About Value Streams and Value Chains

Posted on by Helene
Value streams vs Value chains
23
Aug

A few weeks ago, I was giving a French SAFe class to an executive audience, and several of them were already familiar with the term “value stream” that we translate as “Chaîne de valeur”. Happy to pass quickly over this section, I was surprised when one of them drew a Michael Porter value chain on the blackboard. It’s a common confusion: in French, “Value Chain” and “Value Stream” are often translated the same way by “Chaîne de valeur”, but their objectives and origins differ markedly.

 

Value Chain

Michael Porter uses the Value Chain concept to complement his thinking on the strategic positioning of companies. According to Porter, a company must choose to compete either through cost domination or product differentiation. Porter also mentions focus, i.e. segmentation, which enables a company to offer a low-cost or highly differentiated product to a specific population. The aim is to maintain the company’s competitive edge by selling a product similar to the competition with better margins, or conversely, a highly differentiated product at a higher price. These strategies are often at odds with each other, as it is difficult to apply them simultaneously or to maintain them over time.

The value chain is a holistic way of analyzing all the activities of a business unit and its suppliers in the light of the company’s chosen strategy. It describes all the activities a company carries out to bring its products or services from conception to delivery, and even beyond. The value chain includes, for example, design, production, logistics flows, marketing, distribution and product support. Each stage in the chain adds value to the company’s products or services.

The value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors. Michael Porter, Competitive Advantage, p. 33

The generic value chain

The value chain model enables us to make structuring and coherent decisions for a given activity, in order to reduce production costs or increase differentiation levers. The aim of this analysis is to ensure the company’s long-term strategic positioning.

Value Stream

The Value Stream represents all the steps required to take a product or service from conception to customer, “from concept to cash”, as Mary Poppendieck would say. It focuses on the people, materials and information flow required to deliver a product or service to a customer, whether internal or external. It also aims to provide a holistic vision of value creation, thereby reducing the impact of functional silos that restrict flow .

This concept has its origins in the material and information flow management of the Toyota Production System, and has been greatly popularized by the Lean Thinking book mentioned above. Its aim is to create more value for customers, more quickly and with less waste, by optimizing the flow of a product or service.

An Operational Value Stream (OVS) supported by two Development Value Streams (DVS)

Value Stream Mapping is the preferred tool for optimizing the value delivery flow by analyzing the sequence of activities involved in value creation. SAFe adopts the principles of Value Stream Management to ensure that the teams involved in the realization of a project are organized around the value streams, in order to optimize their delivery.

An example of Value Stream Mapping

James P. Womack and Daniel T. John summarize the differences between these two concepts as follows:

Some readers may be confused initially about the difference between the value stream as described here and the concepts of the value chain employed by business strategists, following the work of Michael Porter. […] The differences are very simple. We apply the term “value stream” to the entire set of activities running from raw material to finished product for a specific product and we seek to optimize the whole from the standpoint of the final customer (the ultimate consumer of the good or service). The typical strategic analysis of the value chain aggregates activities like “production”, “marketing”, and “sales” for a range of products and asks which a firm can do to maximize its profit and how it can orchestrate the activities performed by other firms up and down the value chain to that firm’s best advantage. – Lean Thinking, p. 355.

Value Chain or Value Stream?

The Value Chain is used to describe the activities involved in strategically positioning a company to create more or less costly, differentiated and segmented products. It is primarily a tool that contributes to the strategic analysis of the company or business unit in its competitive environment.

The Value Stream is used to describe the activities involved in the value-creation flow in the delivery of a product or service to a customer, in order to identify and eliminate waste and break down silos. It’s a tool for analysis and operational optimization.

“By using the value stream to optimize each stage of production and reduce waste, while applying value chain analysis to examine strategic activities and identify sources of differentiation or cost reduction, a company can simultaneously improve its operational efficiency and strengthen its strategic market position.”

Some references:

James P. Womack et Daniel T. Jones, Lean Thinking: Banish Waste and Create Wealth in Your Corporation, 1996, deuxième édition, 2003

Mary Tom Poppendieck, Implementing Lean Software Development: From Concept to Cash, 2006

Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, 1986

Taichi Ohno, Toyota Production System, Beyond Large-Scale Production, 1988

Value Stream Management, https://scaledagileframework.com/value-stream-management/

 

Article written by Etienne LAVERDIÈRE