Are you a pipe, a tap or the water corporation?

Ope Adeoye 7 minute read

I think all businesses (and products) fit into one of these three buckets.

The water corporation.

A pipe.

A tap.

This is essentially a description of value chains and positioning.

The water corporation

This is the business that produces the actual product. The more unique and defensible the product they create, the better for them. They've got to curry favours from the guys within the value chain and ensure that they produce what the pipes are willing carry and the taps are willing to dispense. I suspect this is the highest risk position to be in the value chain. Why? Because you invest heavily upfront in what you think the end customer wants and then get other players in the value chain to help you deliver. What if you were wrong? It's also often hard for these types of business to change direction.

In a market where there are ready alternatives and little differentiation, this is often the lowest margin position to be in, but here the volumes make up. The good part may be that it's soooo hard and expensive to get dislodged once you are in. But when you fall (which is ultimately very likely), it's gonna be yuuge. The owner of the coke concentrate, Farmers, Oil exploration companies, businesses in the extractive sector, etc. all fit here. In Music, this is the producer and/or recording studio. In Financial services and payments, this looks to me like the banks that keep the store of value.

A pipe

A pipe makes sure that the produced water gets to the tap. Usually involves an extensive network of bridging infrastructure (could be relationships, roads, marketing channels or actual pipelines) that make it easy for the water corporation to get it's water to the tap. These are middle men. Depending on the industry, its either a lot of work and investment or it's nothing. Just jobmen. The internet is the biggest eliminator (and creator) of pipes and middlemen. In the music industry, these are the record labels. In payments, emm... emm... You know who.

A tap

A tap is the customer touchpoint. This is the spot with the direct interface to the end customer. In some respects, I think this is the most powerful position to be in especially when there is the possibility of close substitutes to what the customer wants. Who knows, they say they want water now, maybe tomorrow they'd want wine. This is especially true with consumer products. Retail outlets for FMCG, the fuel station down your main road, QSR franchises, the mallam outside your gate, these are all taps. Hell, MTN is (in some respects) a tap. Taps simply handle marketing, distribution and customer engagement. They don't need to do much R&D per se or build some unique technology stack. In music, this is probably the DJ or radio station or record store. Or Spotify.

It's important that at any point in time, as a product owner or CEO or founder (or whatever title scratches your itch), one is aware of the role one is playing. Constantly assess it against your original plans and whatnot. It helps to identify what risks or opportunities may be lurking around the corner and the best ways to prepare. And respond.

Shey you see how Don Jazzy and Puffy begin show face for music videos and started dropping vocals? Or artistes starting their own record labels and buying streaming services?

Backward and forward integration.

One thing to note though, is the danger and opportunity that backward and forward integration presents. 

Everyone wants to eliminate potential risk and chop a larger slice of the pie where possible. At a point in time, when any of the players get comfortable, they'd start to look for ways to move deeper into the value chain in either direction. Now that he has generated enough cash, the tap owner is considering how to go talk to the water corporation directly and cut out the pipe man, so he buys tankers. Maybe water delivery drones. Or, he wants to cut out everybody so he just starts a pure water factory in his backyard. Or invents a machine that turns air into water. If you are the pipe man or the water corporation keep an eye on your largest "reseller" and consider them acquisition targets when your money is complete.

Ditto for the other players in the value chain.

I gather Samsung makes components for Apple. And Samsung sells devices direct to customers to compete with Apple. The margin is not in the components, it's in the customer interface. People are always looking for opportunities to extend in the value chain.

Bottom line: be fully aware of the position you have taken and keep an eye out for opportunities to move deeper into the value chain in a safe and low-risk fashion.

PS: In many industries, it's not as simple as this. The points in the value chain may be more, but they can all essentially be grouped into one of these 3 buckets. E.g. in Retail which typically has input, production, logistics, processing, distribution and consumption; input and production constitute the water corporation; logistics, processing and distribution = pipe while marketing and consumption = the tap.