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Why founders should focus on value chains instead of point solutions
If you’re a startup founder, you have a clear picture of each step in your head. If you’re the leader of a Fortune 500 company or an analyst for a specific industry, you have a high-level understanding of how raw materials, people, resources, and knowledge transform into value for an end user. Both the comprehensive, intuitive approach and the high-level understanding are value chains.
The value chain is an abstraction of an organization. It views companies as a system composed of multiple subsystems where discrete activities work together to generate value. Each discrete activity or process adds new value to the developing product or service. At the industry level, value chains become value systems or “industry value chains”, where external partners like suppliers, distributors, manufacturers, and retailers connect.
Understanding the value chain or value system is abundantly helpful for Canadian entrepreneurs, innovators, and investors.
The Canadian tech ecosystem’s challenges, most notably slow or limited access to capital, cause an extreme focus on point solutions. In an effort to generate revenue, keep the lights on, and fund growth, entrepreneurs become laser focused on specific products or services. In reality, they should be focusing on mapping out the entire value chain for their given industry. This exercise often produces two major insights:
A greater market opportunity. Investigating the value chain of a point solution can unearth more lucrative startup opportunities. For instance, a company focused on creating a B2C investment app for consumers may find there’s a greater need for a streamlined B2B technology solution to meet Know Your Client (KYC) requirements for opening an investment account.
A long-term strategy that focuses on value, rather than revenue. Entrepreneurs may spot opportunities to deliver irresistible value by building solutions for several points on a value chain. In this way, they can offer elements of the value chain for free and use that as a gateway for a more valuable solution that allows them to charge money. This also provides a long-term strategy to present to investors, so they understand the need to focus on value generation and scale instead of seeking immediate profits.
Canada has an abundance of innovative potential, but there are challenges that block innovations getting to market. Executing on a long-term strategy that de-prioritizes revenue in the short-term requires significant venture capital. Moreover, this capital can’t be hyper-focused on rapid returns. It must be able to wait until the unit economics exist to take the scale acquired and transform that into profit.
Once Canadian entrepreneurs have greater access to capital, however, applying the lessons of value chains helps companies overcome other challenges such as the country’s smaller consumer market and the handful of powerful incumbents in key industries.