How to create value and acquire value is always the core topic of enterprise strategic management and a mandatory subject for enterprise managers. Generally speaking, value is created and captured in the process when a company delivers a product or service to a customer and the customer has a certain willingness to pay and pay the company. But what is value, and where to find value, in the era of VUCA (Volatility, Uncertainty, Complexity, Ambiguity), these questions are more and more confusing.
Let’s take a look at the data of the world’s largest listed automotive companies by market capitalization (see Figure 1). As you can see, the world’s largest automotive company by market capitalization is Tesla, with a market capitalization of more than one trillion dollars, while Toyota, the world’s largest car shipper, accounts for less than a quarter of Tesla’s market capitalization. BYD’s market capitalization ranks fourth, after Tesla, Toyota and Volkswagen. Rivian, a newly listed U.S. trolley company, has surpassed the market capitalization of century-old GM and Ford, ranking fifth.
Tesla and Rivian do not appear on the list of the top 10 global car shipments in 2020 (see Figure 2). 2020 shipments of Tesla vehicles will be just under 500,000. BYD, which ranks fourth in terms of market capitalization, will also ship less than 500,000 units, and Rivian will ship only a modest 100 units in 2021. What’s even more paradoxical is that Tesla’s market capitalization is already equal to that of all global automakers combined. Obviously, this is not because Tesla can produce and deliver 60 million cars per year, so how should Tesla’s value be measured?
There are different perspectives on measuring value, as can be seen from the industries tracked by the stock analysts who study Tesla. These analysts include not only those who traditionally track the automotive industry, but also those who track companies in high-tech industries such as AI, digital platforms, and big data (e.g., Apple, Amazon, Microsoft, etc.). From a traditional perspective, this is incomprehensible because highly specialized analysts always focus on a fixed industry. Is Tesla an automotive company, an AI/Big Data company, or some other type of company? The determinants of value are clearly different for automotive companies and AI/Big Data companies.
The Evolution of “Value” Thinking
Harvard Business School professor Michael E. Porter, one of the founding fathers of strategic management, pioneered the Five Forces model and the concept of the value chain in the late 1970s (see Figure 3). At the heart of these concepts lies a vertical chain. A company purchases raw materials and components by bargaining with upstream suppliers, then performs a series of basic production and support activities to make a product, enhance the added value, and deliver it to customers downstream. In this model, the boundaries of enterprises are clear, and the relationship between enterprises and upstream and downstream is a linear competition, and thus a clear industrial boundary is formed. In the context of the era when supply was relatively scarce but mechanization had vigorously increased productivity, the five forces model and value chain elaborated the value that existed within the enterprise based on the thinking of large machine production.
Entering the 1980s and 1990s, the interrelationship between the upstream, midstream and downstream enterprises in the industry became closer as they jointly produced. At this time, value shifted to the broader production end, existing in multiple distribution links from suppliers to enterprises and up to customers, and products became the carriers of value. Harvard Business School professor Adam M. Brandenburger and his colleague Harborne W. Stuart introduced the Value stick model (see Figure 4). Like the five forces model, the value stick is a linear model, with the difference that the latter emphasizes that value is created jointly by suppliers, companies, and customers. The value created is divided into two, with the supplier capturing part of the value and the company and customer capturing the other part. The latter is based on price and then divided into two, which is shared by the enterprise and the customer. Unlike the value chain which focuses on the value acquisition within the enterprise, the value bar model extends the perspective to different market players and emphasizes the value transaction relationship between the enterprise and external players.
With the advent of the Internet era, information technology and the wave of globalization have led to the continuous subdivision of industrial chains, and the upstream and downstream of enterprises can be spread all over the world. Many companies that focus on the production of a single component have thus emerged as complementary to other companies. For this reason, Professor Brandon Burger, together with Professor Gary Nalebuff of Yale University, has proposed the Value net model (see Figure 5). Compared to the five forces model, this model extends the traditional single connection between suppliers, firms, consumers, and competitors to include a new player, the complementary player, in the value system. Complementers increase consumers’ willingness to buy by offering complementary products. For example, computer hardware firms (e.g., IBM) and software firms (e.g., Microsoft) complement each other to create a large computer market, increasing consumers’ willingness to pay and creating a win-win situation. The existence of complementaries, who are not directly upstream or downstream of the production chain, provides a new dimension to the value model and allows each participating entity to be integrated into a “plane”.
In summary, in the era of mass production, value is almost entirely carried by the function and basic properties of the commodity itself. Traditional strategy assumes that the boundaries of the industry are clearly defined (five forces model) and the boundaries of the enterprise are clearly defined. Companies can create value and then obtain value (value stick) around the “value chain” from R&D, design, production inputs to marketing and after-sales service. In the Internet era, complementary players join the ecology and participate in creating value and sharing value (value network). In recent years, the demand and consumption side has become increasingly important, and W. Chan Jim and Renee Mauborgne, authors of Blue Ocean Strategy and professors at INSEAD Business School, have adopted the value curve to portray the utility of the products and services provided by companies to buyers. By now, based on the enterprise practice of the Western industrial and information revolutions, the value theory has achieved a comprehensive optimization from the point (value chain) to the line (value stick) to the surface (value network), completing the closed loop from the internal enterprise to the supply side and then to the demand side.
Based on the above discussion, we want to show that value and its determinants, and even strategic management itself, are a product of our time and technology. Therefore, in today’s digital age, value theory also needs to break through to new dimensions.
Time and technology drive the expansion of the value frontier
Next, we use a diagram and an example to illustrate value chains, value networks, and new ideas and frameworks for value strategy. In Figure 6, we create a two-dimensional coordinate system, with the horizontal coordinate representing the cost of realization of a product and the vertical coordinate representing the consumer’s willingness to pay. The value frontier identifies companies that can realize products at the lowest cost and with the highest consumer willingness to pay, based on a certain era and technology context. Next, we focus on computers and their extensions, mobile devices, and explain them with real-world examples.
In the 1980s, when personal computers first appeared, IBM dominated the industry together with Urban life and other companies, and IBM’s high investment in R&D and marketing ensured its consumers’ high willingness to pay, and by continuously optimizing the upstream and downstream of the industry chain, the company reduced costs and increased profits. Production costs are optimized internally based on the value chain, and externally based on the value bar to improve willingness-to-pay and supply costs, ultimately enhancing value. In short, companies create and acquire value by means of the value chain and value bar.
In the 1990s, the computer industry continued to boom, and more companies joined it. The division of labor in enterprise production became more and more refined, and the modular production model emerged. Companies such as Microsoft and Intel emerged in the fields of operating systems and chips respectively, while computer production and sales were seized by companies such as Hewlett-Packard and Dell. Take the rise of Dell as an example, in order to meet the individual needs of consumers, Dell established direct contact with customers and provided customized solutions and technologies. Under Dell’s leadership, consumers, suppliers, complementary players, and businesses came together to form an interconnected network. The evolution of communication technology has greatly expanded the scope of corporate collaboration, and connected complementaries are meeting the differentiated needs of consumers in a more efficient manner. Hewlett-Packard, Dell, and other companies together constitute the second value frontier in the diagram. The value frontier of the computer industry leapt from the value chain and value stick model to the value network model.
At this time, the leap of the value frontier originates from the change of technology and production relationship. In terms of technology, it is necessary to achieve “technological upgrading”, and in terms of production relationship, it is “related” and “complementary”. However, whether it is the value bar model or the value network model, the roles of the subject and the object covered by them are relatively fixed. The suppliers, enterprises and customers in the value bar belong to different links in the value chain, and their tasks are clearly defined. In the value network, the links between subjects are more diverse, and the value boundaries between organizations are expanded, but the roles of companies, competitors, and complementaries in the model are clearly divided. These ideas still “confine” value to the basic attributes and functions of products.
With the advent of the fourth industrial revolution, the rapid development of cloud computing, big data and artificial intelligence, industry boundaries are no longer so clear, enterprises and ecological players are free from solidified roles, and entrepreneurs and startups have come to a world of VUCA. At this time, the popularity of smart mobile terminals has allowed individuals to become interconnected nodes in the network, and information can be shared and interacted frequently in real time, greatly breaking the boundaries of the original role of a single individual or organization, resulting in faster and more complex connections and interactions between consumers, producers, suppliers, and complementaries. Huawei, Apple, and Xiaomi have become the new protagonists in unexpected ways. They recognized the new space of value and successfully opened it. In this space, value escapes the “cage” of basic product attributes or functions and penetrates between consumers, producers, suppliers, complementaries, and even competitors.
The explosion of Apple, Huawei, Xiaomi and other new generation enterprises has expanded the product width to smartphones, tablets, watches and other wearable devices and interrelated ecological products, giving birth to such products as Apple’s App Store and offline experience stores, Huawei’s Huawei Mall and “pollen” club, Xiaomi’s Xiaomi Mall and “In these businesses, companies pay more attention to the value of their products. In these businesses, companies focus more on building and maintaining an inclusive system that aims to connect and interact with a wide range of other stakeholders on a continuous basis. These businesses constitute the top value frontier in the two-dimensional diagram, and technological upgrades have brought “connectivity” and “interaction” to these businesses. At this time, customers are no longer limited to the consumer side, they can also become the “protagonist” of the production side, participating in the design, publicity and other work. For example, the Xiaomi MIUI system is a product born from the interaction and communication of “Mi fans”. This form breaks the thinking model of “self as the main body and others as the object” under the value network model, and the consumer side and the production side are bent together to form a value circle.
Value Linkage Strategy: Value Circle
Based on the above comparative analysis, we put forward the concept of “linked value” to emphasize that value creation comes not only from the basic attributes or functions of products, but also from extensive connections and frequent interactions. Such connection and interaction can be realized at low cost in the context of the fourth industrial revolution. People and people, people and things, and things and things can be easily connected and interacted, breaking through time, space and geographical restrictions and intervening in multiple aspects of value creation. On the other hand, as the multi-dimensional coexistence and overlapping scenarios of value circles replace the linear processes of independent segmentation, traditional value production roles such as suppliers, enterprises, consumers, complementaries, and even competitors need to be given a new understanding.
At this point, the enterprise shifts from issuing orders or controlling to a conductor role. For example, although Apple has the control and decision power, it does not tell developers what kind of app they need to make, but gives them enough market incentives and provides resources to empower them, and they are free to play according to the market demand. Apple is like the conductor of a symphony orchestra, grasping the overall rhythm, and all the participants’ performances complement each other. Participants can also play a richer and more diverse role and become value linkers. For example, Xiaomi enthusiasts can become suppliers and provide design ideas for ecological chain companies; complementary players in the Xiaomi ecological chain, such as rechargeable batteries or smart homes, can not only serve as the supply side to meet the needs of the corresponding consumers, but also become the consumption side, putting forward demands to Xiaomi and other players in the ecosystem. A participant is not necessarily bound to a fixed role and function, but can carry out value activities spontaneously. In this way, the value linkage process between the conductor and the linker makes the linear value creation activities end-to-end, forming a “value circle” (see Figure 7). In the value circle, the two ends of the value stick can connect and interact to become non-linear circles; the fixed players in the value network are liberated and become active linkers, and this continuous interaction leads to the enlargement of the circles and the formation of multiple circles. These circles can be divided into “basic value circles”, “core value circles” and “linked value circles” from the inside out, and we will use a B2B enterprise to We will use a B2B enterprise to illustrate.
Jumia is a commodity industry chain service company that has grown rapidly since its establishment in July 2013 to become one of the most influential commodity industry platforms in China, with an annual GMV of over 100 billion RMB. Consisting of consumers, companies and suppliers is the basic value circle, involving as many consumers and suppliers as possible. In this circle built by JWU, the bulk commodity distribution functions such as settlement, transportation, warehousing and processing become the most basic functions, and the B-side manufacturers (consumers), JWU (conductors) and steel and vanadium and titanium producers (suppliers) together form the basic value circle. In the middle core value circle, companies polish their own labels and complementary players participate in building core segments to enhance operational efficiency and customer adhesion. In the core value circle of CMI, platform attributes are established and cooperation is sought outwardly, and in 2015, CMI launched the online plus offline model, forming the dual platforms of Dahai Logistics Park and CMI E-commerce, which jointly form the core circle of CMI with related complementary parties. Dahai Logistics Park is the offline entity of JWML, and JWML opens up the flow of bulk commodities to the public, attracting a large number of processing enterprises and third-party carriers to the park, making it a unique complementary player. As an online carrier, Jaimei E-Commerce incorporates a wider range of commodity holding entities as well as complementary players such as financial institutions, greatly enhancing the platform traffic. In the outermost linkage value circle, the roles of complementary players, consumers and suppliers are no longer fixed. They can be either raw material suppliers, such as the establishment of the Jaimei Recycling Business by Jaimei IOT, which allows all parties to re-enter the circulation cycle of idle materials; or complementary players providing professional commodity indices, such as the commodity transaction data contributed by Jaimei IOT through big data, blockchain and other technologies to synthesize the commodity transaction data contributed by the participating entities of the platform, providing professional bulk data for the entire industrial ecology. For example, through big data and blockchain technologies, CMI can provide professional commodity indices for the whole industrial ecology; it can also be a linker to jointly serve the potential value release. CMI has greatly opened up its own platform traffic to attract eco-members such as Ali Cloud, Ping An Bank, Kunming Railway Bureau, Zhejiang University Network New, Huawei, etc. to jointly launch forward-looking projects such as steel brain, supply chain finance, public-railway-water joint venture, smart park and industrial 5G. These eco-members, as linkers, have more flexible roles and highly malleable functions, and can even build new roles or take on multiple functions to continuously expand new spaces of value.
Overall, the value linkage strategy no longer determines value linearly like the traditional value strategy. To some extent, this new strategy is more like a vortex, based on the basic functions of the products in the innermost circle, the core board in the middle circle, and the continuous creation of the outer circle under the joint action of the conductor and the linker to continuously release new value.
Value circle with value stick and value network
Now, let’s compare the value circle with the value stick and value network. First, the value stick strategy requires a clear direction for value generation, i.e., suppliers provide raw materials, companies integrate production, and finally deliver products to consumers, with each participant linking up one after another. These companies have clear objectives, organizing production and sales according to their own understanding of market needs. However, the value linkage process shows that the creation of value does not necessarily have a fixed starting and ending point; suppliers, complementary players, companies and consumers, and even competitors are involved in a linkage. Customers can put forward demands to become the starting point of value release, and other nodes may also independently link related entities to initiate value release.
Second, the value network requires the enterprise to be the center of value release and creation, and the enterprise separates and shields each participant from each other, focusing on process optimization and arranging customers, suppliers and complementaries to operate according to established standards. Yet each business entity has its own judgmental perspective, which represents the possibility of more new values existing. The participants of value release and creation are not given at the beginning, but gradually become clear in the process of interaction, and any linker may become the center of a new value release. The “commonality” of value linkage requires the conductor to intertwine with many linkers to create and release new values together.
Finally, there are significant differences in the way different value strategies think in terms of frame of reference and corporate boundaries. In the value bar model, the functional roles of suppliers and users are fixed, the relationships between the internal and external environments are clear, and the main functions of the enterprise are limited to procurement, production, and sales. Under the value network model, the enterprise (self) and others can influence each other, and complementaries and competitors make internal and external interconnections, and the main functions of the enterprise are newly related and complementary. In the value circle model, the enterprise (self) and others can influence each other or even convert each other, and the conductor and linker make the internal and external interconnected, and the main functions of the enterprise are newly connected, interacted and empowered.
Finally, let’s return to the valuation of the “Tesla” companies. The market valuation of traditional car companies such as Volkswagen focuses on the production side, which is based on the idea of value chain and value network, while the valuation of “Tesla” connects the production side and the consumption side, and the production and consumption are connected at the beginning and end, no longer fixed. This is the reason why the valuation of “Tesla” needs to be understood by value circles and linkage strategies. The ability to take over and even utilize the energy of VUCA is the real measure of its value.
According to the core idea of value circle, in the digital era, enterprises should not avoid VUCA, but should actively embrace VUCA. from value stick to value network is the breakthrough of value boundary, while from value network to value circle is the leap of value reference system. In the value network, it is impossible to make others always look to oneself, and it is impossible to have too many initiators, while it is possible in the value circle. In the value circle, it is not necessary for others to be completely aligned to me, but every subject involved is encouraged to have a certain degree of autonomy. As long as his ideas have value and are worth releasing, everyone can look to him. The interchange of the conductor and the linker, the release of initiative, is the change of the frame of reference, the key for the enterprise to undertake, embrace and transform the original power of VUCA in the digital era.