The Value Net Framework

Analyzing Business Relationships

Introduction

As you’ve probably noticed throughout life, not everything can fit perfectly into a template. That includes our frameworks! Not every situation you come across will be able to be slotted directly into one of our frameworks. 

If you’ve read our post on Porter’s 5 Forces, you may have noticed that the framework only accounts for a single competitor in your industry, which is often not the case. While useful, the Porter’s 5 Forces framework is not a fully comprehensive framework, and can leave out potentially important elements when making business decisions. 

This is where the Value Net framework comes in. Different forces in your industry or market (such as suppliers and competitors) can work together, creating brand new opportunities and threats for your business to handle.

The Value Net framework applies to any industry when making strategic decisions, because the same (or similar) driving forces exist in all markets and industries. 

In this post, we’ll be going over what the Value Net Framework is, how it’s different from Porter’s 5 Forces, why this framework is important, an example of when the Value Net Framework is used, and how you can use this framework to enhance your business decisions and strategy.

What is the Value Net Framework?

The Value Net framework takes Porter’s 5 Forces and looks at them through a more comprehensive and ‘real’ lens. By including interactions between the forces, the Value Net framework can account for situations that would be otherwise left out of Porter’s framework.

As shown in Figure 1, the Value Net Framework is able to draw connections between the different forces of Customers, Complementors, Substitutors (Competition), and Suppliers, that can affect your Company either positively or negatively.

Value Net Framework
Figure 1: The Value Net Framework

Each of these forces presents potential opportunities for cooperation with your business, including the competitors. Adam M. Brandenburger and Barry J. Nalebuff wrote a book called ‘Co-Opetition: A Revolution Mindset that Combines Competition and Cooperation‘ that combines the notion of Game Theory with business strategies. They derived the Value Net framework from the idea that cooperation between competing firms can produce amazing results unseen by purely competitive markets.

Now let’s go over the components of this framework:

Customers

Customers are a fairly straightforward player in the market, as they are the people, firms, or other entities that purchase your product or service. Customers ultimately determine the success of your business, with more customers bringing in more revenue. Customers are generally either wholesalers or retailers who will eventually sell your product to the end-consumer, or the end-consumers themselves who buy directly from you. The Porter’s 5 Forces framework labels this party as Buyers.

 

Competitors

Competitors are the other firms in your market that are trying to take away your market share are customers for themselves. They probably offer similar products or services to yours, and direct their marketing efforts at the same group of people that you do. 

Sometimes, Competitors are viewed in a very narrow lens. This can be detrimental to your business as you may fail to consider certain Competitors that are stealing your market share. For example, let’s say you run a gas station. Another gas station across the street would be an obvious example of competition, but what about the transit system in the city? They can all fill the same need for day-to-day travel, so when people take the transit system rather than use their car (and burn their gas), they have less of a need to spend money at either gas station.

Traditionally, Competitors are seen as those companies who compete head-to-head with one another for the same piece of the market. However, it is very feasible as mentioned above to work in cooperation with a competing company. Let’s go back to the gas station example, and say you talked with your competitor to start buying your windshield washer fluid at a given price. This can effectively create a negotiation tactic through bulk purchasing to have the supplier sell to you and your competitor at a lower price per unit.

 

Suppliers

Suppliers are the companies that provide your business with what you need to produce and sell a final product to your Customers. They are one of the most important external forces in the market, because you have to consider their ability to raise prices or reduce the quality of their products. This directly affects your offerings, so it is very important to keep good relationships with your suppliers, and consider mitigating your risk by having a network of suppliers to choose from for any given product.

 

Complementors

Complementors represent the largest difference between the Value Net framework and Porter’s 5 Forces. They’re also one of the most commonly overlooked aspects in business environments! 

Complementors are defined as other companies that offer products or services that work well in tandem with your own product or service offerings. You can think of their offerings as complementary to your own, hence the label of Complementors. A good example of a Complementor is the pancake company to your maple syrup company, because who eats pancakes without syrup?

Because Complementors aren’t referenced in Porter’s 5 Forces, but are an extremely relevant component of the business environment, they are sometimes referred to as ‘the sixth force’.

 

Why is the Value Net Framework Important?

When you are making a strategic decision, it is important to consider the Value Net Framework because of the added analytical depth provided by the addition of “co-opetition”. In general, business is thought of through the lens of “splitting the pie” where everyone is fighting for a bigger piece of the pie. The Value Net Framework encourages the idea that you can “grow the pie” rather than split it. By growing the pie, even if your market percentage remains the same, your overall gain will increase at the same rate as the pie, so to speak. 

By considering the option of competitors working together, you can prepare yourself to pivot from a zero-sum mindset to a win-win situation. Instead of spending your resources competing with other players in the market, you can formulate solutions that benefit all everyone involved.

 

The Value Net Framework in Action

Let’s say you own a grocery store focused on selling healthy and organic food. Company Y is a competitor that has managed to fill their shelves with competitively-priced microbrands to increase their appeal to the target market, and has taken a significant share of this market from your company.

Using the Value Net framework, you can analyze the possible market elements that could be giving Company Y their competitive advantage, and how you can remain competitive and take back your market share.

By analyzing the suppliers used by Company Y, you realize that there are significant advantages to using smaller suppliers and securing exclusive supplier contracts. Company Y was working with their suppliers to secure a higher sales volume for both companies. The two main advantages of this strategy is the creation of a monopsony, allowing the buyer to have significant control of the price, and the perception of the products being more healthy and high quality, since small-scale production is seen as exclusive and artisanal.

By figuring out that Company Y was using monopsony tactics with their suppliers, you are able to either contact lawmakers about anti-competitive practices, or create a duopsony by reaching out to the suppliers, thus allowing for competitive practices to be reinstated between you and your competitor.

 

Using the Value Net Framework

When using the Value Net framework, it is important to remember that the framework itself is not all-encompassing, so you must consider other factors as well.

One such thing to consider is that while the Value Net framework is broader and more comprehensive of factors in the business environment that influence decision-making than Porter’s five forces, you can still implement Porter’s 5 Forces when analyzing singular entities to gauge their level of influence in your market. 

Secondly, you have to account for the non-linear nature of this framework. Because there is not a clear structure from point A to point B, circular thinking can become a problem that leads to ‘paralysis by analysis’ where you get overwhelmed by analytics. By considering this possibility with your team, you can recognize when it starts to happen and pull the group out of it to keep moving forward. 

That being said, the original creators of this framework recommend using the PARTS methodology when using a Value Net, which comes from Game Theory. PARTS is an acronym that will help you identify and analyze all elements of the game: Players, Added Value, Rules, Tactics, and Scope.

  • Players

    • Who are the players in the game? Divide the players into either Customers, Competitors, Complementors, and Suppliers. Are there any opportunities for cooperation or competition with each of these players? Is there another player that you could strategically partner with? How many new players might join the game? If new players join the game, can you use that to your advantage or is it best if competition is limited?
  • Added Value

    • Measure what each player brings to the table from their specific roles. Think about your own company’s sources of value (try using the Value Chain framework to analyze this). Are there ways that you could partner with Complementors or Competitors to add more value to Suppliers or Customers?
  • Rules

    • Every industry has rules and regulations, including yours. Most of the rules are enforced by the written law, and the rest are the unwritten conventions that you’re expected to follow. Who has the power to create and enforce these rules? Which rules might benefit your company? Which rules might be hurting your company? Can you change any of these rules by connecting with the right people?
  • Tactics

    • What are your available actions to influence the operations, strategies, and actions of the other players in the game? Are you able to send out persuasive messages to influence the perception of your company, thus changing others’ actions relative to your firm? For example, if you increase your marketing efforts, it could signal that you have strong faith in the quality of your offerings, or that business is good! You must figure out if being more transparent or opaque would offer the largest benefit to your business.
  • Scope

    • Most industries do not exist within vacuums. Instead, they’re linked to other industries either directly or indirectly. For example, the industries of computer hardware and software are directly linked, as you cannot run software without hardware, and hardware is not really user-friendly without software. What industries might already be linked to your business? How could you add value by linking your offerings to other industries?

Closing

Overall, the Value Net Framework is a very valuable tool to have at your disposal. It provides a more comprehensive look at the market you’re involved with, and highlights opportunities for collaboration rather than pure competition. 

Collaborating with other players in the market through the principles of ‘Co-Opetition’ can result in a mutually beneficial relationship through ‘growing the pie’ rather than ‘slicing the pie’. This allows a shift from the zero-sum game to a win-win situation!

By implementing the Value Net and the PARTS strategy, you can identify potential collaboration opportunities. Furthermore, by using this framework in tandem with Porter’s 5 Forces, you can better analyze which players in your market have the most influence to optimize your collaboration ventures!

In today’s market environment, it is very important that your company is agile and flexible, and strategic partnerships allow you to be both of those things while gaining new access to potential innovations. The Value Net Framework is a great tool to create and sustain a competitive advantage.

 

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