Tse value network_2014

Value Network

The Smart Entrepreneur

Value Network

• Similarly to a Value Chain, a Value Network plots the way in which value is created in a product/service offering, but not in a linear supplier-customer pattern.

• The Value Network highlights multiple exchanges and cooperation between network members to simultaneously create value by combining the skills and assets of different members. The ultimate goal is to satisfy the needs of the end customer so that all businesses in the network will grow.

• Value networks are often more relevant to ‘new economy’ businesses than value chains.

Value Network

Copyright of Bart Clarysse and Sabrina KieferThe Smart Entrepreneur

Value Network

• A Value network shows how firms obtain complementary resources through collaboration. In the best scenario, Firms’ complementary resources are rare, valuable and non-imitable and hence a source of competitive advantage for all the firms in the network.

• Particularly in the ICT industry, building a value network is indispensable for creating value, because no firm owns content, network, software and hardware at the same time.

• A value network also shows how value can be created without direct transfer of money (e.g. User-generated content).

• However, even in a value network, you need to be able to indicate concrete money and value streams (or else go out of business)!


Value Network - features

• In value networks, the flow of benefits may be indirect – you may offer one form of value to a particular member and receive value back from a different membere.g.: Google offers search capability to users but receives income from advertisers

• Value networks highlight interdependence e.g.: you offer training/technical know-how to a supplier so that it can manufacture a component tailored to your specifications

• Several network members may work together to produce a certain type of value or a ‘total customer experience’ e.g. product, services, infrastructure, equipment, training, content, add-ons

• Customers are also members of the value network and may create some of the value, e.g.:

• Providing feedback – Amazon customers rate products and third-party sellers on the site, providing market research data to sellers and advice to other users

• Doing some work in exchange for benefits – Ikea customers transport and assemble their own furniture in exchange for lower prices, wide choice of product and a convenient shopping experience (with restaurant, childcare, sample living environments, etc.)


An example of a Value network may be…

User-generated content sites (blog sites, social networking, citizen

journalism, product rating sites, etc.):

• The user provides content and receives access to the content made by other users

• The site operator provides the online space and the system for uploading the content, and receives revenue from advertisers and content from users

• Advertisers provide revenue to the site operator in exchange for advertising space >> access to a target market

• ISPs and infrastructure operators provide internet access, domain registration and hosting for sites; they are essential but their existence also depends on the presence of a wide variety of sites stimulating customers’ desire for broadband internet access


Why do this exercise?

VAN analysis allows you to think ahead about:

• Cooperation with other players in the industry

• How to overcome a possible weak position in a value chain through cooperation and pooled resources with other members

• Probable consequences for your business model

• Partnerships that generate a “pull effect” on your customer base


Why will this be useful?

• By identifying mutually beneficial (symbiotic) transactions and relationships, a value network approach may allow a start-up to overcome or work around barriers in the industry value chain that might otherwise be an impediment to the firm’s viability.

• Consequently, a value network may reveal ways that you can tap into competencies of other value providers and increase value for all parties, rather than giving most of the value to one powerful member of the chain.

• The combination of competencies can create a compelling new business model that will draw in more customers than the linear value chain approach.


How to Plot your value network

• Plot the value around your business – who are all the other players involved in bringing your product to the customer?

• Identify the position of your product, service or idea in the network

• Identify where value is created: plot the value-creating relationships between the members by linking them – look at your relationships with your suppliers, partners and customers; your partners’ relationships; your customers’ relationships

• Identify all kinds of value: from commercial relationships to exchanges of knowledge and information, support, feedback, favours, etc.

• Identify some focal points of the network, e.g.: you, the end customer, any “node” through which many of the relationships pass


Analyse and optimise your value network

• Look at the players and the relationships: can you identify ways to pool resources and competences with other members – i.e. to redraw relationships, or to add new partners/members or competences - so as to respond to customer needs in an integrated way?

• Can you propose a set of inter-relationships that would create a win-win situation for all parties in the network?

• By introducing new partners and relationships, can you make the product more appealing or more accessible to your customer (while adding value for everyone involved)?


Example 1: Newco

• Newco is a Belgian company that commercialises text messaging services

• Newco’s Idea: to automate medical prescriptions via text messaging

• Workflow: doctor sends prescription by text message to patient > patient forwards msg to pharmacist > pharmacist sends msg to government to receive refund for medicine > …

• Advantages: – no more paperwork

– The company that currently collects paper prescriptions from pharmacies and ships them by car to government offices for processing becomes redundant >> so a cost advantage for the government

– no more wrong medicines issued because of doctors’ bad handwriting

• Question: can Newco create enough value for all players in the network?


The pre-existing Value Networks

Patient

Government

Pharmacy

DoctorCompany shipping

prescriptions

NewcoSms

service

Networkoperators

Phone Vendors/

manufacturors

Newco’s network Existing network for medicine prescription and refund

Client/users

€

Government pays

Shipping company for

service

Refund to patient

Prescriptions picked upPrescription to patient

Prescription and electronic card presented by patient to pharmacist

Presciptions delivered

Note: the Patient, doctors, and Pharmacies cooperate, but only the Shipping company earns money


Newco’s new idea– Plotting the Parties involved

Patient

Government

Pharmacy

Doctor

Company shipping prescriptions

Newco

Networkoperators

Phone Vendors/

manufacturors


Newco’s VAN – Plotting the Value > where is the win-win factor?

Patient?

Government ?

Pharmacy?

Doctor?

Company shipping prescriptions

Newco

Networkoperators

Phone Vendors/

manufacturors

Does the patient want this? What about older people?

Where is the win for the pharmacy?What about existing infrastructure/investments?

What is the lobbying powerof this company? Will they sit andlet their business vanish? Can they develop them-selves? > Is Newco’s knowledge unique?

Does the doctor want this?Can the government force this upon the doctor?Where is the advantage for the doctor?

Will they sell more? What value can they addto the network?

Will government pay for text messaging? Is this more profitable?

More phone traffic =additional value

Revenue sharing with operators?


Conclusion – Newco’s idea is unlikely to work

• The value network can only exist when all parties involved can extract value and benefit

• More research and negotiation would be needed for this venture!


Example 2– News re-distribution

• Idea: to collect and redistribute content

– User generated content

– Re-use of content produced by other news providers

– Re-bundle this to the specific demand of the customer

• Advertising model


Elements of the News re-distribution VAN

Players:

• Content?

• Network?

• Software?

• Hardware?

Relationships:

• Where does the value flow?

• Where does the money flow?


News re-distribution VAN

Newssite

Network operator

Users

News

Technology

providers

Advertisers

Hardware

Content providers

users

Create new access to consumers

€/£ Users provide content for free and sometimes pay for content

New platform to post news in return for money

Paid by News site and Users

Facilitation ofNetwork/pay per

traffic

Red = non-monetary value flowGreen = monetary value flow


Conclusions: this model may have possibilities

The “Win” is clear for all parties involved• The User can express himself by adding personal content• The User has access to specific content (whether paying or not)• The Advertiser obtains new channels to communicate• The network Operator obtains more traffic, sharing value with news site• The Technology (software) providers and hardware providers do not take part in the indirect

value sharing, but maybe they could?

Money streams are also clearer than for previous example:

• From operators, advertisers and users to news site

• From news site to technology and hardware providers

• From users to operators and hardware providers

Interdependency mechanisms are leveraged:

• Without users, there is no content

• Without content, there is no traffic

• Without traffic, no advertisers Working together is essential to create momentum and value


Example 3: Pushing it further… creating a pull effect: Woowoo

• Woowoo was a venture founded to commercialise disposable eclipse protection glasses* during the last total eclipse of the sun in Belgium

• The paper frame could be used for colourful prints or advertising• Lead time for manufacturing the glasses was a minimum 6 weeks

– obviously being ready one day later than the eclipse would mean a total loss of the investment!

– But placing the order before the team worked out how to sell and via whom exactly was a big risk too!

* Paper sunglasses with a strong protection filter for watching the eclipse without suffering eye damage


Woowoo: First ideas1. Sell the glasses to big companies as:

• A gadget gift for clients or an add-on with other products, e.g.: a crate of beer comes with a pair of glasses

• VAC: Production > Woowoo > Big Consumer Goods Companies > Consumers

Problems with this model: » Research showed that marketing budgets at these firms were fixed

a year in advance. This meant that no new expenses were possible at short notice

» Long sales cycles would prevent Woowoo from making a deal before the eclipse took place, and funding an in-house sales operation would erode margins

» Prices proposed exceeded the prices these companies were willing to pay for a free gadget


Woowoo: First ideas 2

2. Sell via large retail chains (department stores)

• VAC: production > Woowoo > Retail > consumer

Problems with this model:

• Very low margins

• Low bargaining power for Woowoo

• Power of the retail companies!


Woowoo: First ideas 3

3. Sell the glasses via paper and bookshops

• VAC: production > Woowoo > Bookshops > consumer

Problem with this model:

» Shop owners not interested

» Dispersed distribution


Woowoo One step futher: creating a VAN with pull effect

• Woowoo came up with the idea of working with pharmacists.• They contacted the Belgian Association of Pharmacists, who represent most

pharmacists in Belgium. • The Association had good communication and channels with individual pharmacies,

and good insight into their associates’ needs and benefits.• Pharmacists, Woowoo discovered, want to get as much traffic into the pharmacy as

possible. They make a big slice of their sales from non-prescription products, such as cosmetics, and margins on these sales is good, because people will pay more for such products in a pharmacy than at other outlets.

• These sales are mostly “impulse sales”; people buy something they see in the pharmacy when coming there for another reason. Therefore, any reason to have people entering the pharmacy is a good reason.

• Putting the glasses in the Pharmacy as a single point of sales would provide this pull.

• Via this partnership with the Association, Woowoo gained immediate credibility.• This activated another leverage mechanism: national television was now interested

in giving coverage to the Association of pharmacists and to Woowoo, to talk about the eclipse and eye safety, on primetime, for free.


Woowoo: a successful VAN

The combination of Woowoo, the Association of Pharmacists and National Televisioncreated an enormous pull effect, and created value for all partners:

• TV received an interesting topic to cover• Woowoo (and the pharmacists ) received free publicity (compared to a “push

approach”, where Woowoo would have faced a £25,000 bill for one single TV commercial)

• Pharmacists received a massive amount of additional clients, who would buy all kinds of additional goods at the counter

• Woowoo received credibility via the pharmacists, which allowed for TV coverage + a very cheap and efficient sales channel, that did not take up a lot of the margin (because the pharmacists’ interest was in extra sales and more traffic in the shop, and people don’t mind a higher price when buying from a pharmacy)

• Woowoo sold all the glasses it had available• Just a pity they did not produce more of them!


Woowoo VAN

WooWoo

consumer

Channel &Credibility

Extra client traffic

Prime Time Coverage

Story€

Double money stream!€

Pharmacies


Example 4: Mobixx

• Mobixx developed a technology platform for transcoding web content for handheld devices and mobile phones

• The technology makes sure anyone will see a mobile page that is sized and adapted to his/her specific device/phone


Mobixx

How to make revenue?

• Sell it as a tool to web developers via a website, and make revenue per website transcodes or per click?

» Problems This takes forever Requires vast marketing and communication investments Requires vast additional technological investments

• Sell projects to large corporations via direct sales?» Problem

Hyper long and costly sales efforts


Mobixx: create a VAN with pull effect

• Offer the technology for free to the technological community

• Gain credibility

• Only start charging when large accounts start demanding the technology

> they will usually not use critical software without a license

• Advantages» No marketing effort…» The technological community creates a pull effect by introducing

the technology


Mobixx

Mobixx VANTechnological Community

Clients

1

2

3

Free software = fun for wizkids + small clients for free

Introduce theproduct/technologywhen providing adviceand services to larger accounts

Pull effect license sales

Mobixx VAN


Conclusion and deliverables

• Whereas a Value Chain analysis is a classic business strategy exercise to understand the flow of monetary value and bargaining power between your business, your direct industry players and your end users

• A Value Network builds on this idea and is characteristic of newer business models where other kinds of value are seen as creating marketing and customer ‘pull’ toward the business, with everyone in the network getting some benefit (‘win-win’), even if it is not monetary

• A clear and effective Value Network concept can strengthen your business proposition considerably; you should aim to build this thinking into your business Value Proposition as much as possible in this IED Stage

• To do so often requires some creativity and lateral thinking, often beyond the obvious boundaries of your specific industry: if you are trying to come up with value network ideas, use the Herman Creative Problem Solving method outlined in the ‘Idea Generation’ activity in the IED Dashboard


References and suggested further reading

• Allee, V., 2003. The Future of Knowledge: Increasing Prosperity through Value Networks. Butterworth-Heinemann, Ch. 11-13.

• Allee, V., 2000. Reconfiguring the Value Network. Journal of Business Strategy, Vol. 21, No. 4, Jul-Aug, p. 36-39.

• Normann, R. and Ramirez, R., 1993. From Value Chain to Value Constellation: Designing Interactive Strategy. Harvard Business Review, Jul-Aug.

• Stabell, C.B. and Fjeldstad, Ø., 1998. Configuring value for competitive advantage: on chains, shops and networks. Strategic Management Journal, Vol.19, 413-437.


Date post:	06-Aug-2015
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Tse value network_2014

Economy & Finance