How to Draw a Competitive Value Train Analysis

(© 2016 David L. Rogers, from The Digital Transformation Playbook: Rethink Your Business for the Digital Age

Overview

Competitive Value Train Analysis is a strategic framework used to evaluate and compare the value a company delivers to its customers relative to its competitors across the entire value chain. This analysis identifies the key activities and components that contribute to value creation and assesses how they stack up in terms of cost, differentiation, and customer impact.

Key Components:

Value Chain Mapping: Break down the business into its primary and support activities (e.g., production, marketing, logistics, and customer service). Identify how each activity contributes to delivering value to the customer.

Competitive Benchmarking: Analyze competitors' value chains to understand their strengths and weaknesses in delivering similar value. Focus on specific value drivers such as quality, cost-efficiency, speed, and innovation.

Customer-Centric Value Evaluation: Determine what customers perceive as valuable within each activity of the value chain. Assess whether your business delivers superior value or suffers disadvantages compared to competitors.

Gap Analysis: Highlight areas where your company excels or lags behind competitors.

Use insights to identify opportunities for cost savings, differentiation, or operational improvements.

Applications:

Strategic Positioning: Helps refine the company's market position by focusing on unique value drivers.

Resource Allocation: Guides investment toward activities that provide the greatest competitive advantage.

Differentiation: Pinpoints opportunities to stand out by improving or innovating within specific value chain components.

This guide provides detailed instructions for how to draw and use a Competitive Value Train Analysis. This tool is designed to analyze competition and leverage between a firm and its business partners, its direct rivals (symmetric competitors), and its asymmetric competitors.

As discussed before, an individual value train diagram is not meant to capture a company’s relationships with all of its customers (particularly not if it is a platform business with multiple distinct customer types). The aim of a value train diagram is to analyze one path for how a given offering (product, service, or a bundle of them) reaches a given customer or segment. For example, if you were a book publisher, you might use one value train analysis to examine how you sell via retail channels, and another for your online business.

The aim of the diagram is to clarify key dynamics in the creation and delivery of value:

• How does the offering reach the ultimate customer?
• What key businesses are involved in the process?
• Which participating firms have more leverage over the others?
• Where is symmetric or asymmetric competition present?

To create a value train diagram, you begin by answering three questions:

1. Scope: What is the value offering (product or service) you will analyze?
2. Consumer: Who is the ultimate consumer? Draw them as a circle on the far right of your diagram.
3. Last firm: What source does the customer receive the offering directly from? Draw this party as a square to the immediate left of the customer.
4. Prior firms: What other firms, if any, provide unique inputs to that firm? Draw them as additional squares to the left.

The number of squares, or “cars” in your value train will depend on your business model and means of distribution. Three broad types which are common as you move leftward, or upstream, from the consumer are:

• Distributor: delivers the product or service to the customer, although they may not manufacture it (e.g. retailers like Walmart, or e-tailers like Amazon)
• Producer: creates the finished product, service, or offering paid for by the consumer (e.g. an insurance company, record label, book publisher, or laptop manufacturer)
• Originator: creates unique elements or parts of the offering (e.g. chips or operating system for a laptop, or musicians creating recordings for a record label)

You can see examples of basic value trains with these three kinds of cars in Figure 3-10.

In these, and many cases, all three roles (originator, producer, distributor) will appear as separate businesses in the value train.  In other cases, such as a fully-integrated firm which solely creates the offering and may sell it directly to the end consumer, there may be only one or two cars in the value train diagram.

After drawing the cars representing the key partners in your value train, the remaining four steps will highlight the competitive dynamics at play:

5. Focal firm: Which firm is the focus of your analysis? (e.g. your own firm, or another whose value train you are studying) Add an additional outline to the square around it.

6. Value exchange: Between each car, add arrows in both directions. Label each arrow pointed to the right to indicate what value is being delivered to the downstream party (e.g. product, service, or component of them). Label each arrow pointed to the left to indicate what value is being delivered upstream (typically, monetary, but there may be other value, such as data or marketing support).

7. Symmetric competitors: For each car in the train, identify the symmetric competitors (i.e. businesses that offer similar value, with a similar business model). Add them to diagram as rectangles below the car they compete with (e.g. if Walmart was in your value train as the final distributor, below it you would put a rectangle indicating other brick and mortar distributors).

8.Asymmetric competitors: For each car in the train, identify the asymmetric competitors (e.g. an alternate distribution channel, product producer, or component manufacturer that can substitute for the business, but has a different business model). Add them to the diagram as trapezoids above the car they could potentially serve as a substitute for.

Ways You Can Use the Tool

The Competitive Value Train can be used to analyze the cross-currents of competition and cooperation in any business’s path to delivering value to consumers.

It is particularly useful for understanding the forces of disintermediation (how an intermediary partner may be “skipped over” and cut out of a value train), or intermediation (what happens when a new distribution partner inserts itself between a firm and important customers or suppliers), as well as any shifts in the relationships between a firm and its sales channels or suppliers or both.

Recall the two power principles of value trains, introduced earlier in the chapter.

First, parties with more unique value at their stage in the value train (e.g. a uniquely influential producer, or distributor) have move power over partners. This principle explains the level of competitive leverage in many inter-firm relationships (e.g. why Walmart has so much influence over the brand manufacturers who stock its shelves).

Second, the parties at the ends of a value train (i.e. final distributors and original creators) have more power than intermediary producers in the middle. This power imbalance was famously described in manufacturing industries by Stan Shih, founder of computer maker Acer. Shih described a “smiling curve” where technology patent holders (my “original creators”) have high power to capture profits, as do companies who ultimately brand and distribute products (my “distributors”), but the product fabricators and manufacturers in between them (my “producers”) languish in a valley of low leverage and profitability. The same dynamics have been observed in services industries, giving more power to the final “customer interface” (the last party in the value train, and in telecommunication and media industries, where unique content creators (like star journalists) and final customer discovery layers (like Facebook and Google) are accruing profits while traditional businesses in the middle of the value train are getting squeezed.

Like the Platform Business Model Map, a Competitive Value Train Analysis can be conducted on the current state of a business, or as a forecast for potential new arrangement. The tool can therefore be used both to predict and assess possible moves by current partners in your value train, or to analyze possible moves that you are considering.

By example, Figure 3-12 shows two value train analyses of two examples seen earlier in the chapter: HBO’s decision to launch a direct online service for viewers (branded “HBO Now”), despite the importance of cable companies as its traditional distributor to consumers; and Allstate’s acquisition of Esurance, an asymmetric competitor to its own affiliated insurance agents, while continuing to sell through them under the Allstate corporate brand name.

Other plans for intermediation, disintermediation, or channel substitution, can be analyzed similarly, to forecast their potential outcomes and impact on competition and cooperation between firms.

[1] Jason Dedrick and Kenneth L. Kraemer, Asia’s Computer Challenge: Threat or Opportunity to the World? (New York: Oxford University Press, 1998), 152–57.

[1] [1] Ben Thompson, “Publishers and the Smiling Curve,” Stratechery (blog), October 28, 2014, https://stratechery.com/2014/publishers-smiling-curve/

© 2016 David L. Rogers  Excerpted from The Digital Transformation Playbook

(Columbia Business School Publishing) Visit www.digitaltransformationplaybook.com

Sample Exercise

Value train Analysis for Sony Music.

1. Scope: The value of service is SONY music products. Sony gets Music records from various musicians. Sony Music sells music CDs to end customers through multiple channels like CD shops and online music channels. 
2. Consumer: the ultimate consumer is the music lovers who buy music records.
3. Last firm: consumers are buying the CDs from shops, online stores and online music services like Spotify, SONY music unlimited. These entities are distributors
4. Prior firms: The music records are provided by musicians, recording studios, music producers, album creators etc. these entities are originators.
5. Focal firm: Sony music is the firm is the focus of my analysis
6. Value exchange: In the downstream, the originators are providing music records to the producer and producer provides music records in CDs for direct sale/rental and digital files for streaming/ online services. The consumer can purchase the physical CDS or subscribe music streaming services. In the upstream, the distributor will get the payment from the consumer, the producer will get payment or royalty and the sales data/metrics. Producer intern pay to the originator as royalty fee or onetime payment.

7. Symmetric competitors:  The Symmetric competitors are Universal Music Group, Warner Music group. They produce the records from originators and selling the record to customers directly and through distributors.  The Symmetric competitor are direct competitors for SONY as their business model is same as SONY Music. 

8. Asymmetric competitors: The Asymmetric competitors are Amazon music, Spotify, Apple music, Deezer, Pandora etc. these competitors are not producing records, they acquire it from producers and stream it as a subscription service to consumers. The Asymmetric competitors are providing same catalog to consumers at different price point. Infact Sony music started a online music service called “ SONY Music Unlimited” in 2011 and later they shut down in 2015 due to severe competition from Spotify, Deezer etc.