When evaluating any move on the value chain, profits and passion are largely known variables; however, power is usually something that has to be earned over time, and this can vary greatly depending on the players and their own power in the market. Gaining power organically over time is hard and slow, so the faster way to go is usually less about internal capability building and more about external partner building.
To help illustrate this point, let’s use a dairy milk example and see how different competitive structures impact your ability to gain power, or not.
The ability to enter each space comes with varying degrees of difficulty and rewards.
- Acquire one of many dairy farms = easy.
- Playing in the processing space with Fonterra = very hard.
- Playing in the product space with a few strong brands like Lewis Road Creamery are trying to do = hard. Playing in the retail space against two giant supermarkets = very hard as well.
As a small business, you most likely don’t currently hold a position of power in your value chain(s). You exist because either:
There is no dominant player in your space yet (monopolistic competition). Or, those who hold power:
- Don’t yet have you on their radar.
- Aren’t interested in your niche.
- Can’t match the value you add in your niche.
- Have decided to let you have your patch since you’re not a large enough threat to warrant any aggressive action…yet.
Knowing this threat is coming once you do get bigger, it may be sensible now to form partnerships/alliances with those who hold some power now in order to protect yourself later. For many smaller businesses, partnerships = power.
“The only way to predict the future is to have power to shape the future”
ERIC HOFFER, PHILOSOPHER AND AUTHOR
It is unlikely the partner you select will be the large market leader since they are usually more interested in taking full control of the market by strangling small players like you rather than helping them grow. They’re also more likely to simply steal your ideas. You will also have low/no bargaining power at the negotiation table.
“My enemy’s enemy is my friend”
The medium sized challengers, however, are different as they’re not #1 and usually want to be (you have probably heard the saying in sport “train like you’re #2”). If you can help them see a way to knock the market leader off the top, and progress beyond their medium sized competitors, then they will be more receptive to the idea of a partnership, and you’ll have more say in negotiations.
NESPRESSO’S PARTNERSHIP GENIUS Capsule coffee systems have been around since the 1980’s, but no one took control of this market until Nespresso nailed it in 2006. Sure it was great branding, great design, and the product tasted good, but arguably the greatest key to its success was the partnership model. Nespresso realised two things: 1. That building machines were not their strength, required support/warranty, and returned low margins. 2. They had weak distribution into home wares and appliance stores. Nescafe partnered with Delonghi, Breville and Siemens (not to mention Krups, Magimix and Miele) to make the new machines. Not only did this remove all the problems under point 1 above, but it opened up entirely new distribution channels (point 2) that Nespresso had not been reaching before (think Farmers, Noel Leeming, Harvey Norman here in New Zealand). As a result, they grew incredibly fast and made far greater margins by selling multiple capsules at $1 each to the customer, rather than just selling one machine at the start of the relationship.
BRAND COLLABORATIONS Brand collaborations allow you to partner with almost any entity from anywhere on the Value Map as long as the alignment makes sense This is a very common strategy for brand, design and fashion based businesses especially e.g. Whittaker’s and Lewis Road Creamery for their chocolate milk product, Karen Walker and Resene for a premium paint range.