The Value Chain Revolution

What the advent of a connected value chain means for your business.

In a previous article, Innovative Products to Innovative Solutions, we explored a world where consumers would expect much more from the brands they trust.  This time, I wanted to more closely examine the dynamics that are making this real.

So - consider a typical value chain – it will be made up of several businesses, each which contribute to the value of the final product.  They each play their role, and also build a connection to those adjacent in the chain.

The challenge for such an array of contributors is to work together as efficiently as possible, while at the same time competing for a greater portion of the overall chain.  Independent organisations such as GS1 and industry self-regulators have emerged in an attempt to minimise waste.  These groups together moderate the balance between competition and connection by defining standards that drive efficiency and prevent competition that might damage the industry.  Still however, waste is prolific throughout the value chain.

Waste is defined as processes which consume more resource than necessary when adding value to the final product.  Waste has most famously been categorized by Taiichi Ohno.  Muda, or Ohno's Seven Wastes

One of the key reasons for this waste is the gap between each contributors’ perception of value and the reality.  With the data flow interrupted at every stage of the value chain, it is almost impossible to accurately determine what is actually desired by the consumer.  Each contributor must somehow engage the consumer directly.  This is inefficient and therefore expensive.

Each business contributes value to the overall chain, eventually resulting in a product that is consumed

As we move more into the Information Age, a new type of business has emerged – that of the connector.  As they embed themselves more into our society, so does the role of the traditional business need to change. 

Connecting functions of traditional businesses are no longer required, and so those businesses need to adjust their operations to focus solely on contributing value, not connecting consumers to that value.

Essentially, each business will become either a contributor or connector; contributors are those that create the value, the connectors are those that disseminate it.

In this connected value chain, a direct interface is enabled between all contributors and the consumer.  This means that not only can the connector ensure that the consumer is connected to the most appropriate contributors, but also that the contributors can specifically address the desires of that consumer.

As a result waste is reduced significantly.  Much more so than could be achieved with a traditional value chain.  Contributors are able adapt their offerings to perfectly match each consumer. 

A new type of business now connects the value chain, not creating value itself but enabling it

Consider ebay – they simply create connections, between buyers and sellers.  Airbnb, uber – these may be more specific in execution, but not in principle.  Although the commercialization is not so obvious, Google does the same for information, facebook for social interaction.

The end result of this is that a whole bunch of stuff embedded in an established contributor business is no longer an asset, and as such has become a liability.

For new players, it’s not a problem.  They just don’t add any of that stuff in the first place.  Most of that stuff is what used to make it hard to enter an industry.

Uber is a great example of this.  To provide private vehicle transport where uber is available, you don’t need anything more than what most people already have – a car and a phone.  The barriers of entry into this industry are now incredibly low. 

For the incumbent taxi firms things are not so easy – each cab is riddled with expensive hardware, payments, navigation, radio, lights, and they cannot easily be repurposed.  Think about the reason for that hardware for a moment – they all enable specific connections.  The bank for payment, the mapping for navigation, the radio to take on bookings – even the light on the roof is to connect with potential consumers as they drive by. 

Those items were necessary to enable the value chain, even though they didn’t add value for the consumer.  With the connected value chain, they have become a liability that do not provide an advantage.

This situation presents a real danger to any entrenched business – an environment where the barriers to survival are greater than the barriers to entry. 

The result is rapid and disruptive, a genuine revolution. 

Find out how to prepare in the next article.