Thursday, January 20, 2011

Value Chain Modeling, Part 4: Value Exchange

This is a continuation of a series of articles on value chain modeling that started with “Value Chain Modeling: Part 1, Capability Analysis
In preceding articles we have focused on a value chain within a business entity.  In this part we will discuss the exchange of value between business entities and its relationship to the value chain.
I define an exchange as a set of related  interactions between two or more business entities that results in an exchange of value.  A fundamental exchange occurs between a seller and a buyer where the seller provides a product of value to the buyer, and the buyer provides money.  This is a viable exchange if both participants perceive an increase in value: the product is more valuable than the money to the buyer, and the money is more valuable than the product to the seller.
We extend this basic concept with the concept of a value proposition from the previous article.  The seller may provide additional value such as a warranty and return policy.  The buyer may provide additional value by allowing the seller to use the buyer as a reference in advertising.  So the model of an exchange represents an exchange of value propositions: the collections of value provided and received by each of the parties.
This concept can be extended to multiple parties as illustrated, below.

The diagram represents an Internet-based business model.  The Internet Publisher provides information content of interest to customers and includes advertising on the pages that deliver content.  The customer provides value to the Internet Publisher by viewing and clicking on the advertisements.  The merchant purchases advertising with payments based on customer clicks.  The customer purchases products from the merchant based on the advertising.
Each of these parties provides and receives value propositions from each of the other.  Not every exchange involves each party in sending and receiving value propositions with every other party, but the net value of value received must exceed the net value of value provided or the exchange is not viable.
In Part 3 we talked about a value proposition as the output of a value chain.  The value chain is the detail behind the delivery of a product or service by a party in an exchange.  At the same time, a party may receive value from a supplier party as input to a value chain.  From the value chain perspective, the transfer of value from the supplier is represented as a flow of deliverable(s) to one or more activities in the value chain.  In the value chain model, this is represented by a specialized flow element that is linked to a transfer of value in the associated exchange.  The supplier may be represented as a single, abstract activity that provides the deliverable(s) needed in the value chain.
The value obtained from the supplier becomes part of the value delivered to the end customer—the value proposition of the receiving value chain.  A supplier, conceptually, provides a value proposition to the purchaser.  This represents the offer of value. However, actual value comes from actual performance.  Consequently, the purchaser is more interested in the value metrics behind the satisfaction ratings.  These metrics, to the extent they are relevant to the value chain, are input to the value aggregations the same as contributions of other activities in the value chain.  Thus outsourcing to suppliers may hide the details of that segment of the value chain, but the value contribution is still part of the detailed value chain model through the value proposition.
From a broader perspective, an extended enterprise might be viewed as depicted in the diagram, below.  Here the operations of four business entities are each represented by a high-level activity.  The supplier provides parts to the manufacturer, the manufacture provides products to the dealer, and the dealer sells products to the customer.  Of course a real, extended enterprise would likely have more participants and branches in the network.  The small circles indicate that the flow is between business entities and could be represented in a more detailed exchange.
Modeling specifications for value chains and exchanges is a work in process.  In particular we need to reconcile these views with other approaches such as the Value Chain Group’s Value Reference Model,  Value Network Analysis, and e3Value.

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