The emergence of "value networks"

By William C Copacino -- Logistics Management, 8/1/1999

With the emergence of a new economy--what we increasingly refer to as the "eEconomy"--many of the traditional rules for success are changing. Virtually all industries are re-evaluating channel structures, approaches to customer-relationship management, the impact of changing scale economies, and the importance of speed vs. precision.

Another important element that businesses are reconsidering is the value of "vertical integration." Vertical integration has been a core strategy for many businesses throughout most of my working life. Until now, increasing degrees of vertical integration have reduced transaction costs and often have provided companies with lower cost structures. In the new eEconomy, however, we see this trend reversing for several reasons:

- First, the cost of collaboration has declined. Through use of the Internet and collaborative planning, a company can develop "extra-enterprise processes" with suppliers that are seamless and efficient. This allows a company to achieve many of the benefits of vertical integration without having to assume the necessary asset base. The term "value networks" has been used to describe these new collaborative relationships.

- Second, the capital charge for a fully vertically integrated enterprise can be prohibitive, a situation that clashes with today's increasing emphasis on creation of shareholder value and effective use of investment capital.

- Third, we are seeing more companies focus on their core capabilities, where they can excel and add distinctive value, rather than try to develop capabilities in all areas of the value chain. Companies, therefore, can outsource more activities to alliance partners that are true experts and that can develop the necessary scale. This is true for core value-chain functions such as component manufacturing, assembly, logistics, product design, or customer management, as well as for such internally focused activities as information technology, human-resource management, or accounting and finance.

The result of all these forces coming into play is the rapid development of value networks in which companies develop collaborative relationships with alliance partners that provide one of the core or infrastructure components of the value chain.

A key success factor for companies in the future will be the ability to form (and re-form) these value-network alliances. Clearly, developing the capability to form alliances will require many cultural, technical, and operational changes. Companies that are able to form value networks, however, will achieve powerful advantages in cost, service, asset productivity, and flexibility.

These value networks also will have tremendous implications for logistics and supply chain managers because logistics, manufacturing, and customer-facing functions will be prime areas for outsourcing or incorporation into value networks. The ability to form and manage these relationships will be an increasingly important skill for logistics managers to maintain.

William C. Copacino is managing partner of Andersen Consulting's Strategic Services Practice for the Americas. A frequent speaker before business and professional groups, Mr. Copacino has a number of publications to his credit, including the book Supply Chain Management: The Basics and Beyond (The St. Lucie Press, 1997). He is based in Andersen Consulting's Boston office, 100 William St., Wellesley, MA 02181. Phone (617) 454-4480.