Industry Value Systems

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IndustryValue Systems

• Adapted in part from
• Competitive Advantage
• Michael Porter, 1985

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Industry Value System

• An industry Value System is the collection of all
  business activities necessary for the end user to
  benefit from the product.
• This includes both supply and distribution chain
  activities, as well as complementary products and
  activities.

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Fireplace Value System
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Link to Five Forces

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Link to Five Forces
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Link to Strategy as Position

• Strategy as Position can be characterized in
  terms of Products and Markets
• What (end) Products for
• Which (end user) Markets?
• However, positioning in an industry value system
  is also important
• in which business activities of serving the end
  user are we going to participate?

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Profit Pools

• Profit concentration among activities of an
  industry value system is often different from
  revenue concentration.
• Automobile financing is the most profitable
  element of the automobile value system.
• Concessions sales are an attractive profit pool
  to entertainment venues.
• Cartridges sales are an attractive profit pool
  for printer manufacturers

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End Users

• Those who purchase a product for their own
  benefit (end users) are the foundation for any
  industry
• Access to end users is extremely important

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Vertical Integration

• Participating in two or more consecutive stages
  of an industry value system
• Forward integration moving towards the end user
  in the industry value system
• Backward integration becoming your own supplier

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Why Vertically Integrate?

• Greater control and synergy of supply /
  distribution activities
• Participate in more / best profit pools of
  industry value system
• Retain proprietary knowledge
• Increases barrier to entry

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Why Forward Integrate

• Get closer to the all-important end user
• Opportunity to learn from end users
• Capitalize on value added profit pools
• After sales serivce, warranties
• More opportunity to differentiate

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BUT Vertical Integration may

• Increase risk
• Decrease flexibility
• Lead to inefficiencies due to lack of market
  discipline
• Become bureaucratic
• Cause channel conflict

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Outsourcing

• Contracting for necessary activities that could
  be done by the company itself.
• May increase efficiency, effectiveness by drawing
  on a competitive marketplace
• Sacrifices some control, requires oversight

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What to (not) Outsource?

• NOT mission critical activities
• Activities that create basis for competition
• NOT activities for which the interface is
  critical
• Activities for which the firms needs do not
  reach efficient economic scale
• Activities unrelated to the core business

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The Virtual Corporation

• Everything is outsourced! The corporation
  provides only the coordination among multiple
  suppliers.
• Internet has greatly facilitated this model

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Related Concept

• Michael Porters Value Chain a framework for
  internal analysis of (large) companies
• Primary activities
• Inbound logistics, Operations, Outbound
  logistics, Marketing and Sales, Service
• Support activities
• Firm infrastructure, Human Resource Management
  Technology Development, Procurement