Reassembling the Value Network for Business Model Innovation

A company never creates value in isolation. There are always other companies involved in some way to realising and delivering the final product for the customer. Such value chains of companies optimise connections on their complementary capabilities, which enables each to focus on what they’re good at.

The composition of a car is a good example here. Car manufacturers design, and assemble cars under their own brand. But all the parts required for assembly come from different suppliers (for pistons, suspension, braking technology, seat manufacturing, etc), and distribution & sales of the car to the final customer is done through networks of car dealers.

Value chain analysis is great for supporting business as usual. However, when you need to shift your business to a seemingly similar, adjacent customer segment (as is often case in today’s turbulent business environments), the value chain’s usefulness breaks down. The solution lies in framing partnership relations in a different way, as I’ll explain in this article.

The Functional Value Chain
Value chain analysis is a great way to understand production systems. You sketch out the value chain for the product from its origin to the end consumer. The value chain shows the companies involved in value creation, and the sequence in which value creation is achieved.

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The linkages in the value chain can be used to describe the relation between each company in that chain. The value chain is a great tool to examine how and where value is created, and where the risks in the production system reside.

The Disfunctional Value Chain
The value chain approach works well for analysing very formalised, industrial production systems with a clear hierarchy in the organisation of production. But the knowledge that comes from analysing the value chain gives an elusive sense of control about the ability to actually change a production system.

The instant you want to focus on a different customer segment, or change your value chain, because a partner role is not contributing value (or has become obsolete) you start sensing the illusion. Change takes more than replacing some of the mechanics in a sequential production system.

When changing your company, and changing the value chain with it, you see that in reality you are part of a complex, highly interdependent, nested production network, that is designed to drive value creation towards a very narrow purpose.

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Attempts to focus on a customer segment outside of the scope of that system flushes up restrictive dependencies, and the configuration’s immune system will have you ousted, rather than change with you. You’re on your own!

This is what Unilever experienced with the recent hostile take-over bid from competitor Kraft. Though Unilever, and its customers are on a change route to sustainable consumption, shareholders remain with their demand of maximising shareholder value. The Kraft bid showed how Unilever has set each foot in a different value network, and that this inconsistency can painfully split a company.

Changing Partner Relations
Professor Tim Kastelle said it well:

“not only do our end users have to prefer our idea, but we also have to get others within the value network to stop using [and supporting] our competitors”.

In order to change your business model to serve a different customer segment, you need to draw in partners involved in other value networks, and lure them to investing resources into yours.

To achieve this, the perspective on partnership relations needs to shift from that of value chain efficiency, and scale, to that of value network discovery, and growth. This entails that partnership relations shift from tweaking business model efficiency, to a joint search for creating, delivering, and capturing new value.

This shift can be seen in Amazon’s partnership with an air freighter. It’s not that existing value chain partners like UPS, and Fedex aren’t able to work to the particular requirements  of Amazon’s operations. It’s more so that Amazon’s B2C customer segment is adjacent to UPS, and Fedex’s existing core B2B customers. They have different demands regarding delivery rhythms, volumes, and shipping rates than Amazon’s customers.

The Business Model, and Partnership Canvas: Tools that change Perspective
The objective is to define the logic of tying 2 business models together in an exercise of joint value creation. Search is required to figure out how you can collaborate in such a way that both your, and your partner’s business benefit from this new value.

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Partnership Design, which is based on Alexander Osterwalder’s Business Model Canvas, and my  Partnership Canvas, provides a way for achieving this. Partnership Design frames partnering as a business model innovation challenge. It brings focus to value inputs that partners can respectively bring to the table to jointly create a new form of value for delighting customers.

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By focussing on the potential of synergy between value offered, and value desired from each partner, discussions on relationships are framed around the merit of their creative potential. It allows thinking to escape the trap of conventions of efficiency in partnership relations, and upfront disqualification of new linkages due to differences in company size, market power, and assumptions about where industry boundaries lie.

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By looking at your partners one-by-one, you can start to gradually reassemble your value network, around a new customer segment.

The Business Model, and Partnership Canvas help teams to quickly flesh out key hypotheses. These need to be tested to verify whether the new relationship will add value to both their partner’s, and their own business model at the same time.

Continue the exercise for all the partners that you’ll need to build the value network, and watch the ripple effects change an industry!

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Transfer activity in partnerships: providing mutual access to each others business models

One of the most frequently recurring questions I get during partnership design workshops is about the transfer activity: “What is it? Can you give me an example?”

In this blog post I will therefore dive a bit deeper into this building block. Firstly, I will describe a bit about the building block’s background. Then I’ll describe what the crucial role is of the transfer activity in distributing value between partners.

Background on transfer activity.
Partnerships enable the access, and flow of resources between partners (Mowery et al. 1996). Part of creating this flow is based on synergy between the resources that partners bring in: what’s their polar attraction, and how strong is it? The other part comes from building the conduits through which partners can connect these resources. How will they provide each partner with access to the resources, and enable them to create value with the partnership. This is where the notion of transfer activity comes in.

Transfer activity describes how exchange of knowledge, technology, and other value elements between partners takes place. Transfer could occur in the form of in-person collaboration between people from both sides of the partnership. It could also be in the form of a more structural (technology) platform where partners can access resources independently, based on prior agreement in their partnership designs.

An appropriate metaphor would be to use a certain stage in a relationship between people. Say you’re taking your relationship to the next level, beyond just dating, and you’ll be inviting each other over to your houses frequently. Now the questions is how will you let each other in? Will you exchange copies of the key, or will it be a string through the door at agreed times? Both provide access, but the nature of the transfer is very different, and important to understand, and agree upon upfront.

Distributing value in a partnership through the transfer activity
The transfer activity has a key role in the partnership. There’s a reason it’s positioned in the middle of the Partnership Canvas (see diagram below). Essentially it has two functions. Firstly, transfer activity connects the value elements that partners put into the partnership. Secondly, it enables the creation of the new form of value that each partner takes back to his or her own business model. Lets look at both of these roles a bit closer.

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A full overview of a partnership with the Business Models of both partners (rectangles), and the Partnership Model (triangles) with the Transfer Activity (highlighted)

The first role of the transfer activity is to connect the desired assets with the value offer. There are two general approaches to set up this mode of transfer:

  1. Interpersonal collaboration.
    In this case your partnership depends on joint coordination and decision making a lot. An example of such a partnership is Nespresso and its machine manufacturers, like Krups and DeLonghi. Their collaboration depends on joint design of (new) machines, and setting up the appropriate marketing that fits both of their channels.
  2. Access via specifically structured technology
    Many information technology partnerships use rule-based transfer activities. Partners define the access that each can have to data, and other forms of IP through agreements on access permissions, and use. In a collaboration like Lyft and Didi in China you’ll see such a transfer activity. Lyft users can hail Didi taxis in China through use of the Lyft app. The transfer activity is an automatic transfer of the order from one system to the other.

When designing options for this transfer, it is important to also take a temporal consideration on the exchange of value. Will the transfer be a frequent, and recurring activity? Or is it more likely going to be a limited and short-term action?

These questions help point to a critical aspect of duration for the partnership. In the case of frequent, and recurring interaction, partners remain dependent on each other for value creation, like in the examples of Nespresso and Lyft above.

In the latter case of limited, or short-term collaboration, dependency expires due to gradual learning and other forms of value appropriation that takes place on both sides of the table. The Tesla-Toyota partnership is a good example here. This partnership expired when Tesla internalized the process of mass manufacturing for their Model S, which Toyota engineers helped them get started with, and Toyota engineers learned about Tesla’s battery technology.

The second role of the transfer activity is to create a new form of value, which can be inserted and activated in each partner’s business model. Taking the examples above again, the Nespresso transfer activity would create the offering of the Nespresso machine as part of the value proposition. Also, it helps create the content that will stream through the partners’ market channels. In the case of Lyft and Didi, the partnership gives Lyft an extension of their active geography to their existing users. For Didi it means a new channel, tapping into a new customer base of travelers coming from the US to China.

What I see happen a lot is that partners define synergy, and then tend leave their partnership designs at that, assuming everything else will fall into place after. They neglect to define how they will actually grant each other access to each others resources, and how they will create the actual value that is needed to run their business models better. They’ll likely be confronted with the problem of deciding how to exchange value and differences in perspectives on that, very late, if not too late, in the game.

So, setting up a solid mode for transfer activity, and addressing this discussion early on in the design process is crucial. Take time in the dialogue with your partner to figure out the transfer activity, and make sure that you understand from each other how you will collaborate in your exchange of value.

Literature reference:
Mowery, D., Oxley, J., and Silverman, B. (1996) “Strategic Alliances and Interfirm Knowledge Transfer”, Strategic Management Journal, Vol. 17 (Winter Special Issue), p. 77-91

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