Break the Chains of your Value Chain Analysis

If you’ve participated in a business school strategy or marketing class, chances are you’ve seen a Value Chain Analysis. It’s a tried and true template from B school. They’ve been around for decades and capture the way value is handed down in a manufacturing industry all the way to the end consumer. And that’s exactly the problem. They’re old and outdated, especially in the context of developed economies moving from products to services. And yet, many strategists are still chained to the value chain. Pun intended.

At Peer Insight, when we’re designing new service innovations, we’ve found the traditional VCA limiting in that it only tells part of the story, and works better in retrospect, rather than in forward thinking. It works for defining What WAS, it’s okay for What IS, and it’s poor at thinking about What IF.  For example, the traditional VCA allows us to look back at the diaper industry and at how Amazon innovated to disrupt it. 

At the top you’ll see the incumbent, prevailing VCA, handing value down from a diaper supplier, say Pampers, all the way to the end consumer, a baby. The value here is always the diaper, a product and you can easily track the way it travels along the value chain. It’s linear and simple. That made it easy for Amazon to see a way to disrupt* it. It vertically integrated to become the distributor and retailer (thanks to UPS and Amazon.com) cutting out middle men in the value chain, and bringing the customer closer to the product.  This fits neatly onto one PowerPoint slide and can explain, at a high level, the disruption Amazon created.

*Note this isn’t true ‘disruptive’ innovation by Christensen’s definition, but try telling that to K-Mart.

From Value Chains to Value __[your creative name here]__

The VCA still works well in a products context, but it falls short when thinking about services. Many B School scholars (e.g. Porter) have updated or elaborated upon the tool in attempts to keep it fresh, but they’ve only achieved incremental improvements. For breakthrough big changes, it took the hands and brains of designers. The D school community hasn’t seemed to land on a name for VCA 2.0, but one I like and that you’ll see often is “Value Constellation.”  First, I’ll share the steps of drafting a Value Constellation, and then I’ll share an example.

 
1. Plot your stars.

When thinking about your opportunity space, perhaps defined as a market or industry, first start by plotting out all your stakeholders, like stars in the sky. Don’t draw them in a line! You’ll want to work on a whiteboard or with paper and pencil for this exercise. 

2. Draw constellations.
Ask yourself: How are those stars connected? How do they serve each other? What value do they create for each other? What do they trade or exchange? Don’t forget to include emotional jobs here too! Find your Ursa Minor and Orion’s Belt.

3. Add more stars and constellations.
You’ll likely think of new stakeholders that sit at the margins of your opportunity space. What wasn’t involved last year, but is now? Who keeps an eye on these transactions? What adjacencies am I missing?

Uber’s Value Constellation

OK time for an example. At Peer Insight, we strive to work in a quick, scrappy and visual way, so here’s my rough pass at a Value Constellation for Uber. Right away you’ll notice a few things: There are several stakeholders, a variety of ways they create and exchange value, and there’s no chain!

Riders pay drivers for trips. That one’s pretty simple and sits at the heart of the business model.

Uber creates value for the user or rider by making their trip to the airport seamless. They do this by aggregating supply (Ubers), streamlining payment and increasing visibility to the whole process.

I’m guessing you’ve taken an Uber before as a rider, so you’ve likely experienced the value it created for you, but what about for the drivers? Uber aggregates demand (riders/you) for drivers, making it possible for a driver to spend their day making drives (and therefore money) instead of searching for customers. In exchange they give a cut of their earnings to Uber.

In the top right, you’ll see this looks very different than the licensed taxi system in most states, where the rider pays taxis to drive them to the airport. Taxis are allowed to operate in their state or city because they pay for a medallion and a license from their state. That medallion serves as a brand indicating a minimum standard of quality to the rider. This system also allows the state to limit the supply or medallions and therefore taxis, making it a lucrative profession for taxi drivers and a big source of revenue for the city. Between 2009 and 2014 medallion prices reached a high of more than $1 million each in New York City. That is until Uber arrived and shook up the value chain.

Cities and taxi drivers are understandably upset about this and thus you’ll read all sorts of headlines about Uber getting itself into legal battles. You could show more value creation arrows by adding stakeholders such as lobbyists, politicians, unions etc. making the constellation that much richer. You’ll have to balance that complexity against the scope of your project.

Hopefully you can already see that by abandoning the value chain in favor of a constellation, you can discover a much more dynamic and inclusive understanding of the value created and exchanged in a services context.