Value Chain Mapping
For any business, identifying the sequence of steps from raw input to delivered value is foundational to understanding where economic rent accumulates and where the firm sits.
The exercise
For any company / industry:
Step 1 — Map the chain
List every step from origination of raw material / inputs to delivered value at the end customer. Be specific. For each step, identify:
- What happens (the transformation or service)
- Who does it (firm types, market structure)
- How much it costs / what margin it commands
- Who captures the rent at this step
Step 2 — Identify the firm's position
Where in the chain does the company sit? What steps does it perform? What steps does it source vs. integrate?
Step 3 — Assess rent capture
At each step, is there rent extraction? Or is the step competitive / commoditized?
Rent typically accumulates where:
- Capacity is constrained (bottleneck-mapping-framework)
- Concentration is high (single supplier or duopoly)
- Switching cost is high
- Differentiation is real
Steps without these features tend to be competitive — capital flows in, returns flow to cost of capital.
Step 4 — Identify the firm's exposure
Upstream dependencies: which bottlenecks does the firm pay rent to? Downstream dependencies: which channels does the firm depend on for distribution?
A firm caught between two strong rent-extractors (upstream bottleneck + downstream channel power) tends to earn poor returns regardless of internal competence.
A worked example — coffee
| Step | Activity | Firms | Margin | Rent |
|---|---|---|---|---|
| Farming | Growing coffee beans | Many smallholders globally | Low | None — commodity |
| Trading | Buying / aggregating | Trading houses | Moderate | Some scale advantage |
| Roasting | Roasting beans | Many; some brand-led | Moderate | Brand-driven where present |
| Packaging | Branded products | CPG companies (Nestlé, JDE, JM Smucker) | Moderate-high | Brand moats |
| Distribution | Wholesale | Distributors, retailers | Moderate | Channel power |
| Retail (CPG) | Grocery sale | Grocers | Mass-merchant moderate margin | Captured by Walmart-class scale |
| Retail (coffee shop) | Brewed coffee sale | Starbucks, Dutch Bros, Peet's, indie | Variable | Location + brand |
| Coffee shop chain (corporate) | Brand, ops, real estate | Starbucks, etc. | High | Brand + scale |
The map reveals:
- Origin (farming) captures very little
- Processing has modest margins
- Brand layers (packaged coffee, coffee chain) capture the most rent
- Coffee chain (Starbucks model) combines brand + real estate + scale → highest rent
Investors paying for "exposure to coffee" through coffee growers or pure-play traders pay for the wrong part of the chain. The brand-equity layer (Starbucks) is where the rent sits.
Where the framework helps deep-value work
Identifying mispriced positions in the chain
Sometimes the market over-prices one layer (the visible / branded layer) and under-prices another (a less visible bottleneck). The map highlights both.
Re-evaluating "exposure"
"Exposure to AI" can mean buying app-layer companies (low rent) or upstream chip / power / data center / lithography companies (high rent). The map distinguishes.
Spotting margin pressure direction
When a chain has a new bottleneck emerging, downstream margins compress. When a bottleneck eases, downstream margins expand. The map provides the early warning.
Linked
- bottleneck-mapping-framework — central; bottleneck identification uses value chain
- porters-five-forces — adjacent
- Sector files — each sector file describes the value chain implicitly
- moat-taxonomy-and-identification — moats live in chain positions