ROI Case File No.274｜'TerraNova Agritech's Value Chain Reorganization'

Chapter 1: Disconnected Processes—A Structure Where Value Leaks

The week after resolving the Arclight Energy Double Diamond case, a consultation arrived from South America regarding an agritech company's profitability deterioration. Case File 274 of Volume 22 "The Pursuit of Reproducibility" is a story about visualizing the entire corporate activity landscape and identifying sources of value.

"Detective, we do everything from seed development to sales in-house. Vertical integration should give us competitive advantage. Yet our profit margin is the industry's lowest."

Carlos Mendes, Chief Operating Officer of TerraNova Agritech from São Paulo, visited 221B Baker Street unable to hide his confusion. In his hands were detailed departmental profit/loss reports contrasted sharply with stagnant company-wide profit margin graphs.

"We provide high-performance seeds and agricultural IT solutions in Brazil. We've internalized everything from seed R&D, production, logistics, to sales support. Economies of scale should work, yet we're not profitable."

TerraNova Agritech's Inexplicable Low Profitability: - Founded: 2015 (agritech startup) - Business areas: Seed development, production, logistics, sales, IT support - Annual revenue: 18 billion yen - Operating margin: 3% (industry average 12%) - Vertical integration: 85% (nearly all processes in-house) - Employees: 850

Carlos's expression held deep anxiety.

"The problem is each department operates independently. R&D focuses on 'creating good seeds,' production focuses on 'reducing costs,' logistics focuses on 'fast delivery.' But they're not coordinating."

Departmental Disconnections: - R&D: Develops breakthrough new varieties → Production: "Can't mass produce" - Production: Cost reduction through mass production → Logistics: "No storage space" - Logistics: Optimizes delivery → Sales: "Doesn't match customer timing needs" - Sales: Understands customer needs → R&D: "Can't reflect in next development"

"We have all the activities, but they're not generating unified value."

Chapter 2: Mapping Primary and Support Activities—Visualizing the Chain

"Carlos, how are your current corporate activities managed?"

To my question, Carlos answered.

"Each department has its own goals and KPIs. R&D has 'new variety count,' production has 'unit cost,' logistics has 'delivery days,' sales has 'revenue.' Each aims for optimization, but we can't optimize the whole."

Current Management Structure (Departmental Optimization): - R&D: New variety development count (annual target 12 varieties) - Production: Per-kg cost reduction (YoY -5%) - Logistics: Delivery lead time (average within 3 days) - Sales: Revenue (YoY +10%) - IT: System uptime (99.5%+)

I explained the importance of seeing linkages between activities.

"Departmental optimization isn't whole optimization. Value chain analysis—the technology of decomposing corporate activities into primary and support activities, visualizing how they generate and link value."

⬜️ ChatGPT｜Catalyst of Concepts

"Value is a chain, not a point. If one link weakens, the whole collapses"

🟧 Claude｜Alchemist of Narratives

"Activities aren't islands. They flow like rivers to the sea. Design that flow"

🟦 Gemini｜Compass of Reason

"Value chain is value's anatomy. See where it's born, amplified, and leaked"

The three members began analysis. Gemini deployed the "Agritech-Specialized Value Chain Analysis" framework on the whiteboard.

Value Chain Structure:

Primary Activities: 1. Inbound Logistics 2. Operations 3. Outbound Logistics 4. Marketing & Sales 5. Service

Support Activities: 1. Firm Infrastructure 2. Human Resource Management (HRM) 3. Technology Development 4. Procurement

"Carlos, let's reconstruct TerraNova's activities as this chain."

Chapter 3: Cost Drivers and Differentiation Drivers—Finding Value Sources

Phase 1: Current Value Chain Analysis (3 weeks)

We visualized all TerraNova activities and measured cost and value allocation.

Detailed Primary Activity Analysis:

1. Inbound Logistics (receiving raw materials): - Activities: Parent stock procurement, fertilizer/pesticide procurement, packaging material procurement - Cost: 1.2 billion yen annually - Challenge: Small-lot transactions with multiple suppliers, inventory management inefficiency - Value contribution: Low (doesn't contribute to differentiation)

2. Operations (production): - Activities: Seed cultivation, harvesting, sorting, quality inspection, packaging - Cost: 5.8 billion yen annually - Challenge: Small-batch multi-variety production of 12 varieties, 62% equipment utilization - Value contribution: Medium (high quality but high cost)

3. Outbound Logistics (delivery): - Activities: Warehouse storage, delivery planning, transportation, delivery - Cost: 2.2 billion yen annually - Challenge: 18 distributed warehouses nationwide, non-optimized delivery routes - Value contribution: Low (industry standard level)

4. Marketing & Sales: - Activities: Sales activities, promotion, distributor management - Cost: 2.8 billion yen annually - Challenge: 85% dependence on distributors, few direct customer touchpoints - Value contribution: Low (25% distributor margin squeezes profit)

5. Service (after-sales): - Activities: Cultivation support, IT tool provision, inquiry response - Cost: 1.5 billion yen annually - Challenge: Service provided free, no monetization matching value - Value contribution: High (customer satisfaction 4.8, repeat rate 92%)

Support Activity Analysis:

Technology Development (R&D): - Activities: New variety development, cultivation technology research, IT system development - Cost: 2.4 billion yen annually - Challenge: 35% commercialization rate of developed varieties (65% shelved) - Value contribution: High (technology capability industry top)

Phase 2: Identifying Value Leakage Points

Analysis revealed surprising facts.

Greatest Value-Creating Activities: 1. Technology Development (R&D): High-quality seed development 2. Service: Cultivation support and IT tools

Greatest Value Leakage Points: 1. Marketing & Sales: 25% distributor margin 2. Operations: High cost from small-batch multi-variety 3. Outbound Logistics: Distributed warehouse maintenance cost

Discovered Contradictions: - Most valuable "Service" provided free - Low-value "distributors" receive 25% of profit - High technology capability offset by production inefficiency

Carlos was shocked.

"We were providing value-creating activities free while paying high costs for non-value activities."

Chapter 4: Chain Redesign—Redrawing In-house and Outsourcing Boundaries

Phase 3: Value Chain Reconstruction Strategy (2 months)

Based on value sources and leakage points, we decided activity reallocation.

Strategy 1: Focus on Value-Creating Activities

Service Monetization: - Previous: Free cultivation support - New model: "TerraNova Premium Support" - Monthly subscription (50,000-500,000 yen based on farmland area) - Content: AI cultivation support, real-time disease prediction, harvest optimization - Value: 20% yield increase, 30% loss reduction - Result: 85% of customers contracted paid service

Technology Development Selection and Focus: - Previous: 12 varieties annually, 35% commercialization - New policy: Focus on 4 varieties, aim for 100% commercialization - Criteria: Market size 5 billion yen+, clear technological advantage only

Strategy 2: Outsource Non-core Activities

Break from Distributors: - Previous: 85% via distributors, 25% margin - New model: 70% direct sales, 30% distributors - Direct sales channel: Direct sales to large-scale farmers - Digital sales: Direct sales via EC site - Distributors: Small-scale farmers only (renegotiate to 15% margin)

Logistics Optimization (partial outsourcing): - Previous: 18 in-house warehouses - New model: 3 core warehouses + external 3PL utilization - Logistics cost: 2.2 billion yen → 1.3 billion yen (40% reduction) - Delivery quality: Maintained (leverage 3PL expertise)

Strategy 3: Chain Strengthening

R&D → Production Linkage: - Previous: Production department takes over after development - New method: Production participates from development stage - Variety design considering mass production - Production process optimization during prototyping - Result: Time to mass production 18 months → 9 months

Sales → R&D Feedback: - Monthly customer needs feedback to R&D - Market voices determine development priorities - Result: Developed variety commercialization rate 35% → 95%

Phase 4: New Value Chain Implementation (6 months)

We executed the redesigned chain.

Post-implementation Activity Allocation:

Strengthened Activities: - Technology Development: 2.4 billion yen annually → 3.2 billion yen (+33%) - Service: Free → Monetized for 1.8 billion yen new revenue

Reduced Activities: - Distributor margin: 4.5 billion yen → 1.8 billion yen (-60%) - Logistics: 2.2 billion yen → 1.3 billion yen (-40%) - Production: Variety focus 5.8 billion yen → 4.8 billion yen (-17%)

New Chain: 1. Customer voice → R&D → Focus on 4 varieties 2. R&D and production collaboration → High mass-producibility variety design 3. Efficient production → Quick delivery via 3-location logistics 4. Direct sales → Build direct customer relationships 5. Paid service → Yield increase benefits customers too

Results after 12 months:

Dramatic Financial Metric Improvement: - Annual revenue: 18 billion yen → 19.5 billion yen (+8%) - Operating margin: 3% → 18% (6x) - Operating profit: 540 million yen → 3.5 billion yen (6.5x)

Revenue Contribution by Activity: - Service monetization: +1.8 billion yen - Direct sales expansion: +1.2 billion yen (distributor margin reduction effect) - Logistics optimization: +900 million yen (cost reduction) - Production efficiency: +1 billion yen (variety focus effect)

Customer Value Improvement: - Paid service subscription rate: 85% - Service user yield: Average +22% improvement - Customer NPS: +42 → +68

Employee Voices:

R&D Director (45): "Previously we developed 12 varieties in parallel, all half-hearted. Now we focus on 4 and polish each thoroughly. Collaborating with production, we can create seeds that actually sell."

Sales Representative (32): "Breaking from distributor dependence, we can now talk directly with customers. Field voices reach R&D immediately and reflect in next development. We're not just seed sellers—we became customers' profit partners."

Chapter 5: The Detective's Value Chain Diagnosis—Value is Born in Chains

Holmes compiled the comprehensive analysis.

"Carlos, the essence of value chain is 'activity linkage.' Even if each department optimizes in isolation, value isn't created. Focus on value-creating activities, review value-leaking activities. And design all activities as one chain. That generates true competitive advantage."

Final Report after 24 months:

TerraNova Agritech transformed into a leading company in the South American agritech market.

Final Achievements: - Annual revenue: 18 billion yen → 28.5 billion yen (+58%) - Operating margin: 3% → 24% (8x) - Market share: 15% → 32% (South American top) - Customer unit price: 1.2 million yen annually → 3.8 million yen (including service revenue)

Carlos's letter contained deep learning:

"Through value chain analysis, we transformed from 'a company having everything' to 'a company focusing on value.' Most important was seeing activity 'linkage,' not 'quantity.' Now whenever considering new business, we draw the value chain. Designing which activities to differentiate and which to outsource—that design is strategy's core, we understood."

The Detective's Perspective—Chain as Design Philosophy

That night, I contemplated the essence of value creation.

The true value of value chain analysis lies in viewing companies as "bundles of activities." Companies don't make products. They create value through a series of activities and deliver it to customers.

Where in that chain are strengths, where are weaknesses. Which activities to strengthen, which to let go. This design philosophy generates sustainable competitive advantage.

"Value is a line, not a point. How you design that line determines a company's fate."

The next case will also depict a moment when structural thinking opens a company's future.

"A chain's strength is determined by its weakest link. But the wise remove weak links and make chains from strong links only"—From the detective's notes

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