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
Technology
Product
development
Production Marketing Distribution
UPSTREAM DOWNSTREAM
Copyright of Bart Clarysse and Sabrina Kiefer

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

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–
MEPorter, 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

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 players
If 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 simple
as 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 Players
and 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
Bars and retailers
Drinking experience
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 venture
Your power in the value chain is currently not large enough to make
the idea viable
More 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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