Value Network Analysis Helps Entrepreneurs Identify Partnerships

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 Kiefer

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 member
e.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
Doctor
Company shipping
prescriptions
Newco
Sms
service
Network
operators
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
Network
operators
Phone
Vendors/
manufacturors

Newco’s VAN – Plotting the Value > where is the win-win factor?
Patient?
Government ?
Pharmacy?
Doctor?
Company shipping
prescriptions
Newco
Network
operators
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 power
of this company? Will they sit and
let 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 add
to 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
News
site
Network
operator
Users
News
Technology
providers
Advertis
ers
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 of
Network/pay per
traffic
Red = non-monetary value flow
Green = 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 ideas
1. 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 Television
created 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
Wo
oW
oo
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 VAN
Technological Community
Clients
1
2
3
Free software =
fun for wizkids +
small
clients for free
Introduce
the
product/
technology
when
providing
advice
and 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.

Value Network Analysis Helps Entrepreneurs Identify Partnerships

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