Value Chains

1
Value Chains

• Yale BraunsteinJune 2004

2
Agenda

• What are Value Chains?
• The Theory of the Firm
• Market vs. Hierarchies
• Redesigning the Value Chain
• Learning Curves

I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
3
Value Chain

• - a linked set of value creating activities
• from raw material to end use product

I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
Customer
Procurement
RD
Manufacturing
Marketing
Distribution
Service
Value chain
Customer Basis
Source Marius Leibold, Gibert J. B. Probst
Michael Gibbert
4
Vertical Integration

• - the process that links the aquisition of raw
  material to the sale of the finished product
• common parent owns more than one part of the
  chain
• examples
• Oil companies
• Fast-food cartons
• (tapered v.i.)

natural gas
Ethane
Styrene
I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
Polystyrene
Cartons
Fast-food restaurants
final customer
Source Ernst Maug
5
Upstream vs. Downstream

• - a company that produces its own inputs
• is vertically integrated in the upstream market,
• has engaged in backward integration
• a company that distributes and markets its own
  goods
• is vertically integrated in the downstream
  market
• has engaged in forward integration
• Firms that are not vertically integrated use the
  market
• can contracts replace vertical integration?

I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
Source Ernst Maug
6
The Theory of the Firm
Transaction costs approach (Coase)
costs providing through the market
costs providing from within the firm
I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
Markets costs negotiations, search and
information, policing and enforcement Firms
costs own production, rd, marketing
7
Markets vs. Hierarchies
Make or buy

• Benefits from outsourcing
• Economies of scale of
• supplier
• 2. Economies of Scope of Supplier
• 3. Descipline on the market reduces agency costs
• 4. Inefficiencies hidden in the house of
  department

• Costs of outsourcing
• Coordination along the vertical chain
• 2. Leakage of critical information
• 3. Transaction costs

I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
Source Ernst Maug
8
Specialization

• Specialization in the vertical chain
• often small firms
• knowledge benefits for them
• Result Advantage in competition
• Negative
• - may be spread to thin if production in chain
  grows

I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
Source Ernst Maug
9
Redesign of the Value Chain

• Redesign must create dramatic gains in
• cost structure
• asset investment
• speed of responsiveness to external changes
• What has to be redesigned?
• set of activities
• the interfaces across the chain

I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
Source Marius Leibold, Gibert J. B. Probst
Michael Gibbert
10
Knowledge and Redesign

• Redesign should lead to knowledge about
• the customer base
• technologies
• market
• Redesign
• merges the knowledge of several firms

I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
Source Marius Leibold, Gibert J. B. Probst
Michael Gibbert
11
Learning Curves

• Learning by doing
• reduces costs by acquiring more know-how
• through production
• Learn about
• consumer tastes
• operating aquipment and technological rules
• organizational processes
• Learning can manifests itself in
• higher quality
• lower costs
• better marketing

I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
Source Ernst Maug
12
Learning Curves / EoS

• Learning curves and economies of scale
• Related, but not always the same
• Role of time and volume

Average Costs (/unit)
Average Costs (/unit)
I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
AC1
AC1
AC2
AC2
Q
2Q
Cumulative Output
Annual Output
Source Ernst Maug
13
Learning Curves / Strategy
Learning Curves and Strategy
Product Life Cycle
I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
Growth
Introduction
Maturity
Decline
Source Ernst Maug
14
Learning Curves / Strategy
The BCG/McKinsey Matrix
Relative
Market Share
Relative Market Growth
High
Low
I. Agenda 1. Value Chains? 2. Theory of Firm 3.
Market/Hierarchy 4. Redesign 5. Learning Curves
High
Rising Star
Problem Child
Low
Cash Cow
Dog

• Idea Leverage learning economies by increasing
• capacity early in the life cycle
• use cash cows to fund Problem Child, Rising Star
• devest dogs

Source Ernst Maug