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In my recent HBR article, The New Dynamics of

Competition, I present a new analytical tool called Value
Network Maps, which I explain below.

These Maps are an outgrowth of exciting new work by
strategy scholars developing a mathematical model of firm
strategy that I refer to as the Value Capture Model (VCM).
The VCM calls our attention to three important truths of
competitive strategy that other theories obscure. Business
strategists ignore these truths at their peril. Value network
maps are designed to ensure that your strategic thinking is
complete.

The first truth is that, while value creation and value
capture are crucial aspects of any strategic analysis, they
are different and, as such, must be treated in distinct ways.
As the exhibit below reveals, a Map analysis begins by
looking at value creation. The center of the Map depicts the
firm and the other agents (generally, a supply chain and its
customers) who, jointly, contribute to a “pie” of economic
value. These agents are called the “value network.” This
first step in a Map analysis requires managers to think
deeply about how with whom they create value for the
ultimate end-user. How much of this pie each agent actually

Agents in a network are guaranteed a share of value commensurate with the intensity of competition for them. it surrounds the firm and its value network with a field labeled the “competitive periphery. each corresponding to one of the remaining truths highlighted by the VCM. The third truth is that there are two essential ways a firm captures value — either through force of competition or through force of persuasion. Why? Because. But the mathematics of the VCM vividly illustrate that competition works both on the firm and on those with whom the firm must transact in exactly the same way. when a firm increases its market share it turns potential customers into actual customers. the firm is guaranteed less of it by competition. the firm’s value network is expanded and more value is created. On the other. Thus. as a threat. only one) and makes it comprehensive (by ensuring that the role of competitors for the firm is not ignored). while there may be more overall value up for grabs. One of the interesting implications of this view of competition is that market share is not always the unalloyed “good” that many managers assume it to be. The Map captures the workings of competition in two locations. On the one hand. This is something of a new idea in strategy. Since the mid-1800s all the way through Michael Porter. First.captures is answered in the next two stages of the analysis. This may be the most radical and far-reaching insight for competitive strategy yet to . The second truth is that competition is symmetric in its operation. An agent’s competition-guaranteed share is depicted in the Map as dark shaded slice of the value pie. thereby reducing competition for the firm.” The periphery is populated with those agents who generate competition either for the firm or for others in the firm’s value network. these customers leave the periphery. This balanced view of competition both simplifies analysis (there are not five forces of competition. people have been encouraged to think of “competition” as a persistent driver of profit erosion – that is. in joining the network.

or its customers) does determine a minimum share that it must get of the value pie produced by its network. a second avenue for value capture is opened up for the firm. your buyer may have a maximum he or she is willing to pay. this second source of value capture may be dominant. Firms can be helped in their ability to persuade by a wide variety of factors. received wisdom in strategy suggests that value capture is entirely determined by competition. Competition from the periphery for any agent (the firm. those reservation prices are determined). Imagine negotiating with one of your buyers. your minimum does not equal your buyer’s maximum. Economists refer to these values as “reservation prices” (the VCM helps us understand how. Typically. They may have superior bargaining skill (e. its suppliers.g. exactly.come out of the VCM. that minimum is the amount guaranteed by competition. in which case the final price will be somewhere in-between. perhaps. due to an extremely well-trained sales force).” right? Fortunately. But competition rarely results in a complete allocation of value — that is. In the VCM. such as military contracting. Industry norms (such as the structure of a bidding process) can also affect the relative ability of forms and the other agents in the network to negotiate a larger slice of the pie.. the shares guaranteed by competition do not typically add up to 100%. In some industries. In symmetric fashion. we refer to all ways a firm captures value from its deals other than competition as persuasion and the portions of value created that are up for grabs through persuasion are shown in the map as the light shaded slices of the pie. If there is a minimum price below which you can credibly walk away from the deal — because there are other deals you prefer to take below that price — then. Once again. as illustrated by the Map. After all. prices are determined at the point where “the supply curve intersects the demand curve. the real world isn’t quite so deterministic. When they do not. .

. the Value Network Map shows how much value is up for grabs. finally. deal with individual consumers. For example. Michael Ryall is an associate professor of strategy at the Rotman School of Management at the University of Toronto. The strategic significance of competitive versus persuasive factors is highlighted by comparing the shares guaranteed by competition to the total amount generated by the value network. but within that range the firm can make take-it-or-leave-it offers such that the benefit of bargaining to the customer is below the cost of doing so. To sum up. The latter can still walk away from prices that are not consistent with their alternatives (arising from competition for them). firms may forward integrate to a point in the supply chain at which they have “persuasive” advantages. the extended network of agents who interact with the firm to create that value. producers of products for mass retail markets can forward integrate into retail distribution. By doing so. instead.Relatedly. Big distributors typically have greater incentive to haggle over their share of the pie than do individual consumers. the shares of value guaranteed to the firm and its network partners by the competition from the periphery. they bypass negotiations with big distributors and. a periphery of agents who compete for those in the firm’s value network and.