The Value Chain of a Business Model
Porter’s Value Chain is a set of activities that an organization carries
out to create value for its
customers and return a margin of profit. Michael Porter created the concept in
the 1980s. Also Porter defined the Margin as the difference between the value created and costs :
Value Created – Cost
of Creating that Value = Margin
A Business Model (BM) describes the way a company returns profit/value to the business while delivering the product to customers. A Business Model shows as such how a company makes
profit from its products. Here is Osterwalder and Pigneur’s Business Model canvas.
The Business Model (BM) identifies the way the company returns profit from the activities, resources, channels, partnerships… that deliver the product, while the Value Chain identifies the sequence of activities, from sourcing to marketing and sales, that deliver the product while returning a “Margin” to the company.
Between the BM and the VC it is a matter of emphasis
– either on the Value returned to the company in the case of the Business Model or
– or on the Value creation for the Customer in the case of the Value Chain.
While the Business Model evaluates the returns to the company in terms of Value Proposition, Porter’s concept of “Margin” quantifies the profitability of the Value Chain.
There is always though a Value Chain that implements a Business Model.
As a corollary, any Business Model could be best evaluated or built on the Value Chain that realises it.
The Value Chain a Business Model is evaluated upon, identifies the key sequence of activities that deliver the product. Based on these activities, the associated physical resources and partnerships that deliver in the value chain can be assessed to determine the BM Value Proposition.
Therefore, in addition to representing a Business Model as a number of boxes on a canvas, you can represent it as the associated Value Chain that returns that Margin to the business.
Here is a mapping between the generic Business Model and the Value Chain representation.
Furthermore, to estimate the costs and revenue for the calculation of profitability, the BM and its associated Value Chain should be mapped on the Enterprise Architecture. The EA exhibits in detail the processes/activities and resources that deliver the product.
A Business Model may be represented as such, as a path through an Enterprise Architecture, that illustrates the customer segments, channels, activities and the resources that deliver the product and return profit to the company.
Nevertheless, a slightly different value chain may invalidate the Business Model. For instance, manufacturing in house can turn the Value Proposition negative in comparison to outsourcing it to an overseas partner.
PS: The Enterprise Architecture Handbook will be soon out on Amazon Kindle.
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