When we conduct our Grassroots Strategy workshops, a task on day one is to draw your value chain – the steps your offering goes through before reaching an end-user. In the business-to-business world, value chains can include different distributors, specifiers, installers and value-added resellers, all of whom can influence what gets bought by whom. We recommend looking at not just product flow, but also at how decisions and money flow up and down this chain.
Getting this structure on paper is a foundational step in understanding your market. One recent example stands out, where really understanding the value chain and the economics of the players held the key to a winning strategy.
This particular client made components for on-highway trucks. The product line we were focused on could be sold in several ways – as standard equipment on a new vehicle, as part of a “user-specified” configuration or installed as an aftermarket replacement at a truck dealer. The ultimate end-user was either a fleet or an individual owner-operator, but the entire chain was involved in the decision:
We realized that the chart was equivalent to a logic diagram with ‘gates’ that had to line up. For example, if sales could not convince the OE to include the product line as standard equipment, they would need to convince both OEMs and country level managers to include the product line as an authorized user configuration. But at that point, while owners could be persuaded to ask for our client’s product, if the dealer found it too difficult to configure (or if configuration caused delays), the dealer would usually talk him out of it.
As we talked through the market, it also became clear that the decision process and roles were quite different by OEM. At the time there were seven primary truck OEMs operating in Europe. Some drove all key decisions centrally, offering little or no opportunity for customization. Others were much more flexible, giving the country-level managers and dealers more autonomy for custom configurations and aftermarket replacement options.
Combined, these insights were critical in helping prioritize where to spend sales time. Previous efforts had been mostly around trying to influence end-users and their perception of value (ease of use, safety, lifecycle cost). But armed with this broader perspective, it was clear that some of these efforts were wasted – for example, preference would be irrelevant for a user who was locked into one of the inflexible OEMs (in the extreme, changing one component might even void the vehicle level warranty).
In addition, this insight helped surface new opportunities, like training dealers to use the configuration software and so removing a potential decision blocker. Using this insight to prioritize sales efforts turned out to be particularly critical for this client, whose salesforce was typically exactly one person per major country in Europe! Needless to say, they couldn’t afford to waste a lot of time calling on customers who would never generate an incremental sale.
As a general rule, you should periodically revisit the value chain for your offerings. Some things to look out for:
- Do different competitors and/or potential customers have different value chains?
- Are there channels that are gaining share at the expense of others (like e-commerce) and why are customers shifting?
- Are there alternative ways to create value for end-users that might bypass traditional channels?
- Are the economics of key decision makers changing in terms of search cost, switching costs, etc.?
- Are there influencers or potential blockers that may limit our ability to impact end-user decisions?
- Ultimately, are we spending our scarce sales time at the most important leverage points in this chain?
In summary the value chain exercise is a critical piece of the overall Grassroots Strategy logic and cannot be skipped. More importantly, a thorough documentation of not just product flow, but decision and money flow throughout the chain can provide key insights into the economics of the decision makers and influencers. On occasion, this can fundamentally change how we approach a market or even change our view of ‘who is the customer?’