Value network dynamics and industry evolution

B. Vermeulen

Research output: ThesisPhd Thesis 1 (Research TU/e / Graduation TU/e)

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Machines, appliances, and consumption goods are developed and produced in value networks populated by firms ranging from final assemblers, component suppliers, complement providers, the suppliers’ suppliers, all the way upstream to firms that extrude raw material. Evolutionary models of industry developments describe regular patterns of interlocking changes in market demand, product, and production technology, the industry population, and firms’ strategic activities. However, these models take an industry to consist of a single tier of firms, rather than value networks with firms at multiple, vertically related tiers. In this dissertation, we answer the exploratory research question: how do value networks develop over the industry evolution? We define a value network as the hierarchy of value adding productive steps to produce a product to fulfill market demand. The technological decomposition of the product spans the structure of productive capabilities required, which in turn restricts the topology of buyers and suppliers involved. We then follow two different approaches in answering the research question. In the bottom-up approach, we assume that firms manage their network in response to and anticipation of product life-cycle events. In the top-down approach, we formulate our biplex model of regularities in network development over time, and then derive firm activities and strategies in coping with those regularities. In the bottom-up approach, we study how the value network arrives at its orientation (product-market selection) and organization (distribution of production capabilities). By tuning product specifications to consumer requirements, a value network orientates itself towards demand. In this decision, firms look for a match between requirements and viable specifications, but also seek a competitive position. We study the timing and responsiveness with which to do so, and find that timely entry and responsive upscaling compensates for product inferiority. Furthermore, we find that, in horizontal differentiation, attuning product and component technology overcomes unfavorable agglomeration or even inefficient dynamic equilibria. Firms in the network should hence align the market segments to target, attune the product technology to make, and synchronize entry, launch, and upscaling times. However, with imminent technological or market change, it is in the interest of individual firms, and thereby the network they are part of, to prudently time this alignment, attuning, and synchronization. Value networks have an organization in that productive capabilities are distributed over firms. We study the vertical governance problem on whether to integrate or outsource certain productive capabilities during different life-cycle phases. We hereby study both the cost-based as well as capability-based view. In the era of incremental change, firms’ governance decisions concern appropriation of generated value. We find that firms should balance cost of governance and the competitive effect of vertical control: vertical integration may be pursued to horizontally differentiate and thus soften price competition. In the era of ferment, firms’ governance decisions concern creation of future value. We find that, while capability-based concerns dominate, the actual governance form preferred is determined by the capability regime properties imitability and substitutability. This is an indication that industries with different regimes may well have different governance patterns. In the top-down approach, we formulate a novel biplex model on network development. Rather than the studying management decisions under the presumption of the consecutive nature of development and production activities, as in the classical product life-cycle theory, the biplex model focuses on management decisions given the simultaneous and recurring nature of these activities. We distinguish several phases in network development and then study the implications for both organizational economic and strategic management decisions. We infer that the production network needs cross-generational and cross-phasing flexibility, and benefits from management capabilities to cope with the boom in ties during a product phase-in. The development network benefits from the ability to overcome network development inhibitors, as well as benefits from management capabilities to design products integrally and relegate production tasks. Finally, we discuss how even the industry life-cycle evolves over time. We infer how certain network forms and firm types are likely to emerge in particular industries. We conclude that value network development is generally contingent to the product life-cycle, primarily punctuated by technological changes, but that cross-sectional differences in value network development, both within and across industries, may occur. We conclude that there are at least two types of value network dynamics based on industry particularities. In industries with systemic products, the resolution of dynamic inefficiencies will drive the emergence of sustainable system-integrator networks in which system design knowledge and network orchestration power reside with the integrator. In industries with technological modularity and production decomposability, networks will cycle through phases of specialization for combinatorial flexibility and integration for synergistic specificity.
Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
  • Industrial Engineering & Innovation Sciences
  • de Kok, A.G. (Ton), Promotor
  • La Poutré, Han, Promotor
Award date11 Jun 2012
Place of PublicationEindhoven
Print ISBNs978-90-8891-425-6
Publication statusPublished - 2012

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