Tse value chain_2014 (1)

Value Chain

The Smart Entrepreneur

Value Chain and Value-added

A Value chain shows the process needed for a product to create a product and bring it to the end customer

• It is also a snapshot of your industry environment and the other players you may need to work with in order to do business

TechnologyProduct

development Production Marketing Distribution

UPSTREAM DOWNSTREAM

Copyright of Bart Clarysse and Sabrina KieferThe Smart Entrepreneur

Value-added activities are those that increase a product’s worth to customers;

• The customer will be paying for elements that increase the product’s attraction, usefulness, pleasure, etc.

• This amounts to more than just product features, it can include things like

» Visibility: the fact that customers knows about the product

» Availability: they can find it and buy it easily

» Prestige: it has a high brand value

» Trust in the product and the company that makes it

» Compatibility with other products the customer uses

» Support after sales

Added value is often created through ‘complementary assets’


‘Complementary Assets’

‘Complementary Assets’ are “the assets needed to translate an innovation into commercial returns”

(Source: Teece, 1986)

Examples:

Resources• Brand name• Distribution channels• Customer relationships

Capabilities• Manufacturing capabilities• Sales and service expertise

CoreTechnology

&InnovativeKnow-how


Why do this exercise?

A Value Chain analysis allows you to think ahead about:

• your competitive position in the value chain

• opportunities and challenges you may find with other players in the chain; and

• the likely consequences for your business model

In order to reach your customer, you will need to attract and negotiate with players in the value chain who control any value-added or complementary assets that you either don’t have yourself, or that would be hard for you to build quickly.


Value Chain Analysis: How

• Plot the value chain around your business idea• Identify the likely position of your product, service or idea in

the chain, based on your idea and your capabilities• Identify points where the main value is created• Now identify where the power in the chain is with respect to

‘upstream’ and ‘downstream’ players in the sector – What complementary assets do you not currently have?– Who is more powerful than you?

• Identify the economic and operational impact that the chain structure may have on your business Will it make more sense for you to work with other players and

leverage their complementary assets? Or to build your own complementary assets and

overlap/compete with them?


Plot your Value chain

• What are the specific steps to reach the end user?

• How many phases in the value chain can/should your business cover?

• Who are the other players? What is their bargaining power?

» Identify them by type of business, and by names if possible

• What does the customer really pay for (where is the most value)?

Technology Product development

Production Marketing Distribution

UPSTREAM DOWNSTREAM


Identify your position and your weight/power in the chain

• Which steps are needed to reach the end customer?• Where is the biggest added value for the client? What does the client pay for?• What do you want to do yourself in the chain? What are your capabilities?• Who are the other players? How many alternatives do you have upstream and

downstream? Which ones have most power? Which would benefit from working with you (win-win)?

• Are there parties that can block your path to reaching the customer? Would you have to give away too much value (share of your income) to work with them? Do you need specialists to play on the downstream market?

Technology Product development

Manufacturing Marketing Distribution

Upstream downstream

design

£ € $


Simple examples to compare

1. e.g.: In life sciences, large pharma companies own solid marketing and sales relationships with the medical profession and public health services, based on familiarity, trust, and long procurement processes. It’s nearly impossible to market a new drug outside that distribution chain; therefore large pharma holds the power downstream. If you develop a new drug, your business model will likely require partnering with a large pharma company.

2. e.g.: for a web business – you can reach the customer directly. The main issue is attracting the customer to you (SEO, social media, value networks, etc.) but there is no downstream player sitting between you and the customer.

3. e.g.: suppose your product critically needs to incorporate a technology for which someone else owns the patent? You can’t force them to license you rights to use the technology; they will have to agree to this based on an incentive, assuming that your product will not compete with their business. In that case some power is held by a player upstream from you.


What is “power” in the value chain?

Power generally means:

A tight grip on complementary assets

The ability to choose what other players to do business with or not (e.g. as a supplier or distributor or competitor)

Another player’s ability to affect how you will be able to do business

The ability to compete with you directly for your business

If you do identify a powerful player and you can cooperate with them, this can increase your chance of success, though it also means they will take some value.

Examples of these types of power can be summarised by the Porter’s Five Forces Model on the following slides.


Starting point: ‘Porter’s Five Forces’

N.B. This is just a model to get you thinking about industry power, not a box-ticking exercise!

Forces driving industry competition – ME Porter, 1980

POTENTIAL ENTRANTS

Threat of new entrants

SUPPLIERS

Bargaining power of suppliers

INDUSTRY COMPETITORS

Rivalry amongst

existing firms

Bargaining power of buyers BUYERS

Threat of substitute products

SUBSTITUTES

Copyright of Bart Clarysse and Sabrina Kiefer

The Smart Entrepreneur

1. Upstream: Power of Suppliers

Suppliers may have bargaining power that will impact your business, for instance if:

• There are not many alternative suppliers competing, so they can control price and quality of the product they supply

• The product they supply to you is unique and requires a high degree of specification and specialisation, as opposed to more generic products

• They have many other customers, and/or you are not an important or high-value customer for them

• They can or may wish to integrate/expand into your line of business, so could become a direct competitor or new entrant

• Other… you might disover something more in your resarch


2. Downstream: Strength of Buyers

Buyers may have power over your business, for instance if:

• They make large volume of purchases, so can control price

• They have a wide choice of alternative suppliers to buy from, especially if your product is not highly differentiated

• They are very sensitive to price when choosing or switching suppliers

• They do not attribute much added value or importance to the product you are supplying

• They can or may wish to ‘integrate backward’ to produce or supply your product themselves


3. In your segment: threat of potential new entrants

New entrants may include:

• Other start-ups entering your industry with similar offerings• Future or emerging new technologies• Action by competitors: large established companies launching new

products, e.g. in response to your offering or to the emergence of a new growth market

What affects whether new entrants are more or less likely to materialise?...


New entrants and ‘Barriers to entry’

1. There may be ‘barriers to entry’ that could work for you or against you.

2. Your strategy should also consider ways to erect barriers to protect your own position in the market.

Types of barriers to entry include:• Product differentiation – creating a ‘Unique Selling Point’ (USP)• Intellectual property rights, e.g. patents and trademarks• Creating a reputable brand, customer loyalty• Partnerships and established relationships with suppliers• Exclusive deals with customers• Collusion among competitors, from partnerships to cartels• Knowledge/talent requirements and complexity of technology• Size of investment needed to enter the market, and time required

to realise returns


4. In your segment: threat of existing substitutes

Customers may choose substitutes over your offering

•N.B. ‘substitutes’ are not always limited to your direct product competitors, they can include any alternative choice by the customer

– A luxury client may choose to spend a large sum on a Jaguar, a Porsche (fairly direct competition), but also a swimming pool, a boat, jewellery, etc.

– Business customers may also make alternative choices about where to direct their spending – on marketing, on systems, on new offices, etc.

•Substitutes may be more or less competitive with respect to your offering, depending on:

– Price– Functionality and differentiation– Performance, quality and perceived value to customer– Switching costs: the customer’s costs or inconvenience for switching

between products, for instance if it requires them to purchase new equipment, redesign systems and processes, train staff, etc.

– New trends in the market which attract customers to certain products rather than others


5. Existing rivalry among industry playersIf competitive rivalry in your industry is already strong, this will make your entry more difficult.

Factors that create/affect rivalry include : •Many competitors and low product differentiation, leading to price competition•Slow industry growth (e.g. mature industries), causing fierce competition for market share•The need to shift high volumes of product, because

there are high fixed costs (overheads); production capacity can only be increased in large amounts – so there

are sudden jumps in the ratio of product supply to customer demand

•High ‘barriers to exit’ – companies may be highly specialised and identified with a product, so are unlikely to change business or leave that market•Few or powerful customers (e.g. military, government), creating risk of a switch to competitors•Lack of an established or widespread technical standard in a new industry, causing need to ‘lock in’ loyal customers to a proprietary technology


Example: Innobev - Belgium

• Product idea: a new beverage, based on Pinot grapes and beer, mostly for the clubbing circuit, higher customer segment

• £4.50 /unit is the potential price• The beverage formula still needs to be developed• Packaging, which is totally new and creative according to the

designers, is designed, but not manufactured or field tested• You are the designer who has developed the idea; your core

competence is design of packaging.

Analyse the value chain:• Players?• Where is the value in the chain? Where is the power?• What can you do yourself?• Problems? Solutions?

STAGES

Research

Development

Production

Marketing

Distribution

? Is it as simpleas that?


1. Types of players

Upstream

•Developers of product/formula•Packaging/labelling Design (You)•Packaging production and printing•Brewers •Bottlers •Marketing and sales•Distributors•Restaurants/bars/night clubs

•Retailers

Downstream


2. Plot the value chain

• Position the business activities in the chain

• Show the types of players for each stage


3. What is the customer paying for (where is the value-added)?

What bargaining power do all the players hold? Can they make high demands on your value as a condition for doing business with you?

Value-added Playersand holders of complementary assets

Visual appeal of packaging (first purchase)

Packaging designer (You)

Taste appeal - quality (repeat purchases)

Developer of formula (University);Manufacturer (Brewery)

Brand name (ongoing purchases and growth)

Marketing provider (in-house or external provider?)

Availability – easy to find and buy(ongoing purchases and growth)

Bars and retailers

Drinking experience(ongoing purchases and growth)

Bars


4. Research/Analyse the industry and chain –Conclusions:• Considerable value to be shared with the university that would develop the

formula – licensing royalties• Brewing and bottling is mostly done in the same facility• Some large breweries active in the market, it would not be possible to ask

them to brew a competing product• There are a number of alternative independent brewers of small batches =

positive, because the venture has some choice of players to work with• Producers of packaging: alternatives are available• In the considered market, incumbent brewers own 50% of the bars! This

market is locked for the new venture • Retail is very powerful: they want proof of sales before they even consider

providing shelf space• Retail sector is also a very tough partner to bargain with because they own

the distribution channel to the customer, but also compete in a mature or at least consolidated market

• Grey Market (gas stations, night shops) and smaller Wholesalers is organised in conglomerates which are very untransparent “who knows who”

• Independent clubs only want to work with ‘consignation’• You would need a specialised agent to go and look for “blancs” or niches

for this product, but this competence is very rare and therefore expensive• Working together with an incumbent brewer then? But then you would

need to protect the idea (IP). Another niche can can always be developed…

Very difficult value chain for a new ventureYour power in the value chain is currently not large enough to make

the idea viableMore thinking needed for this venture!

**Raw material**Transportation


Conclusions

• The Value Chain may be more complex than at first presumed

• Research is needed when you don’t know the playing field well

• There may be several places in the value chain where your venture could operate, or several entry routes; what’s the best approach based on your competitive position and access to complementary assets?

• To succeed, you need a business model that lets you get sufficient power and impact on the value chain.

• The smaller your impact on the value chain (e.g. less control over ‘Complementary Assets’ and value added):

1. the more important the presence of multiple competing players (alternatives) in other sections of the value chain – this mitigates any single player’s power

2. The greater your need for legal protection of your idea (Intellectual Property – further explained in the “Teece Analysis” (under Business Model) in the IE&D Toolbox


Tse value chain_2014 (1)

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