The value chain‘s values: Interpretations and implications for firm and industry analysis Diemo Urbig Humboldt Universität zu Berlin urbig@diemo.de www.diemo.de BIR 2003, Berlin, 19.09.2003 Content Value chain – an overview 1. An appropriate value definition ? 2. Relaxing an implicit payment assumption 3. Proposing an extended value analysis 4. Vertical integration and value systems 5. 1
The value chain – an overview value V support activities firm infrastructure “In competitive terms, value is the amount human resource management buyers are willing to pay for what a firm customer technology development provides them. Value is measured by total margin M procurement revenue , a reflection of the price a firm’s inbound opera- Out- marketing service product commands and the units it can logistics tions bound and sales sell.“ (Porter 1985) logistics (costs of) primary activities Value chain as a tool to support the identification and analysis of the origins of competitive advantages (cost leader, differentiation). Who values what ? costs benefit internally V i,f V i,c created revenue costs V x,f V x,c firm externally customer created point of view 2
Definition R of value Value as revenue (implies that margin is (somehow) the profit of the firm) = V i,f V i,c V V , x f M = + M V V , , x f i f V V x,c a partner value Examples: Porter 1985, Hax and Majluf 1996, Zerdick et al. 2001, Meffert 1989, ... Definition W of value Value as willingness to pay (assume willingness to pay = value of received goods or services) M = V V V i,f V , i c = + a stream value M V V , , i c i f V x,f V x,c Examples: Porter 1985, Saloner et al. 2000, Besanko et al. 2000, ... 3
Assumption of inconsistency Inconsitency: Consistency implies: � Gain full customer benefit, V i,f V i,c no value creation by ≠ payments (V i,c =V x,c =V x,f ), or Customer‘s partner value � V x,f V x,c equals value creation by payments (V i,c +V x,c =V x,c +V x,f ) Approach to identify the appropriate definition: � Activities affecting value and created value ? � Identification of competitive advantages ? Activities affecting value (creation) � Increasing value according to definition R – Nominal price increase (affected by market forces) – Changing payment conditions to � make better fit to customer‘s abilities (e.g. installment sale) � Reduce cost / risk of collecting / producing payments � Extend value chain by payment-related activities � Increasing value according to definition W : – Traditional value chain analysis � Increase quality of goods and services � Decreasing costs of absorption 4
Identify competitive advantages Competitive advantage: comparatively low costs or comparatively high value, i.e. a high margin. � Identifying cost advantages – Supported by both approaches � Identifying differentiation advantages – definition R: not directly supported, customer net benefit is not considered – definition W: directly supported, considers customer net benefit Result and example � Definition W is the more appropriate definition � Example: Value for search engines – Definition R: No revenue from user. If contact/ attention is taken as revenue then value is about quantity and quality of contacts, activities for absorbing contacts – Definition W: Value chain is about Helping users to find relevant information on the WWW 5
Implicit payment assumption � Current assumptions of value chain analysis: – Production assumption: V i,f ≠ V i,c – Payment assumption: V x,f = V x,c � Refined payment assumption: V x,f ≠ V x,c – imperfect capital market – positive costs of production – positive costs of absorption (if not already considered, by revenue) An example � Search engine and Internet user: pay per request – Micro-payments have not been available or too expensive � Distribution of profit among the firms of an industry value chain – Linkages between both streams of goods, services, and payments � Barter deal with the Internet user – Absorbing his/her attention 6
Extended value analysis value creation by goods and services V i,f V i,c production absorption value chain net benefit profit V x,f V x,c absorption production payment chain value creation by payments Extended value system � Vertical integration follows two verticals � Different degrees of vertical integration along the different verticals � Linkages between the verticals additionally affect the distribution of profits along the value system firm 1 firm 1 firm 2 firm 2 stream of good stream of good and services and services stream of stream of payments payments firm 3 7
Remarks on value chain analysis � There are two inconsistent definition of value, where the definition of value as willingness to pay is more appropriate. � There is an implicit assumption about payments that should be refined such that payments can be differently valued from the firm and its customers. ( � A value-creating firm‘s (public) primary purpose can be value destroying.) � The extended value analysis can handle the refined payment assumption. Barter deals can be analyzed. Different vertical integrations along the streams are possible. 8
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