Gameplay - Vertical Movements

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Preface

Each company, at a relatively low cost, can move either up in the value chain (easier) or down in the value chain (more difficult). Going after your customers or providers is usually possible when you have some sort of advantage, for example:

  • You are a master of Know your Customers and Think Small (in details). You know what does it take to run a specific service, and, what is most important, you know that you are on something that will increase demand for that service.
  • You have bigger bargaining power. Your provider or your customer will loose much more than you when you stop cooperating.
  • You know how to mine customer metadata (the ILC model).

Going After Your Providers

When you are fluent with Evolution and Value Chains, you can anticipate changes, and what I call change storms. A Change Storm happens when there is a fundamental shift how a given output is achieved, f.e. the invention of the Internet changed completely the way in which movies we want to watch are delivered to us. A replacement of one Value Chain with another one may cause some providers to gain power or gain access to new market niches. If they happen to be your provider, there is nothing that stops you from acquiring them.


If you know your product or a new class of products (1) will grow significantly (2), and increase demand beyond imagination for your provider (3), you may want to exploit this.

Note 1: A golden rule of outsourcing is to outsource mature components. Spotting opportunities below your position in the value chain is extremely difficult because standards and APIs isolate you from underlying knowledge. But it is not impossible.

Note 2: The distinction between this play and Gameplay - basic constraints is very subtle. In both cases you do acquire your provider, but intentions are different. If you want to move down the value chain, you hope to exploit a niche. If you want to play constraints, you want to protect newly acquired asset from delivering services to anyone else.

Sometimes, the acquisition does not have to happen. With enough of bargaining power it is enough to increase margins at the expense of your provider:
Examples include:

  • a market chain notices demand for a particular good. The market chain produces the same (or a very similar) good under market chain brand (see Tesco Beauty ). Sometimes, the provider may be even forced to produce the same product under its own brand and under the market chain brand, all depends on how much is the provider dependent on the value chain. A company which has more to lose has less room for negotiation.
  • a market chain pressing farmers to become de facto workers growing food on behalf of the market chain. Farmers experience reduced risk, reduce capital requirements and, at the same time, no premium for risk.

Note 3: This play contradicts the Incomplete Contracts theory, but only at first sight, because we do not care that much about control of the acquired company but about acquiring profits.

Going After Your Customers

Since new opportunities arise usually on the top of existing services, you can observe your customers, and check whose success indicates fat opportunities. The three gameplays below differ in their sophistication.

Harvesting

See which of your customers is successful. Copy/Take over their business.
The whole trick is in doing this part in a way that does NOT scares companies from using your services, but they consider the takeover as success. All sorts of hackatons and incubators fit here. As an example, look at Ford Innovation Center.

ILC

That has been describe many times (and one of them is available on Simon’s blog or here Using Microsoft and Github to understand ILC).

Subtle ILC

See which of your customers is successful. Analyse their value chains, and create components, while taking the advantage of scale, that are useful to all of them. They will thank you for simplification of their lives, but what they will discover is that their margins shrink. A good example of this is banking sector in Germany, which has a huge number of small, family owned banks, and only a few providers delivering f.e. KYC services, wallets, etc. At the end, one of those providers, after reducing banks to licence holders, can merge them in. Pure evilness :smiling_imp:.

Channel conflict & disintermediation

In simplest words, it means starting selling directly.If you can skip your sales channel (and create one of your own), do not hesitate to do so. This, of course, will create a conflict at first, and then will destroy ineffective channels. Pros & cons include direct access to customers, more customer-related data, higher efficiency and mass scale, but at the same time, you have to be careful about your reach. Sales partners might be adding value and reaching customers that would not look for your products and services.

Example: Tesla & its direct sales.

Additional considerations

When I was studying computer science, I had to learn the Law of Demeter, which says, adapted to the strategy context, that the further you are from your company, the less you know about the environment. It may be easy to go after your customers, going after your customer customers is more difficult, and going even further equals basically starting a completely new business. In Cynefin, the same law is expressed in a different way you can explore ‘Adjacent Unexplored’.

For this reason, I claim that the success of your initiative is defined by who you know and not by what can you do. Doing user research without having access to users… well, is not very cost effective.

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Mapping Glossary
Gameplay - Take Evolution Into The Account