The Magic Pallet, basis for  ValueMagics

The starting point of ValueMagics is the Magic Pallet.

It shows the ValueSpace—the room available to increase the value of a product or service and improve the margin.

It demonstrates how companies can create additional value and subsequently calculate the added value.

ValueMagics works backwards from the consumer price. It deducts VAT, import duties, distribution costs, intermediary margins and other costs.

This makes it possible to estimate the realistic margin that can be generated within the ValueSpace.

An example

A pallet of avocados. For each of the "players" in the value system, the pallet has a different cost and value.

First, the perspective of the producer.

The producer's cost of means and added value determine the selling price.

For a producer in the agricultural sector, increasing added value is not easy. Opportunities often lie in taking control of part of the logistics in the value chain.

The more of the value chain the producer can influence, the greater the potential ValueSpace.

The second perspective is that of the intermediary.

It starts with the cost of ownership—the purchase price, time involved, process adjustments and other sacrifices required to acquire and handle the product.

Value is subsequently added through logistics, marketing and branding, and pre- and after-sales service.

The value added by an importer, wholesaler or retailer in the agricultural sector can therefore be considerably greater than the value added by the producer.

The third perspective is that of the consumer or end user.

On one side are the benefits: design, quality, delivery, service and other benefits perceived by the customer.

On the other side are the sacrifices: price, cumbersome purchasing processes, environmental concerns and other sacrifices.

The consumer weighs these benefits against the sacrifices.

If the balance is unfavorable, the customer may buy elsewhere—or postpone the transaction.

The role of value-adding activities has changed considerably over the last century. The five main activities through which companies create added value are:

The five main processes by which a company adds value

Production
In the last century, production was the center of gravity in the value chain, partly because of the large investments involved. Factories were typically located close to sources of raw materials or major markets.

Today, production still matters, but its relative contribution to added value has declined in many industries. Automation, relocation to lower-cost countries and outsourcing have all played a role.

Technology
At the start of the Industrial Revolution, technology was still in its infancy. As competition intensified, technology became one of the most important ways to differentiate a company, alongside branding.

Its importance is increasing rapidly, driven by software development, artificial intelligence and other emerging technologies. Technology is increasingly becoming a major source of added value.

Logistics
Logistics was hardly an issue in the past. Factories were usually located close to sources of raw materials or major markets.

Today, logistics has become a crucial factor in the value chain. Global supply chains have made the movement of goods more complex. Geopolitical developments can disrupt otherwise smooth deliveries.

As a result, logistics can create—and destroy—significant value.

Marketing
The world used to be a seller's paradise. “You can buy a T-Ford in any color, as long as it is black.”

Today, branding is almost a necessity, especially for affluent consumers in emerging markets. A strong brand can differentiate a product, create preference and increase the value perceived by the customer.

Service
Service used to be an essential part of the product offering. Products were often of mediocre quality, and relationship management played an important role.

Today, service is increasingly treated as a cost item and is often outsourced. At the same time, good service can still create significant value when it improves the customer's experience and strengthens the relationship.

By applying ValueMagics to the five key activities of a company, management can identify where the company's weak links lie—and where opportunities for additional value exist.

ValueMagics also provides a reasonably precise estimate of the added value—the margin—that can be achieved in a specific market.

It shows where value is created, where it is captured, and where the ValueSpace lies.

Outsourcing

Traditionally, production was located close to markets or availability of raw materials. But -as a consequence of globalization in the middle of the twentieth century- production begins to behave like water: it flows towards the lowest-cost locations. Massive outsourcing follows.

As a result, countries—not just companies—begin competing with one another for investment and value-adding activities.

This competition takes many forms, from tax incentives for the automotive industry in South Africa to dedicated lines for “buyers” at immigration in Dhaka airport, Bangladesh.

Governed supply chains emerge, in which a single company can control much of the chain.

Two examples of these chains are: