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Value chain mapping – finding a path
In the second extract from his forthcoming book, Simon Wardley explains how to draw a map to describe the changing nature of your business
As a new CEO in 2004, Simon Wardley was searching for a framework to inform his strategy decisions.
The first part in this series introduced the five factors that matter in competition, identified by ancient Chinese military strategist, Sun Tzu: purpose (what you are doing and why), landscape (the competitive environment), climate (the forces acting on that environment), doctrine (standard operating techniques) and leadership (the strategy you choose).
Wardley realised that companies leap straight from purpose to leadership, and that making strategy decisions without a map of the landscape of the business is like playing chess without being able to see the board. His challenge was to find a way to draw a map that captured the fast-changing activity of a business.
The problem I had was how to map a business. Unlike a board game such as chess with its turn-based moves, a business is a living thing. It consists of a network of people, a mass of different activities and reserves of capital – financial, physical, human and social. It consumes, it produces, it grows and it dies. It competes and co-operates for resources and it is shaped by and shapes its environment. People come and go.
The things we do, the things we build and the things that others desire change over time. All firms are in a constant state of flux and the ecosystems they live in never stand still. What sort of map can cope with that?
I struggled with these concepts for many months, playing around with different ideas of mapping and ways to represent this maelstrom. I knew any map had to have those basic elements of being visual, context-specific, show the position of components relative to an anchor and some means of describing movement.
I had no idea where to start, until I thought about mapping what was core for my business and questioning how this changed using some form of mind map. My reasoning was simple. A business, like all organisms, needs to continuously adapt to changes to survive. If we could somehow describe this then maybe that would give us a map.
Why things change
I started to ask why things change. The responses from my peers varied from “progress” to “innovation” to “disruption”, and they cited examples from history including random innovations that had serious impacts on the way we operated – the telephone, electricity, computing.
Given the upheaval they caused, the close calls with bankruptcy, the death of former great companies and the need to keep learning new skills, why would anyone want this? Surely a more sedate, slower rate of change would be more comfortable?
Alas, it seems that we don’t get a choice. In any industrial ecosystem, new things constantly appear as a consequence of the desire of companies and individuals to gain an advantage over others. The things that are useful will be copied and spread until the once novel becomes commonplace.
Yesterday’s wonders become today’s discounted special offers. We no longer marvel at such things as the electric light bulb, the computer and the telephone, but would reel in shock if presented with a workplace that did not provide them.
Competition and the desire to gain an advantage not only create change; they spread it and force companies to adopt it. Somehow, I had to map this competition, including the journey from novel to commonplace.
To add to the complexity, the novel and the commonplace are connected – one enables the other. A historical demonstration is Henry Maudslay’s screw-cutting lathe of 1800.
The screw thread is said to have been invented by Archytas of Tarentum in about 400 BC. Early versions of this and the subsequent nut-and-bolt designs were custom-made by skilled artisans with each nut fitting one bolt and no other.
Maudslay’s lathe enabled repeated production of uniform nuts and bolts with standard threads, so one nut fitted many bolts. Unique nut-and-bolt pairs were replaced by mass-produced interchangeable components. The novel became commonplace.
But these humble components enabled the rapid creation of more complex machinery. Uniform mechanical components enabled the faster building of ships, guns and many other devices, and opened the way for the introduction of manufacturing systems that took advantage of these components.
In 1803, collaboration between Marc Isambard Brunel and Maudslay led to the principles of modern mass production being introduced at Portsmouth dockyard, enabling an order-of-magnitude increase in productivity with highly standardised outputs. It revolutionised shipbuilding and these practices subsequently spread across the manufacturing industries.
Not only did standardised production evolve from novel to commonplace, enabling new things to appear, but it also allowed for new forms of practice and organisation. Throughout history, it has always been the standardisation of components that has enabled creations of greater complexity.
Without such well-defined mechanical or electrical components, our world would be a less technologically rich place – no internet, no generators, no TV, no computers and no light bulbs.
We are always standing on the shoulders of past giants, of past innovations and past wonders that have become commonplace units. Our society and the wondrous technologies that we can create not only consume but are dependent on provision of these standard components. Remove this and the wheel of progress grinds very slowly and very expensively.
Back in 2004, I was acutely aware that businesses live in a world where there’s a constant flow of change driven by competition – the desire to differentiate creates the novel, the desire to keep up with others makes it commonplace. If we define economic progress as the movement of our society to ever-more complex technological marvels, then progress is simply a manifestation of this competition. This affects all organisations. This is what we have to map.
In all this complexity there was also comfort. I knew my world was built of components and hence it had its own equivalent of chess pieces. Those pieces changed but there might be a way of describing their evolution and movement from novel to commonplace.
The first map
I created my first map in 2005, for an online photo service that I ran. I would dearly love to claim that this map was the result of some towering intellectual might, but in reality it was more trial and error combined with endless accidents. Figure 1 is a map of a single line of business. Take a few minutes to read it carefully.
Figure 1 : A map
This map has all the basic elements of any map identified in the previous chapter. It is context-specific as it is unique to that line of business, containing the components that influenced it at that moment in time.
The map has an anchor which is the users and their needs. The position of components in the map are shown relative to the users on a value chain represented by the y-axis – each component needs the component below it, and the higher up the map a component is, the more visible it is to the users.
For example, the users care about online photo storage, but while this needs the provision of underlying components such as compute and power, they are positioned far below the users because they are less visible. Users cared about what was provided to them but not who provided the firm’s electricity.
The components on the map are each at their own stage of evolution as shown on the x-axis: genesis, which represents the novel; custom-built; product (including rental); and commodity (including utility, which represents the commonplace).
All the components on the map are moving from left to right driven by competition, and as components evolve they become more commodity-like. In other words, the map is not static but fluid.
A Wardley map can also have more advanced features. It can show the flow of risk, information and money between components.
For example, in a military context, components such as troops occupy different positions and, along with their physical movement across the ground, there is also communication between them. That communication is flow.
It’s important to separate the ideas of movement and flow because it’s easy to have troops communicating effectively but, at the same time, being ineffective by moving in the wrong direction – reasons for this include wrong orders being given or no common understanding of purpose.
The components can also represent different types of things – in military terms, infantry, tanks and artillery. In Wardley maps, these types represent activities, practices, data and knowledge.
All of these types of components can move – for example, evolving from left to right driven by competition. However, the terms we use to describe the separate stages of evolution are different for each type.
To keep the map simple, the x-axis of evolution shows the terms for activities alone. The terms that I use today for other types of things are provided in Figure 2.
Figure 2 : Types and stages of evolution
Lastly, climatic patterns – such as common economic patterns and anticipation of change – can be shown on the map. For example, a platform might be considered to be evolving to a more utility form but inertia resists the change.
These advanced features are shown added to my simple map in figure 3.
Figure 3: Advanced elements of a map
Even with my simple map I could start to discuss the landscape – the environment in which we were competing.
For example, had I represented the user needs reasonably and was I taking steps to meet them? Had I included all the relevant components on the map or was it missing key critical items? Was I missing something, such as an unmet need? Were we treating components in the right way? Were we using a utility for power, or building our own power station as though it was a core differentiator visible to the user? If so, why?
I could also start to discuss our anticipations of change – what would happen when platform became more of a utility? How would this affect us? What sort of inertia would we face?
I’ll now describe the steps to help you create your own simple maps.
Step 1: Identify needs
First, define the scope of what you’re looking at – are we a tea shop, an automotive company, a nation state or a specific system? You will often find that in the process of mapping you need to expand or reduce your scope. There is nothing wrong with this. A map for a particular company is part of a wider map for the ecosystem that the company operates in, and a map of a particular system in a company is part of the map for the entire company.
Critical to mapping is the anchor so, within your scope, focus on the users’ needs. Here again, note that the user needs of one map are components in another.
For example, in Figure 3 above, the need for an electricity provider is simply drawn as a single component far down the value chain and described as “power”. That single component could be expanded into an entire map for an electricity provider, showing different forms of transmission, generation and even spot markets.
A common trap is not to think of your user’s needs but to describe your own – your desire to make a profit, to sell a product or be successful. You need to think precisely about what your users need.
If you’re a tea shop then your users may have needs such as a refreshing drink, a convenient location, a comfortable environment, a quick service and a tasty treat, such as a piece of lemon drizzle cake.
I’ve found nothing more effective for discovering this than talking directly to your users, creating a user journey for how they interact with what you provide. It also helps you distinguish between the many things that your users want but do not necessarily need.
As you discuss wants and needs with users, you might find they have genuine unmet or novel needs that they find difficult to describe. These are important. Don’t ignore them just because you don’t provide them at this time.
From the basic user needs, you derive the capabilities you need to deliver them.
In 2005, our user needs included such things as sharing photos online with other users; this required us to have a capability for the storage of digital photos and a web site to upload and share them with others, along with manipulation of images (removal of red-eye and cropping, for example) and printing physical products from photos to mouse mats. These were our top level components, visible to our users, as shown in Figure 4.
Figure 4: User needs
Step 2: Build the value chain
The next step is to describe the subcomponents that these visible components need – their value chain. The best way I’ve found of doing this is to gather a group of people familiar with the business and write down on Post-it notes the user needs and the top-level capabilities required to meet them. Put the Post-it notes towards the top of a large whiteboard or wall in a fairly random order.
Now, for each capability, using more Post-it notes, write down any subcomponents that these top-level components will use. These can include any activity, data, practice or set of knowledge.
Then for each subcomponent, identify its own subcomponents; and continue until they are outside the scope of what you’re mapping. For example, power doesn’t need to be broken down any further if the company consumes it from a utility provider.
When the group is satisfied that they have written a reasonable set of components for all the needs, then draw a single vertical line and mark it as the value chain, as shown at the left of Figure 5 (see below).
Put the top-level components – your capabilities, what you produce, what is most visible to the user – near the top of the value chain.
Place subcomponents underneath with lines drawn between them to show how they are related – this component needs that component.
For example, as shown in Figure 5, manipulating online digital photos needs some sort of online digital photo storage component; this in turn needs a web site, which needs a platform, which needs compute resources, storage resources, an operating system, network, power and so forth. In Figure 5, I’ve added the superfluous term “needs” to emphasise that this is a chain of needs.
These components will become part of your value chain and each component should only appear once. As you go through this process, you may wish to add or discard components depending on how relevant you feel they are to drawing a useful picture of the landscape. They can always be added or removed later.
For simplicity, not every capability is shown in Figure 5. For example, a payment capability is not included.
Figure 5: A value chain
Things near the top are more visible and have more value to the user. For example, online image manipulation appears slightly higher than online photo storage because in 2005 it was seen as a differentiator and hence valued by the users, and online photo storage was also a subcomponent of image manipulation.
The web site, a necessity for sharing, was placed slightly further down because although it was essential, many web sites existed, and it was a subcomponent of online photo storage.
This last point we argued over, but the purpose of doing this in a group is to get challenges and debates about what components exist and how important they are. Don’t ignore challenges but celebrate them as they are key to making a better map.
However, don’t waste time trying to make a perfect value chain to build a perfect map. It’s not only impossible, it’s unnecessary. All maps, including geographical maps, are imperfect representations of what exists.
Step 3: Draw the map
Value chains on their own are not enough to understand strategic play in an environment because they lack any form of context on how it is changing – they lack movement. Uncomfortable as it is, you have to accept that you don’t have a crystal ball and have to embrace the uncertainty of future change.
Fortunately, though evolution cannot be measured over time, the different stages of evolution can be described. So, now add a horizontal line for evolution. Mark on sections for the stages of genesis, custom-built, product and commodity, as shown in Figure 6.
Figure 6: Adding evolution to your value chain
Now move each of the components of the value chain to their relevant stage of evolution. Examine its characteristics and ask:
- How ubiquitous and well-defined is the component?
- Do all my competitors use such a component?
- Is the component available as a product or a utility service?
- Is this something new?
Be warned, this step is often the main cause of arguments. You will regularly come across components that parts of the group feel passionate about, and will declare as unique despite the fact that all your competitors have one. This could be inertia, or because it is a pet project.
However, if arguments continue to rage, investigate whether the component is multiple subcomponents, most of which are commodity but one or two are genuinely novel. In this case, break it down into subcomponents.
It is important to challenge assumptions and prevent individuals applying their own biases to the map. For example, if we are mapping a tea shop, we might argue that our lemon drizzle cake is homemade and therefore custom-built. But is the provision of a cake in a tea shop really something that is rare and hence relatively novel? Or is the reality that a user expects a tea shop to provide cake and it is commonplace?
You might market the cake as homemade, but don’t confuse what you market something as with what it is. The tea shop up the road could just as easily buy mass-produced cake, add some finishing flourishes and describe it as homemade. If it’s cheaper, just as tasty, more consistent and to the user an expected norm for a tea shop, then you’ll be at a disadvantage.
Figure 7 should help you categorise activities.
Figure 7: Stage of evolution: a cheat sheet
Don’t worry if some of the terms in this figure are confusing. Just use what you can. Like chess, mapping is a craft and you will get better with practice.
Aim to complete an entire map of a line of business in a matter of hours, though there is nothing wrong with spending longer on your first attempts to get used to the process.
I’m afraid there is a big downside here. Mapping, like learning to play chess, is something that only you and your team can do. You can’t outsource mapping to someone else any more than you can outsource learning to play chess to a consultancy. But on the plus side, the amount of value that you will get from mapping increases with the amount of work you put into repeatedly using it.
Once you have placed the components in their relevant stage to the best of your ability, you will have a map, like the one shown in Figure 1 (see above) for my online photo service in 2005.
Step 4: Share the map
Now share your map with others in your organisation and allow them to challenge you and your group. This is what I did with my colleague James Duncan, who was CIO of the company at the time.
Our robust debates in the boardroom showed me that business and IT are not separate and we could discuss strategic gameplay together around a map. As I have often found since, the process of sharing not only refines the map but spreads ownership of it.
Also use this time to consider any unmet needs and missing components and ask questions about whether you are treating things in the right way. It’s often surprising to find how many companies are spending vast resources on building their own metaphorical hand-crafted nuts and bolts.
With a map in hand, you are now ready to start exploring the strategy cycle and hopefully start learning some useful lessons. Well, that’s what I hoped for in 2005. In the next excerpt, I shall show you what I discovered.
Read all three extracts from Simon Wardley’s book on value chain mapping
- Making sense of executive strategy: In this first excerpt from his book, Wardley explains why business leaders need to understand the importance of maps for corporate strategy.
- Finding a path: In the second extract from his forthcoming book, Wardley explains how to draw a map to describe the changing nature of your business.
- Exploring the map: In the third and final excerpt from his book, Wardley explains how maps can determine future business strategy.