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Value Creation

Value Creation is the performance of actions that increase the

worth of goods, services or even a business. Many business
operators now focus on value creation both in the context of
creating better value for customers purchasing its products and
services, as well as for shareholders (or stake-holders) in the
business who want to see their stake appreciate in value.

Starbucks - An Example of the Value Chain Model

The business management concept of the value chain was

introduced and described by Michael Porter in his popular book
"Competitive Advantage: Creating and Sustaining Superior
Performance" in 1985. A value chain is a series of activities or
processes which aims at creating and adding value to an article
(product) at every step during the production process.

Businesses aim at enhancing their margins and thus work to

change input into an output which is of a greater value than
what it was at the time of entering the process (the difference
between the two being the company’s profit margin). Thus the
logic behind it is simple; the more value a company creates,
the more profitable it is. When more value is created, the same
is passed on to the customers and thus further helps in
consolidating a competitive edge.
The business activities are divided into primary activities and
secondary activities. The primary activities are directly related
to the creation of a good or service while the support activities
help in enhancing the efficiency and work to obtain a
competitive advantage among peers.

Let’s take the example of Starbucks to understand this better.

The Starbucks journey began with a single store in Seattle in
the year 1971 to become one of the most recognized brands
globally. Starbucks mission is, per its web site, “to inspire and
nurture the human spirit – one person, one cup and one
neighbourhood at a time.”

Primary Activities

Inbound Logistics

The inbound logistics for Starbucks refers to selecting the finest

quality of coffee beans by the company appointed coffee
buyers from coffee producers in Latin America, Africa and Asia.
In the case of Starbucks, the green or unroasted beans are
procured directly from the farms by the Starbucks buyers.
These are transported to the storage sites after which the
beans are roasted and packaged. These are now ready to be
sent to the distribution centres few of which are company
owned and some are operated by other logistic companies. The
company does not outsource its procurement to ensure high
quality standards right from the point of selection of coffee


Starbucks operates in 65 countries either in the form of direct

stores operated by the company or as licensed stores.
Starbucks has more than 21,000 stores internationally which
includes Starbucks Coffee, Teavana, Seattle’s Best Coffee and
Evolution Fresh retail locations. According to its annual report,
the company generated 79% of the total revenue during fiscal
year 2013 from its company operated stores while the licensed
stores accounted for 9% of the revenue.

Outbound Logistics

There is very little or no presence of intermediaries in product

selling. Majority of the products are sold in their own or
licensed stores only. As a new venture, the company has
launched a new range of single-origin coffees which will be sold
through some leading retailers in the U.S.; these are
Guatemala Laguna de Ayarza, Rwanda Rift Valley and Timor
Mount Ramelau.

Marketing and Sales

Starbucks invests in superior quality products and high level of
customer services than aggressive marketing. However, need
based marketing activities are carried out by the company
during new products launches in the form of sampling in areas
around the stores.


Starbucks aims at building customer loyalty through high level

customer service at its stores. The retail objective of Starbucks
is, as it says in its annual report, “to be the leading retailer and
brand of coffee in each of our target markets by selling the
finest quality coffee and related products, and by providing
each customer a unique Starbucks Experience.”

Support Activities


This includes all departments like management, finance and

legal which are required to keep the company’s stores
operational. Starbucks well designed and pleasing stores are
complemented with good customer service provided by the
dedicated team of employees in green aprons.

Human Resource Management

The company’s committed workforce is considered a key
attribute in the company’s success and growth over the years.
Starbucks employees are motivated through generous benefits
and incentives. The company is known for taking care of its
workforce and this is perhaps the reason for a low turnover of
employees, which indicates great human
resource management. There are many training programs
conducted for employees in a setting of a work culture which
keeps its staff motivated and efficient.

Technology Development

Starbucks is very well known for use of technology not only for
coffee related processes (to ensure consistency in taste and
quality along with cost savings) but to connect to its
customers. Many customers use Starbucks stores as make a
shift office or meeting place because of the free and unlimited
Wi-Fi availability. The company in the year 2008 also launched as a platform where customers can
ask questions, give suggestions and openly express opinions
and share experiences. The company has implemented some of
the suggestions given via this forum. Starbucks also
uses Apple’s iBeacon System wherein customers can order
their drink through the Starbucks phone app and get a
notification when they walk in the store.

This involves procuring the raw material for the final product.
The company agents travel to Asia, Latin America and Africa
for the procurement of high grade raw material to bring the
finest coffee to its customers. The agents establish strategic
relationship and partnership with a supplier which is built up
after scouting and communication about the company
standards. High quality standards are maintained with direct
involvement of the company right from the base level of
selecting the finest raw material which is coffee beans in case
of Starbucks.

Bottom Line

The concept of value chain helps to understand and segregate

the useful (which help in gaining a completive edge) and
wasteful activities (which hamper market lead) accompanying
each step during the product development process. It also
explains that if value is added during each step, the overall
value of the product gets enhanced thus helping in achieving
greater profit margins.


 Customers buy based on emotions. How can you explain

customers lining up to pay over $450 for a bag made of PVC
plastic? (optional picture) – by the way this product was
backordered at the time I am writing this post.
 The value of the product is not in its specifications, quality of
the materials, features or benefits. The value is in how it
makes customers feel. When you wear UGG boots and a MK
bag, you feel like you belong, you feel fashionable, you feel
successful. The product is the experience.
 It’s not the price, or the discount, but the feeling that you are
getting a good deal that counts. The shoppers in line felt good,
even if they really did not get a good deal. The end price was
not as relevant as the feeling that they were getting a good
deal. After all, who likes paying list price?
 Even premium brands need to provide the feeling of offering a
good deal. It does not have to be a discount, though:
sometimes free shipping, personalization or an accessory could
do the trick.
 All the talk about brands going away? Nonsense. Brands are,
and will continue to be, extremely valuable. You can probably
get a handbag of similar quality and similar design for 1/10th
of the price at Target, yet customers happily stand in line and
fork out their hard-earned cash for a brand.
My call to action to you: before you start you next price
promotion, think about how you can build a brand, an
experience, that makes customers feel great, and makes them
happy to spend more money with you.