The value chains values: Interpretations and implications for firm - - PDF document

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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

1.

Value chain – an overview

2.

An appropriate value definition ?

3.

Relaxing an implicit payment assumption

4.

Proposing an extended value analysis

5.

Vertical integration and value systems

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The value chain – an overview

(costs of) primary activities support activities margin M firm infrastructure human resource management technology development procurement inbound logistics

• pera-

tions Out- bound logistics marketing and sales service value V

customer “In competitive terms, value is the amount buyers are willing to pay for what a firm provides them. Value is measured by total revenue, a reflection of the price a firm’s product commands and the units it can sell.“ (Porter 1985)

Value chain as a tool to support the identification and analysis of the

• rigins of competitive advantages (cost leader, differentiation).

Who values what ?

internally created externally created

point of view

firm customer

Vx,f Vx,c

revenue costs

Vi,f Vi,c

costs benefit

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Definition R of value

f i f x f x

V V M V V

, , ,

+ = =

Examples: Porter 1985, Hax and Majluf 1996, Zerdick et al. 2001, Meffert 1989, ... Vi,f Vi,c V Vx,c M

a partner value

Value as revenue

(implies that margin is (somehow) the profit of the firm)

Definition W of value

f i c i c i

V V M V V

, , ,

+ = =

Vi,f V Vx,c M Vx,f

a stream value

Examples: Porter 1985, Saloner et al. 2000, Besanko et

• al. 2000, ...

Value as willingness to pay

(assume willingness to pay = value of received goods or services)

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Assumption of inconsistency

Activities affecting value and created value ? Identification of competitive advantages ?

Vi,f Vx,c Vx,f Vi,c

≠

Inconsitency:

• Gain full customer benefit,

no value creation by payments (Vi,c=Vx,c=Vx,f), or

• Customer‘s partner value

equals value creation by payments (Vi,c+Vx,c=Vx,c+Vx,f) Consistency implies: Approach to identify the appropriate definition:

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

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Identify competitive advantages

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

Competitive advantage: comparatively low costs or comparatively high value, i.e. a high margin.

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

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Implicit payment assumption

Current assumptions of value chain analysis:

– Production assumption: Vi,f ≠ Vi,c – Payment assumption: Vx,f = Vx,c

Refined payment assumption: Vx,f ≠ Vx,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

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Extended value analysis

Vi,f Vi,c Vx,f Vx,c

production production absorption absorption

value chain payment chain value creation by goods and services value creation by payments profit net benefit

Extended value system

stream of good and services stream of payments

firm 1 firm 2

stream of good and services stream of payments

firm 1 firm 2 firm 3

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

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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.