| | Industry value chains | Sales distribution agreements | International value chains | Adding value to value chain opportunities | Summary
Industry Value Chains
Today's businesses are increasingly being exposed to the concept of industry value chains. Ironically, many businesses and industries had been fully immersed in the concept before the term itself was coined. Definitions abound; however, in its simplest form, a value chain is typically considered to be three or more otherwise independent businesses from different segments of an industry working together to help each member in the chain meet their business goals. A somewhat headier definition is: A strategic collaboration of organizations for the purpose of meeting specific market objectives over the long term and for the mutual benefit of all links in the chain.
Fundamental to successful value chain participation is a move away from the confrontational and sometimes adversarial relationships between and amongst players customary in many industries. Openness, trust and a genuine desire to see all parties succeed are fundamental prerequisites to an effective value chain scenario.
While a detailed analysis of “market pull” and “product push” strategies is beyond the scope of this article, most would suggest building value chains that focus on “market pull” opportunities stand the greatest chances of being effective.
Sales Distribution Agreements - An Important Link in the Chain
One of the most important aspects of successful value chain collaboration is the specific terms of arrangements between a player at the start of the value chain, and the player(s) in the value chain who are responsible for getting products to the eventual consumer. To cite a specific example, a manufacturer can generally achieve market penetration through:
- Direct marketing/selling, or
- Agency/distributor relationship
By undertaking direct marketing/selling, the manufacturer is essentially choosing to bypass collaboration with players in the value chain, choosing instead to be in complete control of all links in the chain. This is a significant undertaking, especially when exporting into foreign markets.
Typically a path of lesser resistance in penetrating foreign markets is to look for trustworthy, motivated and experienced partners to assist in the process. Generally, agency/distribution relationships are negotiated for this purpose. The party engaged by the manufacturer in this capacity should:
- Be responsible for market research and development, and implementation of the sale plan
- Establish product pricing based on market research and in consultation with the manufacturer
- Be the “storefront” for obtaining customers
A written agreement confirming terms is certainly advisable. Some considerations in defining the terms of the relationship include:
- Product line - Territory - Exclusivity rights
- Use of trademark or other intellectual property
- Minimum sales and supply obligations
- Responsibility for after sales service
- Dispute resolution mechanism
- Payment terms • Termination provisions
- Requirement to stock inventory
- Development and implementation of marketing plan including costs
- Restrictions on competing products, credit terms
International Value Chains
An interesting overlay in today’s business environment is that value chains are being built extensively between and among players in two or more countries. Significant issues face companies attempting to establish value chain arrangements with players in other countries. Our firm has recently worked with Canadian clients undertaking such arrangements in Japan, United States, Europe and South America.
Clients and their advisors need to quickly gain an in-depth understanding of how business is conducted in foreign jurisdictions. Many of the issues surrounding multi-jurisdiction value chains have more to do with how business is done rather than the business itself.
Adding Value to Value Chain Opportunities
How can a business delve deeper into Value Chain opportunities?
- Research the concept of value chains, both generally and specifically how your industry is being impacted by value chain partnerships.
- If an international undertaking, research the nuances of doing business in the respective foreign jurisdiction. Typically domestic government export resources coupled with today’s web-based resources will provide an extensive and comprehensive background.
- Armed with a bit of research, discuss the concept with your management team and external advisors, gaining an understanding of how you might deal with all the interrelated issues.
- Undertake what I like to call value chain mapping. As the name implies, this is the process of reducing the client’s industry value chain to a diagram. You will likely find that the chain is really a matrix. Many times, players in an industry aren’t sequentially linked like a chain formation, but rather have a variety of interrelationships that form part of the matrix.
- If your business is at the start of the value chain, and the final consumer is at the end of the chain, work backwards to identify how opportunistic relationships might be established.
- Conversely, if you are the final user end of the value chain, reverse engineer the chain from the start of the chain out.
- As you identify opportunities within the value chain, consider retaining an external advisor to help the parties facilitate the agreement on terms, and assist with the negotiation of agreements that will be required.
Summary
I believe you would be hard pressed to find an industry that is not dealing with paradigm shifts in their industry value chain, some of which are very significant. Dave Plett, President/CEO of Western Feedlots Ltd. (a significant player in the food industry value chain) summarizes the primary benefit of participating in value chain collaborations as being the enhanced perspective that all players have on creating value for the eventual customer, not just for the next player in the chain.
Conversely, one of the biggest challenges in value chain partnerships, according to Plett, is to break down the traditional adversarial and transaction-based relationships in highly competitive industries, and extending the resulting short-sighted view of customer value creation.
Every business needs to intimately understand their industry value chain, identifying opportunities therein, and considering the possible business arrangements between and among the players in the value chain.
Prepared by Cam Crawford FCA,CMC,CBV, Catalyst Chartered Accountants and Management Consultants |
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