As seen in the previous video, the value architecture is the second component of the business model and is about the "how". It has different aspects: the value chain, strategic resources and key competencies. In this video, I would like to build on the concept of value chain and talk about what we call the extended value chain. Indeed, many things have changed since Michael Porter introduced the concept of value chain in the 1980s. As already mentioned in the previous video, over time companies have outsourced, which means taking many activities out of the boundaries of the company. For each step in the value chain, companies have wondered whether they should “make it” or “buy it”, and the make or buy issue has become key in strategy. The opportunities for outsourcing have grown over the years, for two main reasons, which are reinforcing each other. First, Globalization has made it easier to find potential new partners all over the world. Second, new technologies, have lowered transaction costs, making it cheaper to interact with potential suppliers wherever in the world. It has become easier and cheaper for companies to reach out to potential partners all over the place. The nature of the partners themselves has also changed: more and more, companies are partnering with competitors, NGOs or governments. This is why we would like to emphasize here what we call the extended value chain. 30 years ago, companies where heavily integrated, whereas today, there are many opportunities, including for innovation, in trying to find partners and introducing technologies into the value chain. Let me give you an interesting example that is taking place in Kenya, a country with amazing business model innovations. In this African country, millions of small farmers are faced with drought, flooding and extreme erratic rainfall. During a bad season, they can lose all their crops and in turn, lack the means to buy seeds for the following season. Traditional crop insurances are too complex, too expensive and inappropriate in such situations for several reasons. First, the distribution: how can you reach those farmers, who are located in rural, scattered areas? Second, how can you collect the payment for the insurance? Third, how can you handle the claims? It is too costly to send out an expert to each village when there is a claim. But one insurance company managed to overcome those problems, and to help Kenyan farmers in setting up a very innovative extended value chain. This company is Kilimo Salama. Here is the extended value chain that they have put in place. First: the insurance is distributed via local retailers that sell seeds, pesticides and fertilizers. Farmers will buy all those products at the distributors, as they usually do, and the distributor offers them a bundle including the micro-insurance for about 5% of the price of the goods. Moreover, Kilimo Salama partnered with NGOs who explain the concept of insurance to the local farmers. Second, the payment problem. The communication and the payments between the insurance company, the distributor and the insured farmer are both carried out with mobile phones. Here again, Kilimo Salama relies on a partner, Mpesa, the world leader in mobile banking, that is really successful in Kenya. Remember that over 70% of people in the world have access to mobile phones, including in the poorest countries. Third, the claims. Kilimo Salama has developed an innovative claim settlement process. It uses weather stations equipped with solar panels to collect meteorological data in areas covered by the insurance. In the event of abnormal climatic conditions, a statistical model based on historical data detects the event and triggers automatic compensation for the farmers. They do not have to report a claim and there is no visit to assess the real damage. It is cheaper for Kilimo Salama to pay for all the farmers in the area, including those who possibly didn’t suffer from the damage, rather than visiting each of them. Here again, technology is key. Launched in Kenya in 2008, Kilimo Salama, now called ACRE, is the largest agricultural program in Africa. In 2017, it insured over 1 million farmers in Kenya, Tanzania and Rwanda. As you can see in this striking example, engaging with partners such as distributors that are not in the insurance industry and NGOs, and integrating new technologies in the value chain, leads to an extended value chain, that enables the whole business model. Thus, the boundaries of the firm have vanished over the years, and figuring out an extended value chain can lead to very innovative business models. Before ending this video about the extended value chain, let me add a side comment. With this Kilimo Salama example, I would like to point out that the business model framework can also be very relevant for social businesses, that is, businesses with a social purpose, rather than only a mere for-profit objective. Social entrepreneurs can also find it very useful to use this tool. Throughout our course, we will give you many other examples of this type. In our next video, we will discover the other subparts of the value architecture, that is, strategic resources and competencies.