Millions of eager MBAs populate the executive suites and boardrooms of top companies around the globe, and the vast majority were indoctrinated in strategy classes with Michael Porter’s Five Forces and value chain analysis. These value chains have served corporations as they examine vertical integrations, mergers & acquisitions and the strategic fit of business lines since the Industrial Revolution.
Example: Linear value-chain which offers one direction for business flow only.
This traditional model is no longer useful or practical and the technology revolution of the last 30 years is forcing companies to re-evaluate linear value chain analysis in favor of a “constellation” approach to building businesses.
Example: Constellation approach using TradeIt to showcase the potential of a living breathing value ecosystem that flows to all entities.
As we see in the TradeIt model, the relationship between buyers and suppliers now features a “big bang” view of the ecosystem—partners that support each other and need each other to grow, branching off in every direction.
So why is this beneficial?
The TradeIt model would not be possible without APIs. APIs allow companies to securely work with each other through technical channels in order to focus, build and scale without the same linear approach as historically conceived. But we’re getting ahead of ourselves. First, a refresher…
First described by Michael Porter in his classic 1979 Harvard Business Review article, Porter’s insights started a revolution in the strategy field. A Five Forces analysis can help companies assess industry attractiveness, how trends will affect industry competition, which industries a company should compete in—and how companies can position themselves for success.
Essentially Porter built a framework for understanding competitive forces in an industry and how those drive economic value among the industry players. Today we’re still trying to understand how to drive value, but what’s clear is that it’s no longer through a linear value chain. Instead, we drive value through a platform model where you have contributors owning different pieces, therefore making the sum of the parts greater.
Evolution of the Value Chain
“The value chain describes the full range of activities that firms and workers do to bring a product from its conception to its end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer.” Nowhere does it say the chain has to be linear.
Enter the API
APIs are revolutionizing traditional business alliances and partnerships through scalability, flexibility, and fluidity.1
When companies share APIs, the world expands. Uber relies on Braintree for payments, Google integrates Uber into its map feature, and the list of interdependent API-driven technology businesses becomes more and more apparent.
Similar to the relationships between Uber, Google and Braintree—which are all focused on delivering a service to an end user—in finance, Cross River Bank allows companies like Affirm, TransferWise, and others to be free to build client-facing tools and services without having to do the core banking functions that often slow large incumbents. The ‘big bang’ approach to an ecosystem allows innovative service providers to enter a space with one “killer app” or a new tactic to solve a pain point.
Power in Partnerships
Large incumbents, where all the technology and related services are all under one roof, may not be able to move as quickly due to silos, legacy systems and/or risk and compliance requirements. The keys to this new value chain approach and the ecosystem are the partnerships and the ability to work together in new and innovative ways to meet the end user’s needs.
The visual below shows how TradeIt acts as a hub between supply and demand (brokers vs publishers) and how other partners come into the equation with ancillary and related services.
This type of model not only offers much more flexibility for other players, it also opens the door for additional revenue streams and increased profitability. By creating value at every touchpoint, from broker to publisher and supplier to distributor, the ecosystem will only continue to expand and grow…to the benefit of everyone.
1Bala Iyer and Mohan Subramaniam, “Corporate Alliances Matter Less Thanks to APIs,” Harvard Business Review, June 8, 2015.