Value Innovation: from Value
Chain to Revenue Management
Jason C.H. Chen, Ph.D.
Professor and Coordinator of MIS
Graduate School of Business, Gonzaga University
Spokane, WA 99258 USA
[email protected]
1
Outline of the Topic
• Stages of E-Business
• Internet Impact on Economy and Industry
• Value Creation
– Business Models and Value Chain
– Applications
• Revenue Management
– Models and Applications
• Conclusion
2
Comparison of adoption rates for
Internet, PCs, TV and radio
Internet
PCs
TV
Radio
0
10
20
30
40
Time to reach 50 millions users (years)
3
Stages of Moving to E-Business
“commerce +”
Stage
Stage 11
“e-commerce”
Stage
Stage 22
Web presence
• Develop presence
• Develop technology
capability
Access
information
Stage
Stage 33
Transact
business
• Re-orientate business/technology
thinking skills
• Build integrated approach = web
+ business systems
Anxiety
Gap
2 - 3 years
Wilcocks, Sauer and Associates (2000)
“e-business”
Stage
Stage 44
Further integration of
skills, processes,
technologies
• Reorganize people/structures
• Reengineer processes
• Remodel technology
infrastructure
Organizational
Capabilities Gap
Capability, leveraging
experience and know-how
to maximise value
• Customer-focused organization
• Content-centric services/products
• ‘The new marketing’
Value
Transformation Gap
BUSINESS
VALUE
2 - 4 years
4
IT-producing industries share of economy
9 .0
8 .5
Percent
8 .0
7 .5
7 .0
6 .5
6 .0
5.5
1990 1991 1992 1993 1994 1995 1996
1997 1998 1999 2000 2001 2002 2003
5
Distribution of Internet Users Worldwide
# Country or region
1.USA
2.China
3.Japan
4.Germany
5.UK
6.South Korea
7.France
8.Italy
9.Canada
10.India
11.Brazil
12.Spain
13.Australia
14.Taiwan
15.Netherlands
16.Malaysia
17.Sweden
18.Russia
19.Turkey
20.Thailand
21.Mexico
22.Hong Kong
23.Switzerland
24.Argentina
25.Indonesia
Top 25 in users
Net 208 countries
Total world (users)
Population
(est. 2003)
291,639,900
1,311,863,500
127,708,000
81,904,100
59,040,300
46,852,300
59,303,800
56,209,900
31,720,400
1-067,421,100
179,712,500
41,547,400
19,978,100
23,614,200
16,258,300
24,014,200
8,872,600
141,364,200
73,197,200
63,393,600
101,457,200
6,827,000
7,376,000
36,993,000
217,825,400
4,096,094,200
2,259,449,610
6,355,543,810
Internet users,
Latest date
184,447,987
68,000,000
59,203,896
44,139,071
34,387,246
26,270,000
22,039,401
19,250,000
16,841,811
16,580,000
14,322,367
13,986,724
12,823,848
11,602,523
10,351,064
7,800,000
6,726,808
6,000,000
4,900,000
4,800,000
4,663,400
4,571,936
4,319,289
4,100,000
4,000,000
606,127,392
76,292,120
682,419,512
Growth
(2000-2003) (%)
93.4
202.2
25.8
83.9
123.3
38
159.3
45.8
32.6
231.6
186.4
159.6
94.3
85.3
165.4
110.8
66.2
93.5
145
108.7
71.9
100.3
102.4
64
100
91.4
72.3
89.1
Population
(penetration) (%)
63.2
5.2
46.4
53.9
58.2
56.1
37.2
34.2
53.1
1.6
8
33.7
64.2
49.1
63.7
32.5
75.8
4.2
6.7
7.6
4.6
67
58.6
11.1
1.8
14.8
3.4
10.7
Users
(%)
27
10
8.7
6.5
5
3.8
3.2
2.8
2.5
2.4
2.1
2
1.9
1.7
1.5
1.1
1
0.9
0.7
0.7
0.7
0.7
0.6
0.6
0.6
88.8
11.2
100.0
6
Internet Penetration by Country
# Country or region
1.Sweden
2.Hong Kong
3.Australia
4.Netherlands
5.USA
6.Denmark
7.Iceland
8.Switzerland
9.UK
10.South Korea
11.Singapore
12.New Zealand
13.Germany
14.Canada
15.Finland
16.Norway
17.Taiwan
18.Bermuda
19.Japan
20.Estonia
21.Austria
22.Slovenia
23.Belgium
24.Luxembourg
25.Portugal
Top 25 in users
Net 208 countries
Total world (users)
Population
(est. 2003)
8,872,600
6,827,000
19,978,100
16,258,300
291,639,900
5,387,300
294,300
7,376,000
59,040,300
46,852,300
4,225,000
3,785,600
81,904,100
31,720,400
5,215,100
4,551,100
23,614,200
64,500
127,708,000
1,268,300
8,037,400
1,951,500
10,339,300
451,700
10,366,900
777,729,200
5,577,814,610
6,355,543,810
Internet users,
Latest date
6,726,808
4,571,936
12,823,869
10,351,064
184,447,987
3,375,850
175,000
4,319,289
34,387,246
26,270,000
2,308,296
2,063,831
44,139,071
16,841,811
2,650,000
2,300,000
11,602,523
30,000
59,203,896
560,000
3,340,000
800,000
3,769,123
165,000
3,700,000
440,922,600
241,496,912
682,419,512
Population
(penetration) (%)
75.8
67
64.2
63.7
63.2
62.7
59.5
58.6
58.2
56.1
54.6
54.5
53.9
53.1
50.8
50.5
49.1
46.5
46.4
44.2
41.6
41
36.5
36.5
35.7
56.7
4-3
10.7
7
Distribution of users by language. Online
language populations (total 680,000,000
as of September, 2003)
Oth e r
Du tch 1 .8 %
Ru ssia n 2 .5 %
Po r tu g u e se 2 .6 %
En g lish
35.6%
Ita lia n 3 .3 %
F r e n ch 3 .7 %
Ko r e a n 4 .0 %
Ge r ma n 7 .0 %
Sp a n ish 8 .0 %
Ja p a n e se
Ch in e se
12.2%
9.5%
8
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Impact of e-commerce on selected industries: manufacturing
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30.0
25.0
20.0
15.0
10.0
5.0
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(based on figures from US Census Bureau)
9
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20.0
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(based on figures from US Census Bureau)
10
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30.0
25.0
20.0
15.0
10.0
5.0
0.0
(based on figures from US Census Bureau)
11
Industry Profitability, 1981-2001
Industry
1. Pharmaceuticals
2. Chemicals and allied products
3. Food and kindred products
4. Printing and publishing
5. Rubber and miscellaneous plastic
6. Fabricated metal products
7. Paper and allied products
8. Electronics and electrical equipment (no computers)
9. Nonferrous metals
10. Machinery, except electrical
11. Petroleum and coal products
12. Textile mill products
13. Aircraft, guided missiles, and parts
14. Stone, clay, and glass products
15. Motor vehicles and equipment
16. Iron and steel
17. Airlines (transportation by air)
ROE
25.87%
21.70
24.78
16.30
15.07
19.00
13.77
9.63
10.39
15.69
13.25
5.11
14.02
9.16
11.91
6.40
2.68
ROA
10.27%
7.88
7.25
6.68
6.25
5.58
4.70
4.67
4.23
3.80
3.76
3.71
3.57
3.44
3.16
3.14
2.05
Source: Compustat. Grant explored ROEs for these industries for the years 1985-1997: R. M. Grant, Contemporary Strategy
Analysis: Concepts, Techniques, Applications (Oxford, U. K.: Blackwell, 2002) p. 68.
12
Firm Profitability, 1981-2001
Firm
ROA
Pharmaceuticals
Firm
ROA
Airlines
Bristol Myers Squibb
13.71%
Southwest Airlines
4.85%
Merck
13.37
AMR
1.51
Schering Plough
12.89
Delta Airlines
1.50
WYETH American Home Products
12.52
UAL
0.96
Eli Lilly
10.23
US Air
0.31
Pfizer
9.66
America West Holdings
-3.27
Pharmacia & Upjohn
7.98
Continental Airlines
-4.97
American Cyanamid
3.57
TWA
-5.37
Northwest Airlines
-3.40
Source: Compustat
13
Determinants of Profitability
WHY?
14
Four Elements for a Successful
Enterprise
•
•
•
•
15
Cooperating to Create Value
Revenue
Competitive forces
(coopetitors)
-Suppliers
-Customers
-Rivalry
-Threat of Entry
-Substitutes
-Complementors
(influence)
Firm’s Decisions
1.
2.
16
Why New Models?
• We need some new models
– for how we go about exploring IT for
competitive advantage,
– for IT infrastructure how we create it and
manage it
– for how we acquire, manage and deploy the
skills that are needed to run that infrastructure
– __________________
17
Business vs. Revenue Model
Business Model
Revenue Model
Value ________
Value _________
It describes the way in
which a company
enables transactions
that create value for all
participants, including
partners, suppliers and
customers.
It can be realized through a
combination of
- subscription fees,
- advertising fees,
- transactional income (e.g.,
fixed transactional fees, referral
fees, fixed/variable
commissions, etc)
18
Striving for Competitive Advantage
• Firm level: Industry & Competitive Analysis
– Competitive Forces Model
– Competitive Strategy
– __________________________ (New 7Ss)
• Business level
– __________________ Analysis
19
The Five Forces Model and IS
• The Five Forces Model provides a way to think
about how information resources can create
competitive advantage.
• Using Porter’s Model, General Managers can:
– Identify key sources of competition they
face.
– Recognize uses of information resources to
enhance their competitive position against
competitive threats
– Consider likely changes in competitive
threats over time
N
20
PORTER’S FIVE COMPETITIVE
FORCES MODEL
Threats
•Switching cost
•Access to
distribution channels
•Economies of scale
THE FIRM
•Selection of suppler
•Threat of backward
integration
INDUSTRY
COMPETITORS
•Cost-effectiveness
•Market access
•Differentiation of
product or service
•Redefine products
and services
•Improve
price/performance
•Buyer selection
•Switching costs
•Differentiation
Bargaining power
21
Porter’s Model vs. Hypercompetition Model
Industries
Porter’s
Model
Relatively stable
Hypercompetition
Model
Dynamic
1) Ever-increasing
competition
2) Changing
power between
players
Competitive
Advantage
(Characteristics)
Establish a strong,
long-term position
and defend it.
Competitive
Advantage
(How to)
Attain a fit with the
environment as in
traditional markets
22
Porter’s Generic Strategy Framework –
3 Strategies for achieving Competitive Advantage
Competitive Advantage
Lower Cost
Position
Industry-wide
(Broad
Target)
Particular
Segment only
(Narrow
Target)
Overall Cost
Leadership
Uniqueness
Perceived by
Customer
Differentiation
Focus
Competitive Mechanism
23
Porter’s Competitive
Advantage Strategies
• Cost leadership: be the cheapest
• Differentiation: focus on making
your product and/or service stand out
for non-cost reasons
• Focus: occupy narrow market niche
where the products/services can stand
out by virtue of their cost leadership
or differentiation.
24
Hypercompetition and
the New 7-S’s framework (D’Aveni)
• Every advantage is eroded.
• Sustaining an advantage uses too much time
and resources that can be a deadly
distraction.
• The goal should be disruption, not
sustainability of advantage.
• Initiatives are achieved with a series of
small steps.
25
D’Aveni’s Disruption and 7-S’s
Vision for Disruption
Old 7Ss:
structure, strategy,
system, style, skills,
staff, and superordinate goals.
Identifying and creating opportunities for
temporary advantage through understanding
• Stakeholder satisfaction
• Strategic Soothsaying
directed at identifying new ways to serve existing
customers better or new customers that are not
currently served by others
Market Disruption
Capability for Disruption
Sustaining momentum by developing
flexible capacities for
• Speed
• Surprise
That can be applied across actions to
Build temporary advantage
Tactics for Disruption
Seizing the initiative to gain advantage by
• Shifting the rules
• Signaling
• Simultaneous and sequential strategic
thrusts
With actions that shape, mold, or influence
the direction or nature of the competitor’s
response
N
26
Example:
• At General Electric, Jack Welch, implemented a
DYB (“Destroy Your Business”) approach by
placing employees in the shoes of competitors to
highlight weaknesses and find fresh ways of
meeting customer needs.
• Similarly GE’s Medical Systems Division used
DYB (and GYB strategy) to respond to the
challenges posed by the Internet.
–
–
–
–
Speed,
Stakeholder satisfaction
Strategic Soothsaying
Shifting the rules
27
Porter’s Model vs. Hypercompetition Model
Industries
Competitive
Advantage
(Characteristics)
Competitive
Advantage
(How to)
Porter’s
Model
_____________
Establish a strong,
long-term position
and defend it.
Attain a fit with the
environment as in
traditional markets
Hypercompetition
Model
_____________
1) Ever-increasing
competition
2) Changing
power between
players
Short-lived, take
advantage of any
small window of
opportunity that
arises.
1) change rules of
competition
2) create disruptions
(during which
temporary advantages
can be exploited)
28
The Value Chain: Process View of the Firm
(Value)
29
The Value System
• The value chain model can be extended by
linking many value chains into a value
system.
• Much of the advantage of supply chain
management comes from understanding
how information is used within each value
chain of the system.
• This can lead to the formation of entire new
businesses designed to change the
information component of value-added
activities.
30
The Value System:
Interconnecting relationships between organizations
Upstream
value
Firm
value
Downstream
value
31
Business Strategies
and its Competitive Advantage
Lower Cost
Position
Industry
wide
(Broad
Target)
Particular
Segment
only
(Narrow
Target)
Uniqueness
Perceived by
Customer
Cost
Leadership
Differentiation
Cost Focus
Differentiation
Focus
Industrial economy
Knowledge-based
economy
Competitive Mechanism
32
Business Models and Revenue
Management
• The framework for making money.
• It is the set of activities which a firm
performs, how it performs them, and when
it performs them so as to offer its customers
benefits they want and to earn a profit.
33
Business Models and Revenue Management
(Business Model)
__________ Factors
-Competitive forces
-Cooperative forces
-Industry value drivers
Firm
create and
appropriate
value
Profitability
________________ FACTORS
___________
Resources
ACTIVITIES
Costs
______ Chain
(Business
Systems)
Which,
How,
When
•Customer value
•Market segments
•Revenue sources
•Relative positioning
Value
Systems
34
When to Perform Activities
• Two firms can perform similar activities in
similar ways but still end up with business
models whose profitabilities are different if
the timing of when they perform the
activities is different.
– First-mover advantage
– Windows of opportunities
• periods within which some activities are best
performed
35
Keen’s Six-Stage Competitive Advantage Model
Stimulus for action
First major move
Commoditization
36
Profits relative to competitions (%)
Relationship between profits and time
of market introduction
300
250
200
150
100
50
0
-10
-5
0
5
10
Time of market introduction relative to competition (months)
37
When to Perform Activities
• First Movers
Advantages
Disadvantages
• Build brand recognition
• Newer technology
• Control scarce resources
• Higher development costs
• Establish networks
• Reverse engineering by
competitors
• Early Economies-of-Scale
38
Case Example: Wal-Mart
• Analysis: Which, How, and When in WalMart’s Success
– Which:
• moved into small towns that its competitors shunned
– How:
• Wal-Mart saturated contiguous towns and built
distribution centers and logistics systems
– When:
• First mover advantage by capturing scarce
resources, locations, and loyal employees and
customers
39
Revenue Management
(a.k.a. yield management)
Expanding or
Saving?
40
Revenue Management (RM)
• RM focuses companies on revenue growth, not
cost-cutting and downsizing.
• RM drives bottom-line increases through top-line
improvements.
• Growth comes from the marketplace, not the
workforce.
• The key to real growth is learning how to deal
effectively and proactively with a constantly
changing markets.
41
Revenue Management (RM) vs. MIS
• MIS is to deliver
– the right information, to the right people
– at the right time, with the right form
• RM is to sell
– the right _______, to the right ______
– at the right _____, for the right _____
– Thereby maximizing revenue from a company’s
products
42
Examples on Revenue
Management
• A No-Tech approach to RM
– Barbershop
• A Low-Tech approach to RM
– Opera House
• A High-Tech approach to RM
– Airlines
43
Other Examples
•
•
•
•
•
•
•
________
Car rental
_______
Broadcasting
Shipping
_______
Etc.
How about your ideas?
44
Some U.S. airline industry
observations
• Since deregulation (1978) 137 carriers have
filed for bankruptcy.
• From 95-99 (the industry’s best 5 years ever)
airlines earned 3.5 cents on each dollar of sales:
– The US average for all industries is around 6 cents.
– From 90-99 the industry earned 1 cent per $ of sales.
• Carriers typically fill 72.4% of seats and have a
break-even load of 70.4%.
45
Matching supply to demand when supply
is fixed
• Examples of fixed supply:
– Travel industries (fixed number of seats, rooms, cars,
etc).
– Advertising time (limited number of time slots).
– Telecommunications bandwidth.
– Size of the MBA program.
– Doctor’s availability for appointments.
• Revenue management is a solution:
– If adjusting supply is impossible – adjust the demand!
– Segment customers into high willingness to pay and
low willingness to pay.
– Limit the number of tickets sold at a low price, i.e.,
control the average price by changing the mix of
customers.
46
Revenue management and margin
arithmetic
• Small changes in revenue can have a big impact on profit,
especially for high gross margin and low net profit %
industries:
Percentage change in profit for different gross margins, revenue increases and net profits as a
percentage of revenue.
Net profit % = 2%
Net profit % = 6%
Revenue increase
Gross
margin
100%
90%
75%
50%
25%
15%
1%
2%
5%
8%
50% 100% 250% 400%
45% 90% 225% 360%
38% 75% 188% 300%
25% 50% 125% 200%
13% 25% 63% 100%
8% 15% 38% 60%
Revenue increase
Gross
margin
100%
90%
75%
50%
25%
15%
1%
17%
15%
13%
8%
4%
3%
2%
33%
30%
25%
17%
8%
5%
5%
8%
83% 133%
75% 120%
63% 100%
42% 67%
21% 33%
13% 20%
47
Ugly reality: cancellations and no-shows
• Approximately 50% of reservations get cancelled at some
point in time.
• In many cases (car rentals, hotels, full fare airline passengers)
there is no penalty for cancellations.
• Problem:
– the company may fail to fill the seat (room, car) if the passenger
cancels at the very last minute or does not show up.
• Solution:
– sell more seats (rooms, cars) than capacity.
• Danger:
– some customers may have to be denied a seat even though
they have a confirmed reservation.
48
Winners vs. Losers
• What separates winners from losers in creating
(ultimate) strategic competitive advantage is
neither bleeding-edge technology nor “timing for
market entry.”
• It is from “value innovation”
utility
Firm
Innovation
price
Value
Innovation
cost
49
Conclusion
•
•
•
Value innovation and business models
Revenue management and overbooking give
demand flexibility where supply flexibility is not
possible.
Concept and powerful tools to improve revenue:
– American Airlines estimated a benefit of $1.5B over 3
years.
– National Car Rental faced liquidation in 1993 but
improved via yield management techniques.
– Delta Airlines credits yield management with $300M in
additional revenue annually (about 2% of year 2000
revenue.)
50
The Twenty-first Century will
...
• The twenty-first century will witness only
two kinds of companies:
– those that
– those that
51
Revenue Management
• If you are interested in
the issues of RM
• International Journal of
Revenue Management
• http://www.inderscience.
com/ijrm
52
The Seven Core Concepts of
Revenue Management
1.
2.
3.
4.
5.
6.
7.
Focus on price rather than costs when balancing
supply and demand.
Replace cost-based pricing with market-based pricing.
Sell to segmented micro markets, not to mass market.
Save your products for your most valuable customers.
Make decisions based on knowledge, not supposition.
Exploit each product’s value circle.
Continually reevaluate your revenue opportunities.
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