While spending some time recently in NYC, having gotten through all the reading I brought with me more quickly than expected, I decided to do a quick re-read of The Innovator’s Solution. It is the first place I can recall seeing “value networks” used in place of “value chains,” and so I began reflecting on the notion of value networks further.
“Value networks” suggests new complexity to creating what Geoffrey Moore calls a whole offering. Value isn’t created sequentially, in a chain similar to the assembly lines of the factory system. Value comes from multiple partners working in parallel value chains that assemble together into a larger network of value for customers. Think about the value of the iPhone that is derived from the phone itself, the infrastructure provided by mobile carriers, and the population of app developers.
Companies need to be comfortable operating in these sorts of large and complex value networks. They need to know where they sit within a given value network, and understand the relative position of their competitors and partners in theirs and other value networks.
Partner network development and management has become a business critical capability, enabling companies to take advantage of both open innovation and outsourcing and alerting companies to emergent opportunities and threats in adjacent markets.
It occurred to me that relative to its importance, little is available to aid firms in developing this competency. Managers and executives need tools and frameworks to help design strategically advantageous partner relationships and actively manage partner networks. While originally intended to help companies craft an open innovation strategy, the strategic openness matrix I started working on a few weeks back could help solve this problem.
Replacing research areas with capabilities, managers and executives could use the matrix to determine the capabilities most important to differentiation and competitive advantage (the so-called core) and those that are necessary but undifferentiated (sometimes referred to as context or periphery). Core would be targeted for internal investment while context might be outsourced to a more capable partner. Should the focal firm already be a leader in a “context” capability, offering that capability as a service to others may present an opportunity to launch and grow a new business (e.g. think Amazon Web Services).
What about selecting partners and designing (yes, willfully designing) the dynamics between partners? For that I have drawn inspiration from Osterwalder’s business model canvas and customer value map. I created what I’m calling (for now) the partner relationship map (referred to as “the map” for the remainder of this post). As with the strategic openness matrix, I am making this early version available under a creative commons license so that others might build off of and improve what I started.
The map is separated into three sections. On either side of the map are the sections representing the focal firm and the partner firm (which side is which is an arbitrary decision really). Each firm/partner is endowed with a unique set of resources and capabilities that it employs in the service of specific customers and according to identifiable business imperatives, all of which is reflected in the map.
The middle section represents the interface between the two firms. The interface is characterized by the level of interdependence and integration between the two firms. Two firms might be highly interdependent with a customized interface that approaches vertical integration. Of course, tight integration does not require mutual dependence (is Apple really dependent on any one developer for its iOS platform?), and such asymmetries create business risk that must be recognized and actively managed.
The inverse of a tightly integrated interface would be a modular interface, characterized by a high level of standardization that allows firms to easily swap out one partner for another (or be swapped out). Returning to the example of iOS, its noteworthy that from the perspective of the app developer, the app it is creating will only run on iOS and must be modified for Android, implying tight integration between the app and the platform. From the perspective of Apple, the interface is standardized so that any app developer can plug into the iOS platform. At the interface, perspective and directionality matters. To understand how, it helps next to consider the arrows going in either direction labeled value proposition.
Firms present a value proposition not just to customers but also to partners. In a partner relationship, there is an exchange of value, as reflected by the reciprocal value propositions in the map. The partner uses its resources and capabilities to offer some value in service to the focal firm’s business imperatives or in service of its customer segments. In return, the firm offers the same, perhaps most commonly in the form of a payment that serves the partners imperative to grow revenues and make a profit.
The value proposition of the firm may be appealing to lots of partners of the same sort (e.g. SFDC, Wal-Mart, and Amazon all offer valuable platforms to their partners) or only a few. The value proposition of the partner may, too, be appealing to lots of firms (think of outsourcers all the companies they serve) or only a few.
Let’s consider another case of a focal firm that has created a valuable platform which its partners can leverage to reach their customers. Facebook is one such case, with its partner Zynga. From Facebook’s perspective, it has created a modular interface, accessible to all sorts of partners, Zynga included. Facebook offers access to a large population of users who frequent the site. From Zynga’s perspective, the interface is highly customized; offerings have to be built or adapted in some way to plug into the Facebook platform specifically. Zynga enriches the Facebook user experience with fun games, but lots of other companies could offer a similar value proposition.
The partner relationship map can be used to identify these sorts of power asymmetries. They can also be used to come up with win-win partnerships that balance out the power and value propositions on both sides. I’d invite anyone who has gotten to the end of this post to try out the map; draw out one of your partner relationships or the partner relationships of an example company and reply in the comments with your thoughts on how useful the map is and how it might be improved.