What is a Value Network?
Outsourcing some of the activities and resources needed to produce a particular value proposition does not make those activities less important. In fact, in a well-optimized business operation each piece of the process, either produced internally or sourced to third parties, is assumed to play a critical role in your strategy (otherwise it would have been cut out already).
The concept that best captures the way a company’s value chain interacts with external companies in the creation of the business’s offerings in a synchronized fashion is the Value Network, an idea introduced by Harvard professor Clayton Christensen in his seminal book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.
Christensen defines a value network as a “collection of upstream suppliers, downstream channels to market, and ancillary providers that support a common business model within an industry”.
In other words, a value network is a kind of “ecosystem” of companies which has been optimized to support a particular value proposition.
The idea of an optimized ecosystem implies that the members of a value network are bound in some way by clear agreements and understandings (usually in the form of contractual terms), based on each party’s interest, which enable co-ordinated collaboration among them.
One of your goals as an executive of your organization is to create businesses that are supported by well-optimized value networks since, in the end, the final product our customers receive is the result of the work of the network, not just the business’s value chain.
Just like any other business relationship, the optimization of a value network requires considerations of a strategic nature since the performance and long-term sustainability of your business could depend on how these networks are structured.
Giving third parties too much control of functions or supplies that could become critical to competing in the future could put you in a difficult situation later on, since that third party will use their bargaining power to reduce your company’s potential profits.
An ideal situation is one where you secure access to key supplies and services without making unbreakable commitments that would prevent you from making a quick transition towards a new value chain architecture if needed.
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
Christensen, Clayton. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Management of Innovation and Change). Harvard Business Review Press. Kindle Edition.