Sell Hammers, Not Houses
A simple guide to value chains
Welcome to Mo’s Letter, a weekly publication by Dr Mo about social media, business strategy and career development.
In the video above, Vusi Thembekwayo touches on value chains (around 11:23 minutes in). He makes a salient point about moving up the value chain of a business in order to realize greater profits.
He gives an example of the paper industry: owning a retail paper business is a high-competition game, but owning the pulp factory is more profitable because all the wholesalers and retailers have to buy from you.
You can extend this phenomenon to any industry. If you live in a town with no chicken in the supermarkets (say, Antarctica), your best bet is to sell frozen chicken. Once competitors converge on that space, your next best move is to sell eggs and incubators.
Similarly, if there are no chartered accountants in your city, you should study accounting and become one of the first. When the number of CAs starts rising faster than the number of jobs, take a step back and sell tutoring, training and exam prep for CAs.
I call it “selling hammers”:
When everyone is building or buying property, sell hammers, not houses.
In a growing real estate market, the winners aren’t the real estate agents, but those who help build the houses: the architects, contractors, sand and cement companies, painters, and interior designers. They’ll never be out of work.
The real winners, though, are the hardware stores.
They sell the drafting tables the architects use; the buckets, pails and wheelbarrows the builders use; the paint for the painters; and the glue, hammers, nails, drills, bolts and nuts used by everyone else.
They’re further up the value chain and everyone below has to buy from them.
Sell hammers, not houses
The idea behind this is simple: there are more attempts than achievements in any field.
100 students might enrol in a program each semester, but only 40 - 50 will graduate.
1,000 people might apply for a job, but only one will be hired.
50 companies might apply for a tender, but only one will get the project.
However, those 100 students all need bags, pens, books, and laptops.
The 1,000 candidates all need their CVs written. Some would also pay for interview coaching, corporate photography, and LinkedIn overhauls.
The companies all need their businesses registered and their tender documents compiled, proof-read, and formatted. They’ll also need envelopes.
The goal is the “house.” Everything needed to get it is the “hammer.”
Sell hammers.
Sell on both ends
The best part of this strategy is you can sell to them, very lucratively, on both sides of the “pipe” — on the attempt (going in) and on success (coming out of the pipe).
After selling the students stationery and laptops, you can sell the graduates gowns.
After making money drafting CVs, you can sell the winning candidate a suit, some new shoes, a laptop bag, some dress shirts, and other nice things they’ll need at their new job.
(And if you’re a bank, you can simply sell them a car or house loan, payable from their new salary over the next 30 years. Think about that.)
After winning the tender, the company that paid you for business registration will need service providers for payroll, tax compliance, service delivery, and more. Which of those can you offer?
Own both ends of the pipe.
Here’s one more: humanity has an innate need to reproduce. Following the hammer theory, it’s more profitable to sell nappies than to build a primary school. But if you can, do both.
Better yet: sell condoms.
Till next week,
In my last post, I explained why your logo is not important in the beginning — and what you should focus on instead:
Hit the heart ❤️ button for unbreakable condoms.
I absolutely loved this Mo. Just this morning I was thinking about ways to expand my makeup business and when I saw "Sell hammers, not houses", I couldn't click fast enough. Totally affirmed everything I was thinking and I loved how you've explained value chains in layman's terms.
Inspired. I'm thinking of venturing into entrepreneurship. Not focused on any specific market yet, still trying to identify a gap. Any ideas to share?