Deconstructionofthe Value Chain (Wertkette) · MINIMUM WAGE $5 A DAY No Employee to Be Discharged Except for Unfaithfulness or Hopeless Inefficiency.-NYT “Distinctly Utopian and

SCHMIDT CONSULTING Business Advisors – 7500 St. Moritz & 8044 Zürichwww.schmidt-consulting.ch

Deconstruction of theValue Chain(Wertkette)

ReferatsunterlagenDr. Alexander Schmidt

- 1 -© SCHMIDT CONSULTING BAS GmbH – 7500 St. Moritz / 8044 Zürich - www.schmidt-consulting.ch

Dr. Alexander Schmidt

DECONSTRUCTION OF THE VALUE CHAIN



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



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



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



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



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



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



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


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)



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



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


Connections



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



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



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



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



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



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?”



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)



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



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



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



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



Kontakt Schmidt Consulting Business Advisors GmbH

Direktkontakt Geschäftsführer:Dr. oec. HSG Alexander SchmidtFon: +41-79-419 3011E-Mail: [email protected]

SCHMIDT CONSULTING Business AdvisorsPlazza dal Mulin 37500 St. MoritzSwitzerlandFon: +41 - 81 - 834 4005Fax: +41 - 81 - 834 4006Mobile: +41 - 79 - 419 3011 E-Mail: [email protected]: www.schmidt-consulting.ch

Schmidt Business Advisors Zürich GmbH:Christopher SchmidtSusenbergstrasse 578044 ZürichSwitzerlandFon: +41 – 79 – 419 3011 E-Mail: [email protected]

Documents

Deconstructionofthe Value Chain (Wertkette) · MINIMUM WAGE $5 A DAY No Employee to Be Discharged Except for Unfaithfulness or Hopeless Inefficiency.-NYT “Distinctly Utopian and