What's this for?
A nascent business idea implies a choice of different business sectors it can enter or routes to market it can choose. Some industries are harder to enter than others, and some routes present competitive obstacles, while other options may be easier.
The differences between industry environments also imply different choices between the activities that your venture should perform itself (design, production, sales, etc.), as opposed to outsourcing or working with other players in the sector (such as manufacturers, distributors, designers or other external partners). To what extent should you 'integrate vertically' or outsource/partner? How powerful are the other players in your prospective industry?
Value chain analyses are most appropriate for positioning your venture in an industry of physical products going through a product design, manufacturing and distribution process.
Value network analyses are particularly useful for positioning a venture offering virtual products or services with easy distribution channels, such as internet-based businesses, where value and money are not always exchanged in a two-way linear fashion (e.g. site visitors consume website content, but advertisers pay for it).
However, the above are not rigid rules – decide whether one or both are useful case by case! They are different ways of visualising your industry environment and the business relationships you will need to form.
Recommended easy reading for context: Chapter 5 of The Smart Entrepreneur.
To identify the ‘paths of least resistance’ to reach the market, for instance:
• To map out and understand the industry players relevant to your business, so you can determine the functions your business can or should perform and those it should not or cannot.
- A value chain maps the value added at each step in a linear process from technical development through to the sale of the product. It plots commercial relationships between the different segments of a business sector (technology inventors and suppliers, product designers, manufacturers, marketers, distributors and vendors, consultants, etc.).
- A value network broadens the concept to a web that includes all parties or circumstances affecting the value of a product or service, with or without money transfer, and helps identify interest groups complementary to your business.
• To structure your thinking about the strength of your proposition and the way you can realistically create value from your venture:
- Where you will sit in the value chain (or whether you should choose a different sector value chain which you could enter more successfully).
- Which partners you need in order to deliver your product or service to the end customer.
o How other industry players may create obstacles, depending on your respective strengths and incentives.
o How partnerships adding value for all players might be created.
• To think about possible business models by considering different value chains or networks, or different business sectors to enter, including:
- Whether you are more likely to enter a market for end products or a market for technology, depending partly on the size and strength of other players.
• To begin considering the possible pricing of your end-product (or service) in view of the players involved (because most players will exact a fee, commission or trade-off for being part of your value chain). More about this in the section on Business Models.
1. Click the links to access the Learning Manuals: IE&D Value Chain and IE&D Value Network.
2. a) For a Value Chain:
• Plot out the steps and players needed to reach the end customer and make a diagram.
• Identify all aspects of value: ‘what specific attributes is the client paying for?’
• Identify which activities you can/want to perform as a venture and which should be done by others (complementary assets).
• Look at upstream and downstream environments: are there many players or do a few players monopolise the chain?
• Draw conclusions about the power you can obtain in the value chain; is it strong enough? How could you increase it to retain value? Where may you have to give away value and where can you retain it? Where might you have to build capacity (complementary assets) to occupy more of the chain?
2. b) For a Value Network:
• Plot out other players who currently or potentially play a role in the attractiveness of your product/service.
• Identify flows of value that may be created between players, including non-financial value (e.g.: reciprocal publicity, knowledge sharing, complementary products and services, capacity building, customer satisfaction).
• Identify potential relationships that may create a 'pull effect' on customers.
- A good example to illustrate this type of dynamic is the ‘loop’ model of a user-generated content site:
The site provides content to readers.
Many readers generate further content for the site (articles and comments), unpaid, which attracts additional or returning readers.
The site’s operation and maintenance (and financial profit) is paid for by third-party advertising, not the users themselves.
But the advertisers are attracted by the ‘user base’, i.e. the number of readers seeing their adverts, thus creating a value loop.
- Can you think of a value loop that will draw customers to your business?
Another current example is the open source model, or the availability of API interfaces to allow other programmers to make complementary products, for instance with the iPhone. Apple is not paying external app programmers itself, but they create additional value for the Apple product, while also earning money themselves by selling the apps directly to customers.
If you need to print out a copy of the learning manual(s) for offline use, please follow these steps:
- Click the "Create PDF" button at the top right hand corner of the page.
- Scroll to the "Attachment" section (at the end of the last page).
- Click on the paperclip icon next to the manual.