Shorten the value chain Transforming the stages of value delivery A pattern study from the Center for the Edge’s Patterns of Disruption series Deloitte Consulting LLP’s Strategy & Operations practice works with senior executives to help them solve complex problems, bringing an approach to executable strategy that combines deep industry knowledge, rigorous analysis, and insight to enable confident action. Services include corporate strategy, customer and marketing strategy, mergers and acquisitions, social impact strategy, innovation, business model transformation, supply chain and manufacturing operations, sector-specific service operations, and financial management. Transforming the stages of value delivery Contents Overview | 2 Case studies | 8 Is my market vulnerable? | 17 Endnotes | 18 Contacts | 20 Acknowledgements | 20 About the authors | 21 About the research team | 22 iii Shorten the value chain Overview Shorten the value chain Transforming the stages of value delivery Def. Restructure the value chain to provide significant benefits to the customer by removing or shifting stages. Long-standing value chain models are being transformed by new entrants who restructure the way value is delivered to the customer. Digital and other technological innovations help new entrants eliminate or shift stages in the design, manufacture, commercialization, distribution, and support of products to create and capture new value. The large amounts of capital and infrastructure required for longer and more complex value chains are no longer required when significant stages are elimi- nated or shifted to different participants in such a way that the economics are dramatically changed. Incumbents with longer value chains provide ample targets for new entrants to reconceive how, when, and by whom value is created and delivered. In the report Patterns of disruption: Anticipating disruptive strategies in a world of unicorns, black swans, and exponentials, we explored, from an established incumbent’s point of view, the factors that turn a new technology or new approach into something cataclysmic to the marketplace—and to incumbents’ businesses. In doing so, we identified nine distinct patterns of disruption: recognizable configurations of marketplace conditions and new entrants’ approaches that can pose a disruptive threat to incumbents. Here, we take a deep dive into one of these nine patterns of disruption: shorten the value chain. 2 Transforming the stages of value delivery Figure 1. Pattern snapshot Figure 1. Pattern snapshot Shorten the value chain Transforming the stages of value delivery Cases Digital cameras x Kodak | Dell x PC manufacturers | IKEA x furniture manufacturers Conditions Catalysts Challenges Where is it playing out? When? Why is it difficult to respond? Revenue Assets Assumptions Markets that have high inventory Enabling technology Cannibalizes core revenue streams costs, a fragmented customer Digital infrastructure providing Revenue from existing channels and base, and rely on long/slow value richer connectivity product configurations will erode chains to provide products/ser- Lower-cost physical and digital Renders significant assets obsolete vices that are costly to own distribution technologies Existing manufacturing facilities and and/or use Customer mind-set shift equipment may need to be written off to From passive customer to active shorten the value chain participant Challenges core assumptions Platform Changes assumptions about what Aggregation platforms consolidat- customers value and the required steps ing customer purchasing power to satisfy demand Arenas CP Financial services Health care Power and utility TMT—telecom Airplane fashion banking providers providers infrastructure manufacturers providers More vulnerable More resistant Graphic: Deloitte University Press | DUPress.com 3 Shorten the value chain The term “value chain” was coined by past, high barriers to entry in many industries Harvard Business School professor Michael left customers with few options. Long value Porter in 1985 to describe the set of activities chains developed to optimize value within the performed to design, produce, market, deliver, cost imperatives for scale and standardization. and support products (figure 2).1 While a sup- But, in a world where information flows freely, ply chain is oriented around the flow of inputs product lifespans are collapsing, and consum- and outputs from raw materials to finished ers value products that better meet their needs, goods, a value chain is oriented around the even if, or in some cases especially if, they generation of value for the customer, as defined have to interact directly with providers, this is by the customer. Supply chain efforts will tend beginning to change. Enabling technologies toward integrating processes and improving and changing customer behaviors allow new efficiency in ways that incrementally reduce entrants to remove low-value stages or shift costs or risks for the company. Value chain stages to different types of participants and restructuring in the context of this pattern, seize economic benefits for themselves and on the other hand, focuses on how new their customers. approaches might be used at each stage to meet Across industries, technological advances evolving customer needs in significantly dif- are allowing responsibility for significant parts ferent ways in order to deliver greater value to of the value chain to be transferred or shifted the customer.2 The new arrangement of stages to different participants. Digital technolo- and participants can create additional value gies, capabilities, and infrastructure provide (for example, timeliness or insight) for the for richer connections among value chain customer and the producer beyond the incre- participants and with consumers. As a result, mental cost savings derived from having fewer products move from idea to market faster, and steps or shifting work to other participants.3 the distinction between participants (such In long or complex value chains, the ability as manufacturer and retailer) blurs as activi- to understand and swiftly respond to chang- ties such as design, financing, marketing, and ing customer preferences is limited. In the fulfillment are done in new ways. For example, Figure 2. A typical value chain Inventory Sourcing and Manufacturing Store operations Customer use Design management Fulfillment procurement and assembly and sales and support and distribution Prototyping Purchasing Acquiring, storing, Managing and Managing the point Delivering products Helping customers products or building and preparing distributing of sale, and to the consumer maximize the value inventory raw material products to executing of the of products inputs be sold purchase (supplier) transition Using and maintaining products (customer) Graphic: Deloitte University Press | DUPress.com 4 Transforming the stages of value delivery “[W]e can’t do it alone. Our business idea is based on a partnership with the customer. First we do our part . then you do your part. So together we save money.” —IKEA4 many of today’s hardware startups are using eliminating the need for the complementary social media and digital platforms such as products that went with that stage. For exam- Kickstarter to connect directly with customers, ple, the emergence of digital camera technol- building affinity for both product and com- ogy removed formerly crucial steps from the pany. In parallel, innovations such as 3D print- value chain, such as film developing and print ing and on-demand fulfillment reduce or can making, and the need for the products and even eliminate the need to invest in inventory, participants that accompanied those steps. further shifting the economics of the value When shortening the value chain reduces chain and lowering the barriers to competition. costs—for instance, as a result of eliminating For example, by releasing a few limited-edition an entire stage or reducing the use of middle- designs every week for preorder, San Francisco men or the need to hold inventory—new clothing startup BetaBrand receives constant entrants may pass on a portion of the cost sav- demand data and reduces the risks and costs of ings to further strengthen customer relation- carrying excess inventory. ships and increase their competitive advantage. Customers are also participating more For example, in the case of customer support actively across the value chain stages, often being shifted to a customer-driven forum, with the promise of lower prices or more customers derive value from getting more rel- influence and control in exchange for greater evant product assistance and also benefit from ownership. In addition, aggregation plat- not having to buy expensive support packages. forms such as the product-enthusiast startup Digital marketplaces are another example Massdrop, by consolidating demand and where new entrants have significantly stream- increasing customer purchasing power, make it lined or eliminated inventory management, easier for customers to bypass portions of the store operation, or distribution stages in a way value chain. that adds new value for fragmented customers New entrants who shorten the value chain who have limited buying power. Meanwhile, may challenge markets that rely heavily on for manufacturers or retailers, direct customer intermediaries (for example, third-party relationships help them to be more responsive wholesalers) or complementary products. In to changing customer needs (like Dell in the some cases, new product