What is it?
The value chain describe the different activities that are conducted in order to deliver an end product or service to a customer. These activities can be conducted within one company – this is the internal value chain, or activities can be conducted by other companies – the external value chain.
The external value chain has
- Suppliers – there can have various levels – e.g. the automotive industry has Tier 1 direct suppliers, Tier 2 are key suppliers to Tier 1 suppliers
- Complements – customers may be buying a bundle of products that need to work together, requiring you to collaborate with complementary manufacturers
- Channels – channels are routes for your product to reach your customers.
- Distributors – Usually add value and are long term partners. They can actively sell your products, do marketing services to build the brand, repackage, customise, install, configure and even implement full solutions. Distributors can be very sophisticated, when they might be called Value Added Resellers, Systems Integrators or Prime Contractors.
- Wholesalers – usually just box movers, manage credit, break bulk. They add less value than distributors – in emerging markets there can be up to 6 tiers of wholesale, though this is not efficient.
- Retailers – for consumer goods products
- Customers – different types of customers can be reached through different Routes-To-Market
When is it useful?
Making strategy requires you not just understanding your competitors, but also the full industry ecosystem. Visualising it will help you see the key relationships.
It is useful to quantify the map -, indicating what % of the market flow through which routes to market for instance in order to highlight the key channels.
For more complex industries (e.g. platforms) mapping the ecosystem may be more useful than drawing a linear value chain.
The “whole product” picture is an alternative customer-focused perspective on the key partner collaborations.