Value chain analysis: who does what and who earns

A value chain is the sequence of steps that turns an input into something a customer buys. Each step adds value, and each step has someone who gets paid for it. Drawing it out shows how money moves through an industry and where it gets stuck.

The idea comes from business strategy, but you can use it on any sector as a reader. If you know the steps and the players, a news item such as a new funding round or a rule change becomes easier to place. You can see which step is being improved and who may lose out.

Begin with the customer at the right edge and work backwards. Ask: who delivers the product to the customer, who supplies that player, and who supplies them in turn? Write each step as a box in a row, from the earliest on the left to the customer on the right.

Under each box, add three lines: who does this step, how they earn, and what they depend on. Keep each box simple. If a step has many sub-steps, make a second chain just for it. Five to nine boxes are enough for a first draft.

• Step: the job being done, such as storing, moving, selling or checking.
• Players: the kinds of companies or people who do it.
• Earnings: a fee, a margin, a commission, interest or a subscription.
• Dependencies: what that player needs from others to do its job.

Food delivery has a clear chain. Farmers and suppliers sell ingredients to restaurants. Restaurants cook the food and earn the price of the meal. An app lists the restaurants, takes the order and charges the restaurant a commission, plus fees to the customer. A delivery partner carries the food and is paid per order. A payment provider moves the money and takes a small fee. The customer pays the final price.

Now see where money is made and lost. The restaurant carries food cost and rent. The app earns commission but pays for discounts, marketing and delivery. The delivery partner's earnings depend on order volume and distance. When the app changes its commission, the restaurant feels it at once. This kind of dependency is easy to miss without a drawing.

In most industries, a few steps earn a large share of the profit while others run on thin margins. Profit tends to gather at steps where there are few competitors, where switching is costly or where the player controls access to customers. A platform that owns the customer relationship often earns more than the many suppliers behind it.

To find these points, compare the steps on two measures: how crowded they are and how much each player earns per unit. A crowded step with low margins is a tough place to start a business. A step with few players and healthy margins invites attention, and also invites new entrants.

Startups generally attack a chain in one of four ways. They can remove a step, as direct-to-consumer brands do when they skip the distributor. They can speed up or cheapen a step, as digital payments did for cash collection. They can add a new step that was missing, such as quality checks in used-car sales. Or they can join several steps together, a move called vertical integration.

Each has trade-offs. Removing a step upsets partners who relied on it. Joining steps raises costs and the need for cash, because the company now handles more work. Investors often ask which step the startup owns and why it can hold that position.

Check the chain against reality by talking to people at different steps. Ask a shop owner what the distributor charges, ask a delivery partner what a typical day pays, and ask a manufacturer what share of the final price it keeps. Their numbers will differ from your guesses, and the differences teach you where the chain really hurts.

Also follow one real product from start to finish. Pick a single item or a single customer order and trace every hand it passes through and every rupee that moves. This small case often reveals steps you missed, such as a quality check, a return flow, a tax charge or a financing arrangement that quietly takes a cut.

Keep your notes in a table with columns for step, player, earnings and risks. A table is easy to share and update. When a news story mentions a new company or a rule change, you can add a line and see at once how the chain shifts.

Do not draw only the happy path. Add the steps that cause trouble, such as returns, payment failures, collections and compliance checks. Do not leave out the regulator when a licence is needed to do a step. And do not assume that a player earns the same everywhere; margins differ between cities and customer types.

A value chain changes as technology and rules change. Mark the date on your drawing and update it when a new player or rule arrives. Nothing here is investment advice. It is a way to read an industry clearly.