Designed for students and by students. Created by Sunil Mehrotra
4.Industry Value Web and PIE
The topics covered in this segment are: Understaning the concept of an industry’s web or chain of connections with its suppliers, distributors and customers, how to measure the value added by each member in the value chain; the concept of potential industry earnings (PIE), which is the “theoretical” earnings that an industry as a whole can realize from the end-customer, how this PIE is split between members in the chain, and what factors influence who gets how much of the PIE. There is often confusion in the use of the term value chain of an industry versus that of a firm within an industry. In this segment our focus is on the industry as a whole and not any firm within it.We will discuss a firm’s value chain in later segments.
For strategists it is very important to understand the dynamics of the industry as a whole and how they effect firms within the industry. For example, the internet and digital technologies are having a profound affect on Sony Music, EMI, Universal records and other labels in the industry. The industry as a whole is scrambling to find new strategies and business models to succeed in this digital age.
I personally prefer the term Value Web or Value Ecosystem, the reason is that the term Value Chain is most often used to define a company’s value creating processes, and not when describing the industry’s ecosystem which links raw material suppliers, manufacturers to distribution channels to end customers. In this section we are focused on analyzing the ecosystems of different industries, and not of a given company. We will be discussing individual firm’s (company’s) value chain in subsequent sections. Our focus in this section is to understand how the various participants in an industry’s ecosystem add value and capture economic value. Which participants have the economic power in the ecosystem and how that power translates into economic value captured (profits).
Digital content production and distribution value chain/web
Tyson Foods has an informative and easy to followinvestor presentationon the chicken, beef and pork industry supply chain/value chain (value web).
Here is a good analysis of On-line Advertising Industry Value Chain (web) from liesdamnedlies.com ; worth reading to understand both the specifics of online advertising and the general concept of industry value chain (value web). A more rigorous and slightly academic review of broadband content delivery value chain/web article and strategic implications for content creators and various players in the value chain.
Online Video Game Industry ecosystem and IBM’s analysis of the strategic implications for each player in the ecosystem. A good article to read to understand the concept of industry value chain/value web/ecosystem and how it is used for analyzing strategic implications for an industry, in this case the online video game industry.
Read and listen to this segment from NPR news on how Kindle is changing the book publishing industry. This segment has interviews with all the key players-publisher, book seller and a customer- in the book publishing chain, and their point of view on Kindle and ebooks. This news feature brings to life the impact, in human terms, on each player in the chain when an industry undergoes a profound change. In this case the publishing industry is being impacted by two disruptive technologies-the Internet and eBooks.
The strategic reason for analyzing an industry’s value chain is to understand what value is added by each member in the value chain, and what value is captured by each, and to identify the forces that drive the value creation and capture process. Each member in the chain receives “input” from the previous member, “adds value” to this input through its internal activities/processes and passes on the “ouput” to the next member in the chain, as represented in the image below:
Each player in the chain adds value. We will discuss how to estimate the total value added-from raw material to the end customer-and how much of the value is created and captured by each player in the chain. We will also learn what factors influence who captures how much value (that is understand the source of power in the value chain). We will learn about the concept of industry PIE (potential industry earnings).