The dynamics of value networks
Barriers to entry and exit
Ecosystems and the networks they consist of are dynamic structures. New actors enter the system and existing actors change their behavior or leave the system. Since Porter we know that to understand this dynamic, you need to understand what the barriers to entry in and exit from your value network are [i]. The following questions help you with this.
- What are the barriers to entry of new players in your value network?
- How easy is it for others to become your supplier, complementor, competitor? Could substitutors, not in your value network now, offer alternatives to your customers?
- How easy is it for a competitor to replicate your value proposition? Or for you to replicate someone else’s value proposition? What investments are needed?
Answering these questions gives you an idea of the relative power of actors in your value network. Here are two examples.
- What are the barriers to exit of existing players in you value network?
- Can they survive outside your value network? What is the effort for them to leave the network? What would they miss, what would they gain? Would the network survive without them?
- Can you survive without the value network? Can the value network survive without you?
Entering the Netflix value network as a competitor to Netflix requires a lot of effort and takes a large budget. Some companies do have that kind of budget. For example, Disney, Amazon, Apple all started streaming services. Entering the Netflix value network as a subscriber is very easy. Just pick your subscription and give your payment details. Leaving is easy too and if subscribers have seen all the movies they are interested in, they are likely to leave. Finally, if Netflix is removed from the value network, all other network actors will continue to survive and thrive.
Entering Amazon Marketplace’s value network as seller is easy. Providing some data and doing a credit card check suffices. Exiting from it is more difficult. Amazon provides many services such as logistics, payment and branding that are hard to give up once you use them.
For a buyer, entering and leaving Amazon’s value network costs no effort. However, with free shipping and lowest prices, there is little reason for a buyer to leave Amazon’s network. And for Amazon Prime members, Amazon offers extra services such as streaming video and one-day shipping. For most Prime members, this creates a barrier to exit.
If Amazon is removed from its network, many sellers will not survive.
For actors participating in a value network, we need to look at the strength of their dependencies. The strength of dependencies can be characterized by switching costs of actors. How much does it cost an actor to switch a relationship to another actor? The weaker a dependency, the easier it is for an actor to switch to another.
The following questions can help you understand switching costs in a value network. They take the point of view of a focal actor.
Answering these questions provides additional insights in power dynamics in a value network. Let’s look at the two examples again.
- How important are other actors’ value propositions for the survival and well-being of the focal actor? Or the focal actor’s value proposition to theirs?
- Do other actors have a competitor with a competing or substitute offering? Does the focal actor have competitors or substitutors?
- What are the costs for a focal actor to switch to another supplier? Or for its customers if they switch to one of the competitors of the focal actor? Is there a substitute for the offering of the focal actor?
Netflix crucially needs the rights to use the intellectual property of movie studios for its own survival and well-being. Without it, Netflix cannot offer its streaming services for content produced by others. It cannot just switch to other movie studios. It wants to maximize its offering by having a relationship with as many studios as possible.But the studios do not depend on Netflix to stream movies. Some of them, such as Disney, started their own streaming service. All movie studios now have several streaming companies to choose from. And all of them, including Netflix, have their own studios of which the productions are not streamed by other providers.
Netflix customers can easily have a relationship with several streaming providers. And if they are bored with one provider, they can easily switch to another one.
This sketches a picture of intense competition for subscribers, where Netflix is morphing into a streaming company with a studio, and the movie studios into studios that are also streaming. They are all competing for the same subscribers. Subscribers’ motivation to stay with one streaming company must be fed with new, expensive productions.
Amazon Marketplace has a value proposition (200M unique visitors per month) that sellers cannot obtain elsewhere. There is no comparable or substitute offering and for sellers, switching to another marketplace is not an option.
Amazon could easily replace one seller by another, but it is in Amazon’s interest to have as many sellers as possible on its platform. It will not replace any seller but try to add as many sellers as possible. This sketches a clear picture of power relations in the Amazon marketplace value network.
Porters value chain concept (Porter, 1985) was adapted to ecosystems by Vincent Pijpers (Pijpers, 2010).