External value chains and value networks

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Reduced time to market and increased customer responsiveness can be achieved through reviewing the efficiency of internal processes and how information systems are deployed. However, these goals are also achieved through consideration of how partners can be involved to outsource some processes that have traditionally been considered to be part of the internal value chain of a company. Porter's original work considered both the internal value chain and the external value chain or network. Since the 1980s there has been a tremendous increase in outsourcing of both core value-chain activities and support activities. As companies outsource more and more activities, management of the links between the company and its partners becomes more important. Deise et al. (2000) describe value network management as:

the process of effectively deciding what to outsource in a constraint-based, real-time environment based on fluctuation.

Electronic communications have facilitated this shift to outsourcing, enabling the transfer of information necessary to create, manage and monitor partnerships. These links are not necessarily mediated directly through the company, but can take place through intermediaries known as value-chain integrators or directly between partners. In addition to changes in the efficiency of value-chain activities, electronic commerce also has implications for whether these activities are achieved under external control or internal control. These changes have been referred to as value-chain disaggregation (Kalakota and Robinson, 2000) or deconstruction (Timmers, 1999) and value-chain reaggregation (Kalakota and Robinson, 2000) or reconstruction (Timmers, 1999). Value-chain disaggregation can occur through deconstructing the primary activities of the value chain and then outsourcing as appropriate. Each of the elements can be approached in a new way, for instance by working differently with suppliers. In value-chain reaggregation the value chain is streamlined to increase efficiency between each of the value-chain stages.

The value network offers a different perspective which is intended to emphasise:

the electronic interconnections between partners and the organisation and directly between partners that potentially enable real-time information exchange between partners;

the dynamic nature of the network. The network can be readily modified according to market conditions or in response to customer demands. New partners can readily be introduced into the network and others removed if they are not performing well; different types of links can be formed between different types of partners. For example, EDI links may be established with key suppliers, while e-mail links may suffice for less significant suppliers.

Figure 2.6, which is adapted from the model of Deise et al. (2000), shows some of the partners of a value network that characterises partners as:

1 supply-side partners (upstream supply chain) such as suppliers, business-to-business exchanges, wholesalers and distributors;

2 partners who fulfil primary or core value-chain activities. The number of core value-chain activities that will have been outsourced to third parties will vary with different companies and the degree of virtualisation of an organisation which involves outsourcing non-core services;

3 sell-side partners (downstream supply chain) such as business-to-business exchanges, wholesalers, distributors and customers (not shown, since they are conceived as distinct from other partners);

4 value-chain integrators or partners who supply services that mediate the internal and external value chain. These companies typically provide the electronic infrastructure for a company and include strategic outsourcing partners, system integrators, ISPs and application service providers (ASPs).

Value network

The links between an organisation and its strategic and non-strategic partners that form its external value chain.

Examples which illustrate the importance of value networks to Internet marketing are the affiliate networks and ad networks described in Chapter 8. Rather than working directly with individual publishers to drive visitors to a site, an online merchant will work with an affiliate network provider such as Commission Junction (www.cj.com) or ad network such as Miva (www.miva.com) which manages the links with the third parties.

Strategic core VC partners

Upstream VC partners

Suppliers

Strategic core VC partners

Upstream VC partners

Inbound logistics

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