Key Takeaways
- Every business has a value chain. The leverage is at the step where you are hardest to replace.
- Understanding your suppliers' economics changes how you negotiate with them.
- The business that controls the most critical step in its value chain has the most durable competitive position.
Most founders think about their business as a product or service. The more useful frame is to think of it as a position in a value chain, a sequence of activities that transforms inputs into outputs that customers value. Where in that chain the company sits, and how difficult it would be to replace it at that position, determines a significant part of the company's strategic position.
Mapping the Chain
The exercise Saim Abbasi runs with founders in his portfolio is simple: list every step in the process of creating and delivering value to your customer. Not at a high level but specifically. For a software company, this might include: identifying customer pain point, designing the solution, building the software, hosting it, supporting customers, billing. For a services company, it is different but equally specific. The map reveals where the company is differentiated and where it is interchangeable.
Finding the Leverage Point
The leverage in a value chain is at the step where the company is hardest to replace. This is usually the step that requires the most specialized knowledge, the deepest customer relationships, or the most proprietary data. The company that controls this step has genuine pricing power and genuine defensibility. The company that is interchangeable at every step is competing on price everywhere.
The Supplier Relationship Reframe
Understanding the value chain also changes how you think about supplier relationships. A supplier who provides a step in your value chain that you could not easily replicate internally has leverage in the pricing conversation. A supplier who provides a commodity step that five other suppliers could equally well provide does not. Understanding which category your key suppliers fall into determines how you negotiate and how much margin you can expect to sustain.
"Find the step in the chain that nobody else can do as well and build your business around it."