain clarifies what to do internally versus what to outsource to a vendor or when to enter a relationship with a strategic partner. Below is a sample assessment list that you can use to decide whether to keep in-house, outsource or partner. Also, depending on the stage of your business you may need to outsource certain activities until you are able to bring it in-house.

Keep activities in-house when they:

• Create your competitive advantage
• Require tight integration
• Involve proprietary knowledge
• Generate critical insights
• Impact your values directly

Outsource when:

• Others do it significantly better/cheaper
• It’s not core to value
• You lack scale
• Technology changes rapidly
• Focus would distract from priorities

Partner when you need:

• Capabilities you can’t build
• Risk sharing
• Scale without commitment
• Flexibility while growing

Your Value Chain Action Plan

Map Your Current Reality

Draw the workflow of your business by listing and connecting all the activities from suppliers to customers. Make a note of connections and dependencies. Mark where value gets created or destroyed. Even rough sketches reveal insights.

Analyze Performance

For each activity ask these simple assessment questions: Why is this activity important? How does this add or subtract from customer value? What’s going smoothly about this activity and where do problems occur during this activity? What one thing can we do to make this activity better, and which other activities will impact this change? While doing this, pay special attention to handoffs between activities—that’s where value often leaks. Ask yourself if the right information is being communicated from one activity to another, and is the information being delivered to the next activity in the most effective and efficient manner possible? As an example, are you providing them enough information or too much information and is it presented in a way that is easy for the next activity to grab it and use it?

Identify Opportunities

Start with low hanging fruit. Look for activities that don’t add value or connections that aren’t working well. Start with quick wins you can implement fast with minimal risk. Then fix the efficient connection/handoff (i.e. eliminate approval points in the process that is adding no value and automate that repetitive task).

Test and Learn

Start with the crawl, then walk, then run methodology. Start by running small experiments or strengthening one connection. Try a new approach to an activity and measure the results carefully. Achieve a few demonstrated successes that will give you the confidence to approach bigger changes. Also design some of the experiments for learning, not just results. Sometimes you need to spend time learning and understanding before implementing for results. It is inevitable that once in a while you will make changes that you have to undo. However, the more time you spend learning, the fewer of these occurrences you will experience. 

Evolve Continuously

Your value chain must adapt as markets change and technology advances. Schedule periodic reviews. With my teams, I check in quarterly and every six months. Make a list of observations in between the reviews that you can add to the agenda when you meet to review. This process will help to build a culture where everyone thinks about value chain improvements.

Common Pitfalls to Avoid

Optimizing parts of the system and not considering how it impacts another process: The efficient new process in department A might create chaos in department B. 

Losing sight of the customer while making the changes: Internal metrics can become ends rather than means rather than being the means to an end. The customer value is the end, the value chain is the means to providing that value to the customer.

Building an effective system that neglects people: At the end of the day, your people need to manage the systems and processes in the value chain. It’s detrimental to both your customer and your company if you create a value chain that is difficult for people to run or makes you lose employee engagement. People desire to enjoy coming to work. As much as reasonable, still create a space that they like to work, so that they don’t leave to go work somewhere else. 

Fighting evolution: All successful businesses grow in size and in doing so need to mature and evolve in how they do things. Mentality and thought processes such as “this is how we use to do things” or “If it’s not broken, why fix it?” will stunt your business’s growth. However, if your plan is to remain small forever, then do not make any improvements. Warning: this may mean you eventually go out of businesses because other businesses grow and leave yours behind. 

Building Your Legacy

As a CEO building something meaningful, your value chain is where values become reality. Every choice about creating and delivering value shapes your business. There’s an intentionality that is required to continuously provide value to your customers. There’s also an understanding that this success doesn’t happen overnight and it becomes part of your business journey to becoming mature. 

As a CEO that wants to leave a legacy, the first thing to remember is that what you leave behind will impact people and communities it touches. Therefore focus on treating suppliers as partners in success, creating meaningful work for employees, and delivering genuine value to customers so that you can strengthen the communities around you by generating sustainable returns. 

This isn’t about sacrificing performance—it’s recognizing lasting success comes from value chains creating wins for all stakeholders.

Start Today

You don’t need to revolutionize everything overnight. However, there is probably one thing that you can do today. You can start by:

1. Sketching your value flow – Even napkin drawings provide insights
2. Picking one connection – Choose something frustrating everyone
3. Talking to stakeholders – Ask what would help most
4. Running a 30-day experiment – Test one improvement
5. Sharing lessons learned – Help your team understand value chain thinking

Remember: competitive advantage comes from connecting many things thoughtfully, not doing one thing perfectly. Start small, learn constantly, build systematically. You’ll be amazed at the business you create—one connection, one improvement at a time.

Whether preparing for growth, improving profitability, or building foundations for a future COO, value chain excellence pays compound returns. It’s not just about operations—it’s about building a business that efficiently creates lasting value for everyone it touches.

Reference:

• Porter, Michael E. Competitive Advantage: Creating and Sustaining Superior Performance

Ready to transform your value chain into competitive advantage? We help new CEOs identify opportunities and build operations that create lasting value. Let’s explore how value chain excellence can accelerate your journey from startup to legacy business.