The complexities of Asia present many
companies with daunting challenges to
effective collaboration and governance.
Value Network Analysis (VNA) offers
companies a way to gain clarity, pinpoint
deficiencies, and realize maximize benefit
from an extended network of people and
organizations. VNA is gaining traction among
researchers and practitioners from a wide
range of fields. A brief VNA case study is
also presented.
The lure of Asia continues to attract multinational investment.
With billions of dollars pouring into the region as firms build
up their operations, Asia's share of the world's FDI has
increased from 13% to 22% over the past few years. Value
chains are extending across the globe, with all of the
positive and negative effects of globalization in their wake.
Still, as firms chase lower costs and greater market access,
the complexity of operations increases dramatically. These
challenging levels of complexity often threaten the ability
to generate sustainable profitability in the region. Recent
research among large Western firms found that while Asia
represented 34% of sales potential, it accounted for 14%
of sales, 5% of assets, and only 2% of their top 200 people.
The Complexity of Asia
The Asian region encompasses incredible diversity. There
are over 2,200 distinct languages spoken in Asia - 415
languages are spoken in India and 235 in China. Indonesia
alone has over 300 ethnicities represented among its 220
million people, which are spread over 6,000 inhabited
islands and speak over 737 languages. In addition to ethnic
diversity, there are significant differences in economic and
political development across the region. GDP per capita
in Singapore and Hong Kong is approximately US$29,000.
GDP per capita in Indonesia is approximately US$1,400;
in India, it is US$820. All of these differences contribute to
the complexity of operating in Asia.
For most Western companies seeking markets in the region,
a local distributor or agent is often assumed to be the
obvious low cost, low risk mode of initial investment in
Asia. Operations grow organically over time. Distributors
are engaged in what are deemed attractive markets, and
a regional sales office is eventually established. For firms
that are sourcing, manufacturing, and prototyping in the
region, these functions add to the complexity of managing
operations in Asia. The network of internal and external
parties is often extensive and spread across vast
geographies, different languages, and distant cultures.
In managing international operations, firms rely on processes
and structures that have been successful in optimizing
operations and governance structures in home markets.
However, in Asia, business practices and industry dynamics
may be fundamentally different in ways that are not readily
apparent. Without understanding these differences,
efforts to optimize operations and governance structures with traditional tools (e.g. processes, procedures and
organization charts) are ineffective. As a result, firms miss
significant value-creating opportunities in Asia Pacific.
Operational practices and governance structures must be
adapted for the fundamental differences in business
practices and market structures encountered in Asia. Value
Network Analysis is an effective methodology that enables
firms to uncover these differences and retool their approach
to Asian markets.
Estimating Opportunities
According to Salomon, the difficulty of estimating
opportunities is largely due to a lack of quantifiable
measures regarding social, political, religious, economic,
or technological factors. "It is much easier to estimate
demand where we know what a country's population is,
we know what their disposable income looks like, and we
know what GDP per capita looks like," he said. "Howerver,
China is a collectivistic country and United States is
an individualistic country. How do I factor that into my
demand equation? How do we factor in that Country A is
a predominantly Catholic country and Country B is a
predominantly Muslim country?"
To manage these uncertainties, Salomon suggests that
firms expand in markets that are similar to its own, or in
markets they have already been successful in. For instance,
it is often easier for British companies to expand in America,or American companies into Canada. Or, if a company is
successful in Hong Kong, it might consider expanding into
Singapore. Companies can also look for markets where
similar companies have been successful or companies
from similar industries have been successful. "If the past
says that all American firms do just fine in China on average,
then maybe China is not a bad place to enter," Salomon
said. "Look at other folks in your industry. Have other folks
in your industry had success there?"
Value Network Analysis
Every company delivers value to its customers through a
network. The complex web of suppliers, vendors, service
providers, outsourcing centers, distributors, agents, and other participants surrounding a firm are resources which
create value together through their interaction. The value
can be tangible or intangible, public or proprietary. Every
organization can be described as a value network,
and every organization is part of a value network,
whether a government, a hospital, an association, or an
industrial enterprise.
Value Network Analysis (VNA) is a methodology that enables
firms to visualize and understand how value is created,
reveal gaps in collaboration, and develop effective
governance capabilities. VNA views the entire system from
the top down. It encompasses in its scope the internal and
external participants in a value network and captures both
tangible transactions and intangible knowledge flows.
In VNA, a model of the existing network (e.g. structured
transactions, existing processes, traditional organizations,
informal participants, and unstructured knowledge flows)
enables each component to be justified for its contribution
to the whole, the interaction between components
accurately described, and governance structures evaluated.
The model makes visible what is really happening and
uncovers what is not captured in existing processes and
structures. Insights from the existing model form the basis
for a revised model and a plan for realizing maximum
benefit from the overall system.
VNA is complimentary to methodologies and tools such
as business process reengineering, UML, six sigma,
enterprise architecture, ITIL and CMM. In fact, value
networks language is finding its way into a variety of
software tools and reference models.
Many Western firms with operations in Asia Pacific struggle
with the complexity of operations and face challenges in
governing a disparate value network. VNA offers a high
level, efficient way to gain clarity and pinpoint deficiencies
in operations and governance before committing significant
resources to new infrastructure.
The Evolution of Value Networks
The concept of the value network is not new and can be
traced back through a variety of ideas, including industrial
dynamics, knowledge management, and transaction cost
economics. However, recent research has generated
greater interest in the application of the concept of
value networks.
In 1985, Michael Porter outlined the concept of the value
chain. Defined as a sequence of activities that add value
to a final output, the value chain includes primary activities
such as logistics, production, sales and marketing and
service, as well as support activities such as administration,
HR, purchasing, and R&D. While foundational, the
description is focused on costs and control at the firm
level. The value chain concept has since been expanded
beyond the individual organization and can refer to an
organization and its supply chain and distribution channels.
In 1993, Norman and Ramirez stated that "strategy is no
longer a matter of positioning a fixed set of activities along
a value chain... but the value creating system itself."
Strategy, then, is viewed as a social innovation where a
variety of actors co-produce value. Since a single company
rarely produces everything anymore, a company's principal
strategic task is the reconfiguration of its relationships
and business systems.
Stabell and Fjelstad, in 1995, positioned the value chain
as one of three generic value configurations. Value chains
are relevant for sequential and interlinked activities. Value
shops, however, are a better description for systems which
mobilize resources and activities to resolve customer
problems (e.g. educational institutions and hospitals).
Value networks create value by facilitating exchanges
among their customers (e.g. insurance companies, banks,
and telephone companies).
Ehret highlighted the challenges value networks pose for
companies that view relationships through traditional lenses
such as CRM and buyer-seller arrangements. He reminds
us that being customer focused is not the same as
being market focused - articulated by Christensen in The
Innovator's Dilemma - as core customers may distract us
from emerging opportunities. It is often not well understood
what capabilities a company needs in order to manage a
variety of relationships well in a value network. Furthermore,
when the number and forms of relationships increase,
managing those relationships becomes an even more
important strategic issue.
Kleinaltenkamp and Ehret differentiate between different
types of relationships and provide a framework for making
appropriate decisions about investments in relationships.
In addition to potential cash flows from specific transactions,
the place a firm occupies in the larger value network is
important in determining what investments to make in
its relationships. The implication is that investments in
business-to-business branding or in relationships with low
cash flow but significant influence in a value network can
be worthwhile investments.
The central questions that the value network concept seeks to address are how to create and deliver value to customers
and how to determine the governance structure that will
enable maximum value creation for all participants.
Case Study: Structure Corp.
Despite extensive experience in the region, Structure Corp. suffered years of low margins, small market share, and low growth in Asia Pacific. The regional markets for its products were growing rapidly, but other global and local competitors were capturing this growth. Structure had built an extensive distribution network in key markets throughout the region.
The company identified low-priced local competition and unreliable distribution partners as the main causes of its problems. To mitigate these problems and meet growth targets, the company had experimented with a variety of reengineering efforts in its distribution channels and implemented a series of staffing changes. The core problems of low margins and low growth remained. An effort to understand its own value network revealed new solutions that previous efforts did not.
VNA revealed that the underlying issue was an approach
to marketing and distribution that did not reflect local
market realities, but was based instead on practices in
Western markets. The Company cultivated relationships
with similar buyers as in its other markets. However, there
were influencers in the buying process in Asian markets
that were being ignored.
As a result of VNA, the company developed new processes
and governance structures. These steps enabled the
company to better mobilize its resources, focus its efforts
on the right influencers and decision makers in the buying
process, and build new capabilities for leveraging its value
network in Asia Pacific.
Conclusion
The concept of the value network is important for large
and small companies, for those firms operating in Asia,
and for those who are considering entry into Asian markets.
VNA offers firms a new methodology for efficiently and
effectively managing the complexity of operations in Asia,
for understanding how to build and manage the relationships
which are critical for success in the region.
Bibliography
All Mouth and No Trousers. 2007. Economist, March 29.
Ehret, Michael. 2004."Managing the trade-off between relationships and value networks. Towards a value-based approach of customer
relationship management in business-to-business markets." Industrial Marketing Management, 33: 465-473.
Kleinaltenkamp, Michael and Michael Ehret. 2006. "The value added by specific investments: a framework for managing relationships
in the context of value networks." Journal of Business and Industrial Marketing, 21(2): 65-71.
Normann, Richard and Rafael Ramirez. 1993. "From Value Chain to Value Constellation: Designing Interactive Strategy." Harvard
Business Review, 71(4): 65-77.
Porter, Michael. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press.
Stabell, Charles and Oystein Fjeldstad. 1998. "Configuring Value for Competitive Advantage: On Chains, Shops and Networks."
Strategic Management Journal, 19: 413-437.
Christensen, Clayton. 2000. The Innovator's Dilemma. New York: HarperCollins.
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Launched by Woodward Partners in 2007, Woodward Fellows is a non profit research foundation based in the United States. Woodward Fellows probes strategic management issues in Asia Pacific to better understand the challenges firms face in the region, explore the application of research to these challenges, and contribute to the research field through partnership with leading institutions. In doing so, Fellows seeks to build bridges between scholarship and practice.
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