A value chain is a stack of markets that supply one another, from the first capture of the resource, through its transformation and distribution, until it is sold to an end user. Each market within a value chain will have its own characteristics, and the value chain as a whole will have its own.
Layers
Value chains are usually described by the end product that is sold to the last customer. For example, consider a simplified value chain for concrete houses.
The home buyer is the last customer in this value chain, with each person before him or her buying from the previous link. You can extend a value chain in either direction, like by putting mining machine manufacturers before quarriers- at some point you have to make a judgement call and give your chain two ends.
Describe the flow of your value chain, in terms of the markets and how they connect, in sequence. At each stage, describe how a product is transformed, providing a journey for the product from the start to the end.
Overall Health
The health of the value chain as a whole is important. Efficiency plays may affect the players within a market, but disruption plays frequently change an entire value chain by connecting previously unconnected markets and removing the incumbent intermediaries. Think what the internet did to travel agents, as airlines and holiday-makers were connected directly.
A disruption is an unknown unknown, so it’ll be hard to determine exactly what may come and topple your value chain. But you, as an expert in one of the markets of your value chain, should be able to foresee where the trends and risks are.
You will also want to look outside your value chain to competing ones; do people buying concrete houses also buy wooden houses? If so, the value chain starting with forestry and ending in wooden houses is a competitor- a substitute product- that you need to be aware of.
The point is that you may be in a very healthy market, but your market exists within a value chain, and an investor needs to know that the healthy market won’t be removed by forces outside it.
Returns and Ratios
If you can, provide the various financial ratios (Gross Margin, EBITDA Margin, Net Margin) and numbers (total revenues, company sizes) from each stage in the value chain. Often there will be relative bottlenecks in a chain, where profitability is higher due to higher demand relative to supply (you might see monopolies there), and stages where profits are low, perhaps at the customer-facing stage.
Coupled to this, there may be differences between different stages in terms of how their companies look. One stage might be filled with companies that have a lot of debt, while another stage is all equity funded. Earnings in some stages may be volatile, but smooth in another. Companies might be listed or private, profitable or not, international or local, and so on.
Core Resources
Think about why the stages have the characteristics they do; this is unlikely to come up in a pitch, but it will help with your ideation and strategy. There will be something about how the value chain interacts that has given each stage- each market- a core resource that correlates with success for companies within.
For example, the huge costs and expertise associated with designing and manufacturing airplanes means that there are very few plane manufacturers, giving Airbus, Boeing, Embraer, Bombardier and a few others an oligopolistic hold on their market. If access to capital is a core resource, you would expect companies that can succeed in this market to be listed, and even get government support.
The first question you face is whether you have the core resources needed to enter the market you have chosen.
If you are making an efficiency play, then how do you see your product changing the profitability ratios across the value chain? Whether you are entering a stage of the value chain or supplying to it, presumably you will increase its profitability, in which case the adjoining markets need to have enough profit in them for you to transfer across to yourself.
If you are making a disruption play, you can ask the alternative question of whether you have created something that allows you to bypass that market or change the market so drastically that you no longer need the core resource?