deconstructionofthe value chain (wertkette) · minimum wage $5 a day no employee to be discharged...
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SCHMIDT CONSULTING Business Advisors – 7500 St. Moritz & 8044 Zürichwww.schmidt-consulting.ch
Deconstruction of theValue Chain(Wertkette)
ReferatsunterlagenDr. Alexander Schmidt
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Dr. Alexander Schmidt
DECONSTRUCTION OF THE VALUE CHAIN
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Dr. Alexander Schmidt
DECONSTRUCTION DRIVEN BY NEW ECONOMICS OF INFORMATION
0
20
40
60
80
100
120
1985 1989 1993 1995 1998
$/MIPS Band-width
1014
0104103
102
Time
Processing costs (1) Throughput
Lower transaction costs
Time
Size of firm; level of integration
(1) From $120/MIPS in 1985 to $0.99/MIPS in 1998Source: Micro Design Resources
Connectivity
1 2 3 4 5 6 7 8 9 10 n
Value
Cost
0 2v 6v 12v 20v 30v 42v 56v 72v 90v n(n-1)v
F+0 F+ 2c F+ 3c F+ 4c F+ 5c F+ 6c F+ 7c F+ 8c F+ 9c F+ 10c F+ nc
Connections
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Dr. Alexander Schmidt
Between 1770 and 1783, productivity per worker increased at an annual rate of 1.7%
By 1775, the whole process of yarn manufacture, including carding, drawing, rolling and spinning was performed by a succession of operations on one machine
Technological and manufacturing innovations introduced during the Industrial Revolution allowed for the production of an efficient supply of yarn
INDUSTRIAL REVOLUTION REDEFINED STATUS-QUO ECONOMICS
0
20
40
60
80
100
120
1770 1776 1783
Index
Workers per bushel of manufactured cotton
Source: History Today, March 1, 1998
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Dr. Alexander Schmidt
LATER, FORD REWROTE THE BUSINESS RULES OF HIS TIMEJanuary 5, 1914: $5 Work Day Announcement
“A blinding rocket through the dark clouds of the present industrial depression.”
» Cleveland Plain Dealer
FORD GIVES REASONS FOR PROFIT SHARING
Taking dividends in Good-Will, the Automaker Calls His $10,000,000 Plan.
- NYT
WILL SPEND $600,000 ON FORD PLANT HERE
Great Addition Will Be Built to Assembling Factory in
Long Island City.
MANY MEN SEEKING WORK
More Than 200 Apply Each Day in Person—A Board Will Pick
New Men.
- NYT
Price index
GIVES $10,000,000 TO 26,000 EMPLOYEES
Ford to Run Automobile Plant 24 Hours Daily on Profit-
Sharing Plan.
MINIMUM WAGE $5 A DAY
No Employee to Be Discharged Except for Unfaithfulness or Hopeless
Inefficiency.
- NYT
“Distinctly Utopian and dead against all experience.”
» NYT
“The most foolish thing ever attempted in the industrial world.”
» Wall Street Journal
“The increase in pay . . . Is neither charity nor wages. It is simply profit sharing.”
» Henry Ford
“A magnificent act of generosity.”
» New York Evening Post
Source: Ford: The Men and the Machine, Robert Lacey; Newsweek; New York Times
0
20
40
60
80
100
120
140
1908 1909 1913 1924
Model T
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Dr. Alexander Schmidt
MOORE PREDICTED PROCESSING COSTS TO FALL PRECIPITOUSLYFraction of What It Used to Be
The number of transistors on a microprocessor will double every 18 months
Processing costs will continue to fall
0
20
40
60
80
100
120
1985 1989 1993 1995 1998
$/MIPS
Source: Micro Design Resources; C/net glossary
Processing costs Moore’s law
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Dr. Alexander Schmidt
BUT WE HAVEN’T SEEN ANYTHING YET
0
20
40
60
80
100
120
1770 1775 1780
Index
1908
1985
1913
1989
1924
1993 1998
Model T
Manufactured cotton
Processing costs
0
50
1770 1773 1776 1779 1782
$0.12
$40.00
Moore
Cotton
Cost of cotton shirt (1)
(C$)
0
5'000
10'000
15'000
20'000
25'000
30'000
1908 1913 1918 1923
$15
$24,500
Moore
Model T
Cost of Model T (2)
(C$)
$4,823
0.00
2'200.00
1999 2004 2009 2014 2019
$0.21
Moore
Cost of computer (3)
($)
(1) Estimate(2) Used 1929 GDP deflator and assumed 5% annual inflation from 1908-1928(3) Compaq 5670, Pentium II processor, 450 MHz, 19 Gb hard drive, 128 MB RAM, 5X DVD-ROM, 1.5 MB max digital modem, 4/8 MB 100 MHz SGRAM video memory
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Dr. Alexander Schmidt
GILDER EFFECTS OUR EVERYDAY LIVES
6 minutes to brew 1,944 cups of coffee, or 8, 30-gallon servings
Super 80 transports 34,992 passengers from Dallas to Chicago on a two-hour flight
Lunch of 243 burgers and small fries in an hour
488,187 passengers ride Splash Mountain each hour at Walt Disney World
6 minutes to brew 8 cups of drip coffee
Super 80 transports 144 passengers from Dallas to Chicago on a two-hour flight
Lunch of one burger and small fries in an hour
2,009 passengers ride Splash Mountain each hour at Walt Disney World
Today In 2008
. . .
. . .
. . .
. . .
Source: Boeing web-site; Walt Disney World—Splash Mountain operating hourly ride capacity
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Dr. Alexander Schmidt
METCALF’S LAW DRIVES THE CREATION OF NETWORKS
0
10
20
30
40
1992 1994 1996 1998 2000 2002
U.S. households connected to the internet(M)
Connections 1 2 3 4 5 6 7 8 9 10 n
Value
0 2v 6v 12v 20v 30v 42v 56v 72v 90v n(n-1)v
F+0 F+ 2c F+ 3c F+ 4c F+ 5c F+ 6c F+ 7c F+ 8c F+ 9c F+ 10c F+ nc
Cost
Harnesses the value of Moore (processing) and Gilde r (transmission)
0
20
40
60
80
100
Value increases as the square of connections
Profit
Loss
Value, cost
Cost increases linearly with connections
(1) Estimate(2) Ad spending datesSource: Veronis, Suhler & Associates; Internet Advertising Bureau (IAB); Advertising Revenue Reporting Program
Ad spending
Internet connections
1Q96 3Q96 1Q97 3Q97 1Q98 3Q98
460
345
230
115
0
Ad spending
(M)
(1,2)
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Dr. Alexander Schmidt
FIRMS FORMED TO MINIMIZE TRANSACTION COSTS
Coase’s Theorem: Firms form when market inefficienci es, driven by the cost of information between indep endent entities, exceed the cost of managing and directing resources within a firm
Coase’s theorem explains the formation of firms suc h as Standard Oil, National Steel, and IBM
Costs of contract
negotiations
Costs of communication
Costs of transactions
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Dr. Alexander Schmidt
FIRM SIZE IS BEING DRIVEN DOWN BY PLUMMETING TRANSACTION COSTS
0
10
20
30
40
1996 1997 1998 1999 2000 2001 20020
20
40
60
80
100
120
140
1985 1988 1991 1994 1997
$/MIPSProcessing costs Transmission capacity increasing
Old
New
Firm size
MooreDS-3miles(000) One fiber, one route mile
Connectivity
1 2 3 4 5 6 7 8 9 10 n
Value
Cost
0 2v 6v 12v 20v 30v 42v 56v 72v 90v n(n-1)v
F+0 F+ 2c F+ 3c F+ 4c F+ 5c F+ 6c F+ 7c F+ 8c F+ 9c F+ 10c F+ nc
Connections
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Dr. Alexander Schmidt
EXAMPLE: PHOTOGRAPHYTaking a Photo and Sending to Relatives
Traditional method
35mmcamera
Film Developing Mail
$250 $3 for roll of24 pictures
$6 for 24 pictures
$0.32 peritem
$0.05 per picture (1)
$0.125 per picture
$0.25 per picture
$0.32 per picture
New Method
= Total cost: $0.75 per picture
Digitalcamera
PCInk Jet color
printerEMail
$400 $800 $300 $720(2)
$0.08 per picture (1)
$0.16 perpicture
$0.06 per picture
$0.144 perpicture = Total cost: $0.44 per picture
(1) Assumes 5,000 pictures; equivalent to using less than three rolls a month for six years(2) Assumes $10 per month for six years
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Dr. Alexander Schmidt
EXAMPLE: PERSONAL BANKING
Review account information by calling bank representative
between 9 AM and 5 PM or visiting the local
branch office
Transactions via mail/physical drop-off
Checkbook (paper)
On-line account information
Transactions via e-mail
On-line checkbook (paperless)
Average cost per transaction in retail banking via a branch is $1.07; via the telephone is $0.68
Average cost per transaction in retail banking via the Internet is $0.10
=
=
Traditional method
New method
Source: Unleashing the Killer App, Larry Downes, Chunka Mui
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Dr. Alexander Schmidt
EXAMPLE: TOY SHOPPING
Limited selectionSpecialty toy stores (e.g.
hobby shops)
Unlimited selectionOn-line (e.g. E-toys)
Search time of one to two days
Search time of less than one hour
=
=
Traditional method
New method
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Dr. Alexander Schmidt
THE ECONOMICS OF DECONSTRUCTION DO NOT ALWAYS ADHERE TO CONVENTIONAL ECONOMIC THEORY
Some Driven by the Network Effects of Information
Conventional economic theory Deconstruction economic theory
Increasing Returns to ScaleDecreasing Returns to Scale
Source: W. Brian Arthur, Professor of Economics at Stanford University, pioneered the study of increasing returns economics
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Dr. Alexander Schmidt
THE ECONOMICS OF INCREASING RETURNS CREATE SEVERAL NETWORK EXTERNALITY BENEFITS
Direct externality
Market-mediated
Market-completeness
Competition
Source: Rand Journal of Economics, Vol 16, No. 1, Spring 1985, pp. 70-71
When a consumer’s value for a good increases as other consumers buy a compatible good
Telephone
Benefit Explanation Example
When a complementary good becomes cheaper and more readily available the greater the network
Software
When a richer second hand market develops
Car parts
When compatibility within a network prompts price competition among sellers
Floppy disks
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Dr. Alexander Schmidt
APPLYING ONLY CONVENTIONAL ECONOMICS TO DECONSTRUCTION CAN LEAD YOU TO ASK THE WRONG STRATEGY
QUESTIONS
Strategy questions grounded in conventional economics
Strategy questions appropriate for deconstruction economics
“How do I create barriers to entry in my market?”
“How can I encourage others to enter my market?”
“How should I compete?” “How should I cooperate and co mpete?”
“How can I create advantage from product differentiation?”
“How can I create advantage from product standardization?”
“How should I price my product?” “Should I price my pr oduct, or should I give it away for free?”
“How can I accelerate my rate of innovation?”
“Should I promote innovation or favor the status quo?”
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Dr. Alexander Schmidt
DECONSTRUCTION: COMING SOON TO YOUR MARKET
LONG DISTANCE
Wholesale (Network)• Design/build• Operations/maintenance• Resale/interconnection
Retail• Sales/marketing• Account management• Billing
Retail• Sales/marketing• Account management• BillingNetwork
• Design/build• Operations/maintenance• Resale/interconnection Retail
Retail• Network intelligence• Value added services
Wholesale service creation• Network intelligence• Value added services
Network management/dispatch
Wholesale
PHARMACEUTICALS
Research Development Trials Registration Manufac-turing
Sales &marketing
Increased development costsRole of blockbusters increasing
Quality outsourcers availableEasier coordination
1980s
1990s Research Development Trials Registration Manufac-turing
Sales &marketing
Academic labs
Biotech firms
Contract research organizations
Contractmfrs
PBMsJVs/
licensing
ELECTRIC UTILITIES
COMPUTER INDUSTRYAT&T, MCI and Sprint
… fragmented radically
Microprocessors, integrated circuits,
memory chipsComputers Operating
systemsApplications
software
Marketing, sales, and
distribution
Common standardsTime based competition
1995Intel
Motorola
AMD
Cyrix
Compaq
Dell
Apple
Packard Bell
IBM
DOS and Windows
UNIX
Mac OS
OS/2
Microsoft Office
WordPerfect
Others
Retail
Superstores
On-line
Mail orderNeXt
IBM , Digital
1997
Primaryfuel
Powergeneration Trading Distribution
Backward integration to reduce risk
Forward integration to open supply channels
Scale through focusing on huge power plants
Synergy through bundling capabilities of general trading and energy business
New services for the customer
Ruhrkohle
Mobil
BP
Shell
National Power(UK)
Electrobel (Belgium)
RWE (Germany)
Norsk Kraftmegling
(Norway)
Enron
United Utilities(UK)
South-ernWater
Eastern Elect-ricity (UK)
Stadt-werkeMunch-en (Ger-many)
1990
1995
19851990
Statkraft (Norway)
Oslo Energi (Norway)
EVO (Germany)
IVO (Finland)
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Dr. Alexander Schmidt
DECONSTRUCTION ALSO AFFECTSORGANIZATIONAL STRUCTURES
From Hierarchies To Hyperarchies
Command controlFixed information flowDirect collaboration Strategic plans
Self-initiativeUnfettered information flow Market-oriented interfacesOpportunistic strategy
Breaking of richness/reach compromise
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Dr. Alexander Schmidt
INDUSTRY DECONSTRUCTION A Drive for Market Efficiency
ProductionExplorationTransport & logistics Refining
Transport & distributionMarket-ing
Oil & chemicalproducts
Retail gas
Texaco
Shell Oil
Mobil
Oil field services
Schlumberger
Halliburton
ExxonFranchises
Drilling contractors
Oil Industry Value Chain (circa 1978)
Players
Franchises
Franchises
Franchises
Star Martfranchises
Shell ChemicalShell Midstream
(Gulf)
Schlum-berger
GeoQuest
HalliburtonLandmark Graphics
Tosco
ProductionExplorationTransport & logistics Refining
Transport&
distribu-tion
Market-ing
Oil & chemicalproducts
Retail gas
Oil field services
Seismic software
Conveniencestore
Credit cards
Koch Refining
Bayway (NJ)
Franch-ises
Drilling contractors
Equilon Enterprises (Western)Star Enterprise (Eastern, Gulf)(Texaco, SRI & Shell)
Shell nonfuel retail (Houston)
Texaco
Shell Oil
Mobil
Exxon
Aera Energy (CA)
Texaco and Shell combine R&M
RaceTrac
QuikTrip
UnitedMeridian
Parker &Parsley
Flores & Rucks
Newfield
Nuevo Energy
Chesapeake Energy
Huntsman Chemical
Ocean EnergyLeviathan
Franchises
Franchises
Oil Industry Value Chain (circa 1997)
Players
Incumbents
New business units
Reinvigorated players
New entrants
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Dr. Alexander Schmidt
INDUSTRIES DECONSTRUCT IN TIMES OF RAPID CHANGEForces Put Pressure on Vertically Integrated Incumbents
E-commerce
Natural monopolies
Improved contracting
Deregulation & free trade
Reengineering & flexible production
Easier, greater, cheaper flows of information, incr easingly detached from other supply activities
Emergence of products with network externalities - p roduct’s value increases as numbers of users increase
Better, cheaper, faster ways to make payment and to transfer or recombine risk
Pressure to break up illogical bundles of assets, a llowing capture of hidden scale and other economies
Cheaper, easier, faster exchange of goods and servi ces, opening markets along the value chain
Faster, cheaper production; more outsourcing
Increased asset productivity
Forces Description of Pressure
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Dr. Alexander Schmidt
DECONSTRUCTORS PURSUE COMPETITIVE APPROACHES THAT FOCUS INVESTMENT ON ADVANTAGE
M Market
• Standards• Knowledge• Assets• Scale M M
M M
M M
• Buyers’ agents• Sellers’ agents• Market managers
M M
• Consumer brands
• Industrial solutions
M MM
• Direct bonding
• ReintegrationM
N
Key
X
ayer mastery
avigatorisintermediation
rchestration of integrated offer
D
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Dr. Alexander Schmidt
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