business models complex systems innovation strategy networks

Innovation and the Value Network

By Tim Kastelle

Today I will tell you why it is so hard for you to get your innovative new idea to spread quickly. Well, one of the reasons, at least. It’s because the economy is so interconnected. This is a bit counterintuitive – after all, I was just telling you how we can use networks to spread ideas. The good side of networks is that they can make it easier for ideas to spread. The problem with networks is that to get people to actually adopt your new idea, you often have to get them to break links within their existing network, and this can be very difficult. That is why it is important to understand how to build a position within the value network.

Value networks show up in most of the various business model frameworks. The idea is that when you have an innovation, you have to understand what products, services and routines are related to your new idea. Once you understand this, you can then figure out how much of the value network you need to control yourself. Anders Sundelin just wrote a terrific post on his Business Model Database blog describing how you can map the value network for your innovation, anlyse your position within it, and take steps to improve your position. He does a great job of explaining the mechanics of value network analysis. I would like to show you why it’s important.

As an illustration, here is a model of the value network for mobile phones, adapted from the book Invisible Engines by Evans, Hagiu & Schmalensee. It shows the postion within the value network that Apple has taken with the iPhone:

Apple has chosen to control everything within the circle – in other words, everything! Even the application developers don’t have full autonomy, since every new app has to be approved before it shows up on iTunes. The advantage to taking a position like this in the value network is that it is easier to coordinate the system. Because Apple controls nearly everything, every time they have a new idea, it is relatively easy to decouple the existing value network, insert the innovation, and move along. The disadvantage is that having such tight control over the value network limits the scope of the innovations that can emerge.

In contrast, look at the position within the value network that Google has taken with Android:

They have taken almost the exact opposite approach, controlling only the operating system directly. This greatly increases the the range and number of innovation opportunities within the value network. There are two big downsides though. The first is that they are at the mercy of the other players within the value network. One of the reasons that there are very few Android phones here in Australia is that all of the handsets using it so far have been lousy. The second problem is that with less control over the network, all of the innovations within this network take longer to diffuse as there is no central coordination.

Google has the market pull to take a position within the mobile phone value network that is similar to Apple’s if they choose to. So we have to assume that this is a strategic decision, and that their bet is that the increased innovation scope provided by their more open value network will outweigh both Apple’s first move advantage, and also their relatively slow increase in market share.

And this illustrates the problem that most of us face with our value network – we can usually only control a small piece of it – as Google does with Android. This means that not only do our end users have to prefer our idea, but we also have to get others within the value network to stop using our competitors. This process is slow, difficult, and frustrating – and it adds an extra delay to the spread of our great new idea. Innovations require many players within the value network to unconnect from competitors before they can reconnect with us. This unconnect-reconnect process is often independent from the process of customers adopting our innovation, and it adds another delay to the spread of our new ideas.

There are many different models of business models available for you to use. I don’t care which one you use, but you have to use one of them. They all include an element like the value network as one of the key things that you have to understand and manage when you try to get your innovative ideas to spread. The better your understanding of this network, the more effective you’ll be at innovating.

(Here is a follow-up post with an example to illustrate the issues involved.)

By Tim Kastelle

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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27 thoughts on “Innovation and the Value Network”

  4. Great post Tim and thank you for the kind words and link!

    “This means that not only do our end users have to prefer our idea, but we also have to get others within the value network to stop using our competitors”

    I totally agree with you and believe one major difference, in the increasingly complex, interdependent and dynamic environment in which many organizations operate, is to see other actors in the value network as “customers”.

    How will your organization’s success increase other actors’ success and vice-versa?

    How will the organization enable other actors to win versus their competition?

    How can the organization change the game to its own and its partners advantage?

  5. Thanks for the feedback Anders! Your post was superb, so it wasn’t hard to come up with kind words for it.

    I agree with your ideas about seeing other actors in the network as customers – I think there are clear benefits in taking this approach.

  6. Another great blog on value networks following on Anders of December 28. Another game changing idea is to using mobile to actually activate your value networks for rapid response. I also completely agree with Anders that every node in the network is a “customer” in the sense that there must be value for them in participating in the network. I therefore makes sense to consider every interaction from the perspective of what value is being conferred/exchanged?

    Here are a couple of blogs/articles that may be of interest on innovation value networks.

    Four Value Network Patterns for Improving Innovation: http://valuenetworks.com/public/item/232644

    White paper on evaluating Skane Region (Sweden) innovation networks: http://valuenetworks.com/public/item/246652

    Academic article on measuring impact of innovation networks at the regional level: http://valuenetworks.com/docs/AlleeSchwabe-ResearchNetworks.pdf

    Cheers,
    Verna Allee

  7. Thanks for the feedback Verna, and thanks for the links. That looks like very useful material – I’ll go through it in more detail soon.

  10. […] analysis provides insight into how systemic structure influences innovation potential. Consider the iphone vs. Google phone value propositions: “The good side of networks is that they can make it easier for ideas to […]

  16. That is interesting Sam. I agree with him that it is not a foregone conclusion that Apple’s business model is faulty here. I think it will be very interesting to watch how this market evolves.

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