A business is not a single event. It is a sequence of activities. You take raw materials, you do something to them, and you sell the result for more than it cost you to produce. This sequence is called the Value Chain.
A Value Chain is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product. Conceptually developed by Michael Porter, it breaks your company down into distinct operational steps.
For a founder, this is not just an academic exercise. It is a diagnostic tool. By analyzing every link in the chain, you can see exactly where you are creating value and where you are just burning cash. It allows you to move from a vague sense of “running a business” to a precise engineering of your profit margin.
The Sequence of Creation
#The value chain is typically divided into five primary activities. These are the steps that physically create the product or service and get it to the customer.
Inbound Logistics: Getting the raw materials. For a SaaS company, this might be data ingestion or server capacity.
Operations: Turning those inputs into the final product. This is coding, manufacturing, or content creation.
Outbound Logistics: Delivering the product. This is shipping, downloading, or deployment.
Marketing and Sales: Convincing the customer to buy. This gives the product market value.
Service: Maintaining the value after the sale. This is customer support and onboarding.
If any one of these links is weak, the entire chain fails. Great marketing cannot save a product that breaks during Operations. Great Operations cannot save a product that is stuck in Outbound Logistics.
Primary vs. Support Activities
#Not everyone in your startup touches the product. There is a second layer called Support Activities. These cross over the primary activities to make them possible.
These include Procurement (buying the laptops), Technology Development (R&D), Human Resources (hiring the team), and Firm Infrastructure (finance and legal).
Founders often make the mistake of letting support activities bloat. They hire too many admin staff before they have enough salespeople. Support activities are necessary costs, but they are rarely value generators on their own. You must keep them lean so they do not eat the margin created by the primary activities.
The Margin Calculation
#The goal of the value chain is Margin. Margin is the difference between the total value you create (what the customer is willing to pay) and the collective cost of performing all the activities in the chain.
If you add a step to the chain, you must ask: Does this step add more value to the customer than it costs us to perform?
If you add fancy packaging (Outbound Logistics) that costs $2.00, but it allows you to charge $5.00 more because it feels premium, that is a positive value chain decision. If you add a complex approval process (Firm Infrastructure) that slows down shipping and frustrates customers, that is a negative value chain decision.
Outsourcing the Weak Links
#Startups rarely have the resources to be world class at every step of the chain.
Value chain analysis helps you decide what to outsource. If your core competency is Operations (building the software), you should probably outsource Inbound Logistics (use Amazon Web Services) and perhaps HR (use a PEO).
You should own the links that differentiate you. You should rent the links that are commodities. If you try to own the entire chain from scratch, you will likely run out of capital before you reach the customer.