Your product value chain mapped
How to create a visual representation of your or your competitors' products' value chains.
I’m back from Copenhagen where I spent a week marveling at how beautiful and prosperous the city is. I went for a run on the sidewalks and streets laughing with a thousand people on bikes while we all shielded our eyes from the rain.
Also welcome new Nordic readers! I’m so happy to have met you. The Nordic Fintech Week conference was amazing.
What you’re about to read is week three of a series based on the market analysis course I’ve been taking with Nathan Baschez of Every. If you would like to catch up from the start, the first post begins with the Jobs to Be Done framework.
I’ll be writing about the Divinations Market Analysis Workshop for two more weeks. Subscribe to make sure you don’t miss one.
Your business represented as a value chain
In this week’s class we took the ideas from the first two weeks, Jobs to Be Done and the Basis of Competition, and used them to help us understand a new idea from Michael Porter—the value chain.
Without already knowing those two ideas, the value chain would have been difficult because Porter says that the value chain is all the stuff that a business does internally that is strategically relevant. Well how the hell do we know what the strategically relevant stuff is? By knowing the Jobs to Be Done and the Basis of Competition. If the business activity is relevant to either of those two things, then it is strategically relevant.
As you read this, you may already have some cognitive dissonance. I just described a value chain, and it might not be what you already had in your head. You might have been thinking of a value chain as something like a supply chain where different businesses are doing different parts of producing and distributing a product. That is not it. Value chains are internal to a business. So in a software business, value chains are likely to be things like marketing, sales, customer onboarding, and then the actual things that the customer does with the software to extract the value that they want from the product.
In the class we dissected the value chains of word processors like Google Docs and Microsoft Word, and they looked something like this:
Show text with nice formatting
Collaborate with other writers and readers
Comments / Track changes
Pdf, print, .docx, .txt, .html
Engineering and design recruiting and management
Continuous integration/ devops / site reliability engineering
See that part that I put in bold? I put it in bold because those are things that the software does for the user. The software features are part of what the overall company does to create value for users. We split them out because they are things that matter strategically. They represent Jobs to Be Done, for example sending contracts to to a lawyer for redlining, and they also represent the Basis of Competition because people often choose Google Docs vs Microsoft Word based on weather they want to collaborate in real time or to work completely offline.
There’s one other concept in the value chain to understand: primary activities vs supporting activities. All the activities that the company does are part of the value chain, but primary activities are part of a sequence of events that delivers value. So for Google Docs you might have:
make an account → create a new document → share the document with a friend via email → collaborate on the document simultaneously
Supporting activities are activities that the business does that are not directly in that chain of value but still are strategically relevant. Again for Google Docs you might have:
Recruiting developers, writing code, defining product requirements, etc.
That’s it. This was a lot of explaining for something that might be quite intuitive. Defining a value chain is just listing all the things (activities) a company does at a level of granularity where each thing in the list matters to the business strategy. Remember how Microsoft Word used to have lots of menus and switched to the ribbon?
Does that matter to the business strategy? I would say probably not. The ribbon probably isn’t essential to the Jobs to be Done and probably also ins’t a basis of competition (whether or not the UX people at Microsoft see it as such).
A value chain for Buy Now Pay Later
Now that I’ve paraphrased Michael Porter’s value chain, let’s bring fintech back into the picture. I’m going to leave behind the secret purchasing product that I had discussed in the first two versions of this series because it’s too hypothetical for a value chain analysis. Instead let’s do a value chain analysis of a typical buy now pay later (BNPL) service.
Remembering that the Jobs to Be Done of the service are to let me, a purchaser, buy something with money I don’t yet have or buy something online without adding to my credit card balance, what goes on inside the company for me to receive this value?
Some customer qualification happens so that they can tell I’m not a deadbeat. A new account gets made, and a short term loan is opened in that account. The merchant gets paid the money they’re owed which causes them to ship the product (that bit about them shipping is downstream—a part of the value chain of a different company). Then the BNPL service collects my payments as they become due, and probably has another process that they do in the case that I don’t make my payments as scheduled—including making sure that I don’t get to use their service anymore.
Let’s list these as primary and supporting activities:
Qualify customer for loan
Create a place where the customer can view and manage their loan
Pay merchant amount owed
Collect loan payments
Perform regulatory and compliance activities
Track non-payment to prevent abuse and fraud
Engineer/design recruiting and management
Continuous integration / devops / site reliability engineering
Each of these activities is an opportunity for competition and differentiation. Since we’ve selected the activities at a level that matters to the business strategy—specifically the Jobs to Be Done and the Basis of Competition, then we know that cranking up the quality on any of these activities will have a material impact on our business. It matters if we create the best loan qualification experience in the world. It matters if we get merchants paid faster and more reliably than credit cards.
Upstream and downstream of the value chain
Now that we can create a value chain internal to the company, it’s time to add other players in the market that are upstream and downstream from our company so that we can visualize a value stream.
The receiver of value is downstream of our product, and the things (ingredients / raw materials) we need to create value are upstream.
In my BNPL example, if we use a third party’s application to do regulatory checks like Know Your Customer (KYC), then they would be an upstream provider. The merchants that have the goods and services that people want to buy are actually creating the supply side of the BNPL market, so they’re also upstream. The customers that are receiving the loans are downstream because they receive the value of the product—they get the benefit of not having to save up money and wait to buy something they want right now.
I made a diagram of this value stream with the value chain of the BNPL company extracted out.
If you’re like me, you might look at this map and wonder how you can use it to make business decisions and what it has to do with strategy. Nothing yet. We can all agree that improving the things in the value chain will improve the business, but picking which things to put our effort into is the strategy of the business and we’re not there yet. That’s what’s to come next week. In the mean time, let me know if you’d like to do this exercise with your own business.
Avoid being confused
Oh, one other thing. I ran into a bit of confusion after the class was over last week, and I think if I explain it to you, I can help you avoid it.
After the class we were talking about the primary activities for a YouTube video production company. And at one point I got wrapped around the axle thinking of YouTube as both upstream and downstream of the company.
Nathan was like, "No no, don't you see that the video creator is upstream of the video distributor?" At which point that felt so obvious that I didn't know why I was thinking of them on both sides of the value chain.
But on further reflection I realized I was using a pattern that I picked up earlier in the class. When we talked about word processors, we were putting ourselves sort of in the minds of the product managers and imagining all the features our software did to create value for our downstream users.
And when I was imagining the YouTube video production company, I was imagining they were going to go get advertising partners or do marketing, so they would need to log in to the YouTube Channel dashboard where they would get a bunch of video performance metrics. And then I imagined the YouTube product managers making features with people like them in mind as their downstream customer.
But that’s not the way to think about it. The value chain might have some features that send value up or down the stream, but the overall directionality of the entire chain is what determines who is really upstream and downstream of the company. In this case, YouTube is firmly downstream of content creation. Hope that helps!
That’s it for week 3 of my fintech focused writeups of Divinations Market Analysis Workshop. Thanks for sticking with me through this. It’s a bit specific and I’ve lost a few regular readers going this deep, but I’ve learned so much about business strategy in such a short time, so I’m super pumped to use this on all the new startups I encounter. For the people that have stayed with me, please let me know if you have questions or if this is useful.
Thanks, and see you next week!!