Value Network Essay

The value network models value creation in the context of firms that create value by making it possible for customers to exchange goods, information, and capital. The value network model is most suitable for the representation of value creation for firms that compete in the network economy. Such firms manage clubs or sets of customers. The firms are not the network; they merely provide networking services to their customers. Typical examples include telecommunications firms, airlines, postal and financial services firms, and stock exchanges. Value is created by making exchange viable and efficient by reducing transaction costs. Firms that create value by making possible exchanges link clients or customers who are or wish to be interdependent for exchange purposes.

The value network model is one of three value configuration models. Value configuration analysis is based on the premise that competitive advantage stems from the performance of discrete activities by firms. All value configuration models share the underlying logic that by disaggregating a firm into its strategically relevant activities, managers can understand the behavior of costs and the sources of differentiation and hence understand competitive advantage. A value configuration analysis entails the identification of the primary activities of a firm and thereafter the study of the economic implications of those activities. The models assist managers in determining what activities a firm should perform, and how, and what is the configuration of the firm’s activities that would enable it to add value.

Initially the value chain was advanced to assist managers in creating sustainable competitive advantage through the analysis of how companies create value. Proposed in 1985, the value chain, which has become popular worldwide, appropriately describes value creation in the manufacturing sector of the economy. However, the value chain fails to model value creation of telecommunications companies, consulting firms, doctors, lawyers and banks, and e-business. Its relative importance to managers has also been reduced as the contribution of manufacturing companies to gross national product has fallen since the 1980s, with current manufacturing share of gross domestic product at merely 15 percent in many developing countries. These factors have given rise to two complementary value configuration models, namely the value shop and the value network.

The value network model disaggregates the exchange-facilitating firm (value network) into its strategically relevant activities. The primary activities are “network promotion and contact management,” including activities associated with the management of the adoption of a specific technology or the choice of a specific network provider, the selection of customers who are allowed to join the network, and the initiation, monitoring, and termination of customer contracts; “service provisioning,” including activities associated with the initiation, maintenance, and termination of a range of exchange relations between customers; “network infrastructure operation,” including activities associated with the development, rollout, and maintenance of the physical or informational infrastructure. The primary activities must be performed simultaneously to create value. For example, the technical features of the infrastructure affect the availability of services and the availability of services affects customers joining the network. To the extent to which one of the three primary activities is underdeveloped or not functioning, value creation is negatively affected.

Value network services are typically affected by network externalities. Network externalities exist when customer value is not only affected by the quality feature of the service but also by the number of other customers (global network externalities) and/ or the composition (identity and number) of a specified group of customers (local network externalities) affiliated with the exchange-facilitating firm (value network). Scale is therefore a primary value driver in value networks. Accordingly, technology standard wars, standardization of platforms, and fierce competition at the initial stages of service introduction have been repeatedly observed in such industries as telecommunications, high technology, and banking.

The industry system where such firms operate is characterized by both interconnection and vertical coproduction of services. Unlike value chain and value shop firms, competing value network firms are typically interconnected to one another. For example, the existence of a telephone subscription with one mobile phone operator does not preclude a telephone call to a customer of a different mobile phone operator. Another unique strategic connection is the prevalence of various value network firms to cooperate in the delivery of a new service. For example, internet banking is only possible because of vertical coproduction by telecommunications and banking firms.

Managers of value networks face strategic challenges in terms of determining whether to expand to serve new communities of customers or serve the same customer set but enable more types of exchanges, as well as whether to expand by acquiring competitors or merely interconnecting with them.

Bibliography:

  1. Raphael Amit and Christoph Zott, “Value Creation in E-business,” Strategic Management Journal (2001);
  2. Øystein Fjeldstad and Espen Andersen, “Casting Off the Chains,” European Business Forum (2003);
  3. Michael L. Katz and Carl Shapiro, “Network Externalities, Competition and Compatibility,” American Economic Review (v.75/3, 1985);
  4. Michael E. Porter, Competitive Advantage (Free Press, 2004);
  5. Charles B. Stabell and Øystein D. Fjeldstad, “Configuring Value for Competitive Advantage: On Chains, Shops, and Networks,” Strategic Management Journal (1998).

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