2008 Oxford Business &Economics Conference Program
ISBN : 978-0-9742114-7-3
STRATEGIC AND OPERATIONAL DRIVERS IN EMERGING BUSINESS MODELS: NEW
PERSPECTIVES FOR THE ECONOMICS OF PRODUCTION
David Walters, Institute of Transport and Logistics Studies, University of Sydney, NSW 2006,
Australia. email: davidw@itls.usyd.edu.au
June 22-24, 2008
Oxford, UK
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ABSTRACT
New business models are an emerging form of organisation in the dynamic and fast changing business
context of customer expectations, market characteristics and competition. They are a structured response
to business opportunities that involve changes to the management of internal and external resources
comprising assets, processes and capabilities.
The emerging business models are typically multi-
enterprise in nature; each participant contributing specific expertise or a resource. A critical factor is the
capacity to leverage assets from anywhere in the system to drive organisational growth, improve the
productivity of resources (internally and externally) and most importantly, to deliver greater added value
with lower costs.
The result is a new perspective on strategic and operational value and cost drivers.
Delivering value creates cost, so precisely which and whose value drivers (and value builders) are we
concerned with? Are there differences between value drivers and value builders given that in the “New
Economy” the long-term may require the firm to reconfigure its resource base? What cost behaviour
relationships exist between customer and supplier satisfaction? What are the implications for economics
of production? Are economies of integration and coordination important? In other words it is no longer
satisfactory simply to focus on the firm’s economies of scale and scope? This paper suggests that
traditional views of strategic and operational drivers and the economics of production need to be
reviewed.
Keywords: Strategic and Operational value/cost drivers; value networks; virtual organisations.
INTRODUCTION: A NEW ECONOMY AND NEW BUSINESS STRUCTURES
Shank and Govidarajan (1993) argued that strategic cost management is influenced by many interrelated
factors and understanding cost behaviour requires an understanding of the complex interplay of the set
of cost drivers at work at any given situation. They suggest that strategic management accounting draws
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upon the models of industrial economics of Scherer (1980), Chandler (1990), Porter (1985) and Riley
(1987) in categorising structural drivers; economies of scale and scope dominate the list. A series of
executional drivers determine the firm’s ability to implement strategic decisions these were suggested
as; work force involvement, total quality management, capacity utilisation plant layout efficiency,
product configuration and, supplier/customer relationships. The “New Economy”, now well established,
has brought changes that fundamentally alter the way in which business structures appraise market
opportunity and the way in which the successful organisations structure a response.
It shifts the
corporate focus towards understanding market opportunities and the alternative structural responses,
many of which are external to the firm.
Organisational Architecture
Hagel and Singer (1999) argued that the traditional organisation comprises three basic types of business:
a customer relationship business, a product innovation business and an infrastructure business. They
suggest each of these differ concerning the economic, competitive and cultural dimensions. They argue
that as the exchange of information and "digestion" increases through electronic networks the traditional
organisation structures will become "unbundled" as the need for flexible structures becomes an
imperative and 'specialists' offer cost-effective strategy options in each of these basic businesses. They
also suggested that this lead to car manufactures, for example, adopting outsourcing models for
manufacturing operations (now becoming common practice) and to enter the after-market through
partial acquisitions or partnerships or even fully acquiring downstream companies
The argument underlying Hagel and Singer's model concerns a conflict of production economics. They
contend that customer relationship businesses are essentially driven by the need to achieve economies of
scope and do so by seeking to offer customers a wide range of products and services. By contrast
product innovation is driven by speed: by minimising its time-to-market the company increases the
likelihood of capturing a premium price and a strong market share. Infrastructure businesses are
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dominated by economies of scale. They are typically characterised by capital-intensive facilities that
entail high fixed costs. Given the relationship between throughput and fixed cost it follows that large
volumes of product throughput is essential. The authors argue that: "…these three businesses … rarely
map neatly to the organizational structure of a corporation… Rather than representing discrete
organisational units, the three businesses correspond to what are popularly called "core processes" - the
cross functional work flows that stretch from suppliers to customers and, in combination, define a
company's identity." The solution for Hagel and Singer is to "unbundle the organisation" and to
restructure based upon maximising the effect of the economic characteristics of each of the individual
businesses.
The issue for the "traditional" organisation is to consider what the authors define as interaction costs.
Interaction costs include transaction costs (as described by Coase and others) but add the costs for
exchanging ideas and information.
They argue that the three businesses correspond to what are
popularly called core processes. Virtual organisations (or value chains) form around core processes and
these expand to meet the specific customer needs identified. Hagel and Singer's argument is that as the
exchange of information and "digestion" increases through electronic networks, traditional organisation
structures will become "unbundled" as the need for flexible structures becomes an imperative and
“specialists” offer more cost-efficient strategy options in each of these basic businesses.
Hagel and Singer conclude with: "The secret to success in fractured industries is not to unbundle, but to
unbundle and re-bundle, creating a new organisation with the capabilities and size required to win."
This requires identifying and understanding fully the economics of scale, scope, specialisation and
integration.
Kay (2000) suggests a firm is defined by its contracts and relationships and that added value is created
by its success in putting these contracts and relationships together. He adds that architecture adds value
through the creation of organisational knowledge, through the establishment of a cooperative ethic and
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by the implementation of organisational routines.
Brickley et al (2004) offer an organisational
architectural framework for “addressing organizational problems and structuring more effective
organizations”. They suggest three “critical aspects of corporate organisation”, the assignment of
decision rights within a company, the methods of rewarding individuals and the structure of systems to
evaluate the performance of both individuals and business units. The authors explain their use of the
term organisational architecture to “help focus specific attention on all three of these critical aspects of
the organisation”. These are aspects of process within organisation structures and may differ in detail
depending upon the nature of the organisation and its strategic direction.
Furthermore for any
organisation to be successful each should be present.
This moves us towards the question: what type of architecture is relevant within a value chain structure?
Clearly this will be determined by a number of considerations. There are four basic issues of “fit” that
should be addressed prior to deciding upon the type of structure. These are, strategic fit (the extent to
which all partners share the same view of the strategic direction - a sense of co-destiny), relationship fit
(the cohesion that can be created despite differences in culture, management style and perhaps decision
making processes), the business model profile (and this considers asset structures, postponement or
speculation as value delivery options), and operational fit (the ‘methodology’ of implementation).
These features, together with the ‘three critical aspects of the organisation’, will be the basis around
which the organisational architecture will develop. We can identify generic structures based upon
observations of developing value chain structures. Kay (op cit) suggests there are three types of
architecture, internal (the firm and its employees and among its employees), external (between the firm
and its suppliers and customers, and, networks (between a group of collaborating firms). More recently
the latter two have tended to merge as the extent of network collaboration has expanded. Campbell
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(1996) offers a useful typology of virtual organisation configuration, suggesting a basis for developing
more workable forms of organisation
Internal virtual organisations are seen to occur within firms that have the need to add product or service
characteristics to their offer but often cannot utilise all of the capacity. In these circumstances it is not
unusual to find a separate SBU established to serve these needs and those of other organisations (often
competitors) with similar problems. Examples can be seen in the automotive and pharmaceutical
industries, particularly in the capital-intensive processes. Stable virtual organisations exist in industries
where there are ongoing requirements for specialist inputs.
For example in the automotive industry
there exist complex components such as complete braking systems, automatic transmission and air
conditioning, these are typically provided by external organisations that often are themselves a network
of specialist producers. Dynamic virtual organisations are usually organisations that have appeal to
larger ‘generalists’ who find it more cost-effective to outsource specialist roles and tasks that not only
are capital-intensive but also offer competitive advantage. R&D in the pharmaceutical industry is an
example, so too is the service offered by Real Brand Holdings (a Sydney based business (brand) a
development agency that accepts assignments from organisations to add value to their existing brand(s)
(Australian Financial Review 12 April 2005). Agile virtual organisations have the clear core capability
of being able to respond to complete product-service changes in very short amounts of time. Examples
can be seen in the high fashion/low price segment of the garment industry. Companies such as Zara
(European based company) has the capability of being able to convert a garment style into a product, instore and available to customers, within two weeks. It can also replenish its inventories in 24/48 hours
within Europe.
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Roberts (2004) discusses organisational design and performance management. He suggests that for
many firms an important element of designing the organisation for greater performance is to focus the
firm only on those processes that can create the most value. For many this has resulted in vertical
disintegration (vertical scope); resulting in a range of outsourcing arrangements. Roberts discusses the
role of the “value chain organiser” demonstrating that this role may involve the ‘organiser’ in
performing an additional, important, role within the value chain processes such as product design
marketing, and distribution (as does Nike) or, as in the case of Benetton (fashion) managing the
information and logistics flows, and the marketing processes. In both cases the ‘organiser’ manages a
complex set of relations with other value chain participants and coordinates activities among them. He
identifies an application of the model in electronic manufacturing services. Solectron and Flextronic are
very large organisations with business valued at “tens of billions of dollars a year, but they have no
products of their own”. Roberts also makes reference to computer manufacturers who are beginning to
out-source logistics, order fulfilment, and post-sales service, and even the design and manufacture of
their low-end products.
It is the realisation that specialisation offers an opportunity to share the benefits that accrue to those
organisations that have some special asset, capability or process that enables them to undertake a
specific manufacturing task or service role more efficiently that the economics of integration is based
upon and that the effective management of a group of independent organisations results in the
economics of coordination. See below
Roberts also considers what he describes as horizontal scope to make the point that resource allocation
(specifically capital) may prove ‘easier’ and potentially achieving funding requirements at lower costs.
This includes not just interest charges but the transaction costs involved. The suggestion here is that
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resources may be applied across a number of similar businesses. The local (Australian) evidence
suggests this depends upon the success of the existing model. For example the “franchise” model
pursued by Harvey Norman (a large Australasian company in consumer durables, electricals, etc),
appears successful when many of the core assets (the brand), capabilities (such as procurement
management), and processes (marketing expertise) are centralised. In the “Harvey Norman” franchise
model the product-service range is compact (generically consumer durables) and as such permits the
successful application of expertise and systems.
Roberts is referring to a new phenomenon in
organisational design; the network based value chain or virtual organisation. The essence of the value
chain is that it is a coordinated network of assets, capabilities and processes that have been identified as
the most relevant to a specific market opportunity. This is the decision confronting the firm: not only is
it necessary to match specific skills and resources with opportunities within the value chain but it
follows that the attraction of them is very likely to shift and to change as the business environment
changes.
Successful emerging businesses work together with other partners each of who offer complimentary
expertise – assets, processes and capabilities. In the example of Millennium (a US based pharmaceutical
organisation) the CEO, Mark Levin has pursued the opportunities offered in a rapidly changing business
environment by integrating the expertise of Millennium with those of other organisations. Millennium’s
approach is one requiring constant appraisal of market opportunities and a clear knowledge of the
current ‘worth’ of the firm’s abilities. Figure one suggests a starting point. If the organisation is to
identify with a role within the range of value chain processes it is sound business sense to establish itself
in that role and to monitor potential competition that may attempt to undermine its positioning. This
requires rigorous self analysis and takes a prospective view of product and process developments
together with a similar long-term view of competitive activities. Often this suggests to an organisation
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Oxford, UK
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that possibly due to value migration or perhaps an external shift in the industry characteristics due to
changing technology, or may be relationships structures a company may consider it timely to shift its
positioning within the value chain.
Internal factors may also suggest this to the organisation’s
management as the organisation develops new skills.
Figure one also identifies the role of
“complementors” and “enablers”; products and services that expand the markets of specific products and
services. Nalebuff and Brandenburger (1996) explore the idea that many products and service products
have been successful because of the existence of complementary rather competing products. They cite
numerous examples; General Motors created General Motors Acceptance Corporation in 1919 to
facilitate vehicle ownership; automotive insurance and roadside service insurance have also made
vehicle ownership more “comfortable” by offering a service that relieves the owner of considerable
financial loss (vehicle insurance) and ‘peace of mind’ when undertaking long distance journeys. Used
car markets have been given “credibility” by taking advantage of networked warranty insurance
organisations. “Enablers” are “competitive necessities”, resource characteristics that are essential if an
organisation is to be considered as a viable supplier by customers. Typically the enablers add value by
enhancing the end-product.
Value Chain
Role(s)
Product-Markets
“Industry
Visionary and
Coordinator”
Automobiles
Computers
Dell
“Brand
Manager”
Sports equipment
Fashion
Nike
“Contract
Manufacturer”
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“Process
Specialist”
Consumer durables
PC assembly
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Design specialists, R&D
Buying consortia
“Branded” exclusive
components - Intel
Net-based marketing
Maintenance services
2008 Oxford Business &Economics Conference Program
ISBN : 978-0-9742114-7-3
Value Networks and Virtual Structures
The holonic, or virtual, organisation structure is one model that has found favour.
The holonic
organisation or network is:
“…a set of companies that acts integratedly and organically; it is constantly re-configured to manage each business
opportunity a customer presents. Each company in the network provides a different process capability and is called a
holon” McHugh et al (1995)
Holonic networks are not hierarchical structures – rather, each business within the structure is equal to
each of the others. The network is in dynamic equilibrium and it is self-regulating. Access to, and
exchange of, information throughout the network is open, as is access to and exchange of information
across the network boundaries. The network is evolutionary and is constantly interacting with its
environment. It is a knowledge network, a learning organisation. The authors suggest a number of
advantages accrue to holonic networks:
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
Asset Leverage; increased utilisation from distributed operations through synergy

Speed; specialist inputs enhance time-to-market

Flexibility; the ability to meet requests for product and service changes within
existing
response times

Faster growth and increased profitability; through improved response (time) rates

Increased customer loyalty; longer and more profitable customer relationships

Shared assets and lower total capital investment; investment by partner organisations is limited
to its core processes and working capital requirements are influenced by a ‘just-in-time’
approach

Shared risk at reduced levels; risk is reduced by being dispersed among network members and
because of the high aggregate level of expertise that is deployed.
It follows that a 'network' or value chain design should reflect these advantages. To do so will result in:

Lower investment in fixed costs and working capital.

Lower operating costs due to optimal economies of production and increased customer response
(reducing customer acquisition costs and increased transaction values)

Reduced business risk (defined here as fluctuations in planned market volume (and market
share(s))

Reduced financial risk (defined as the probability of failure to achieve a target return on net
assets)

Decreased response times (both time-to-market a strategic consideration and operationally, the
order cycle time)
June 22-24, 2008
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A CHANGING PERSPECTIVE ON PRODUCTION ECONOMICS
Shank and Govindarajan op cit discuss the changing nature of the relationship between management
accounting and strategic cost management. Management accounting has traditionally drawn on the
basic models of microeconomics, in particular the relationship between volume and cost as described by
the economies of scale (and the experience curve); and draws on economies of scope as and when multiproduct situations are being considered.
However the increase in networked organisations has
introduced other aspects to the hitherto simple economies of production.
Economics of integration and coordination can be defined as: the linking of isolated assets, processes
and capabilities into a single, integrated network system that is fast, responsive, flexible, agile, and
relatively low cost, resulting in a situation in which unit costs decrease as output increases because the
volume of the entire operation is increased through the coordinated flow of materials, information and
cash flow, resulting from the optimisation and “leverage” of the ownership, distribution and location of
assets throughout the value creation system. We can measure the effectiveness of the economics of
integration and coordination by measuring the its actual performance of; profitability, productivity, and
the generation free cash flow against predetermined asset intensity (working capital and fixed assets)
parameters.
Economics of interaction: occur with the searching, coordinating, and monitoring undertaken by
organisations for effective and efficient means to exchange products, services and ideas. They occur on
an intra-organisational basis as well as an inter-organisational basis. ICT developments continue to
enhance the interactive capacity of industries and individual consumers such that it will create new ways
to configure businesses, organisational structures and to service customers. Accordingly it will have a
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major impact on the strategy, structure and competitive dynamics of entire industries and is discussed in
some detail. (Butler et al (1997) and Beardsley et al (200) discuss the expanding influence of intra and
inter-organisational interactions.
Interactions may be classified as: Tacit interactions are knowledge based, requiring experience and
judgement typical of decision making roles. Transactional interactions include not just administrative
roles and accounting tasks but also the tasks that are increasingly becoming automated by the
application of software packages. Transformational interactions are the “production” related tasks in
which raw materials are extracted and processed into finished products. Johnson et al argue that
interactions are an integral part of strategy, organisational structures and operational implementation.
Skilfully used interactions can enhance strategic and operational responses to market opportunity.
Butler et al, provide examples of intra-organisational networks such as Caterpillar who are now linking
designers, distributors and technicians with customers as it builds a global parts service network. They
also contend that as interaction costs decline so too will transaction costs resulting in more market
information transparency. An interesting aspect of all of this is the impact that it will have on traditional
intermediaries, who traditionally exploited the lack of transparency. Their role as providers of market
information is being undertaken by “informediaries”, organisations that provide search facilities across
markets. Clearly such changes have implications for business structures and relationships. Internet
‘interactions’ now facilitate both customer and supplier relationship management.
Product
customisation will become easier, faster and less costly as interaction facilities increase in cost
efficiency and communications can become more closely targeted, frequent and accurate.
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The economics of transformation: adds value (utility) through conversion processes these include:
resource conversion (product); location (distribution); time (time taken and delivery accuracy);
flexibility/agility (“change”; reliability (brand promise); information (“decision facilitating”/risk
reduction); “asset leverage” - tangibles and intangibles (corporate productivity); co-productivity and coopetition are new terms in operations management.
The economics of differentiation: increases customer value by offering “product-service exclusivity”
through customisation and “mass customisation” and collaboration with partner organisations. The
development of a business model based upon product or process innovation that is designed to meet
customers’ expectations more cost-effectively than those of competitors, for example, product range
(choice – through the application of product platforms) and additional services by partnership
arrangements with service ‘specialists’ (whose cost structures or business volumes enable them to meet
the service/cost profile requirements more cost-efficiently.
While economies of scale remain important, Dyer A and Y Jansen (2004) suggest a changing role.
Using examples from the financial services industry they argue that far from becoming a redundant
concept it remains significant. Their argument is based upon that economies of scale can be realised by
midsized and small sized companies, the difference being that companies are aware of the opportunities
of scale that are available by benefiting from capitalising on the benefits of assets rather than
accumulating assets through acquisitions. They identify five “drivers”; the deconstruction of the value
chain (the growth of networked organisations) leading to the realisation that the advantages of scale are
available if managers identify opportunities for focusing on specialist applications; technology (ICT and
process management applications); globalisation of capital markets; the growth of shared services
whereby scale decision may now be considered at an operational level and as such contain investment,
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and; the growth of fixed costs (particularly information costs) has made mergers and consolidation
attractive options. Dyer and Jansen suggest that scale decisions may be more effective on an intraorganisational basis (rather than inter-organisational) by being selective in their product and market
portfolios.
CUSTOMER AND ORGANISATIONAL VALUE DRIVERS
Creating value incurs cost and for many organisations there is a decision to be made concerning the
precise relationship between the value delivered to the customer (and the value generated for the
organisation and other stakeholders) and the cost of creating, producing, communicating, delivering and
servicing the value. The value network has a strategic principle; to optimise value and cost it establishes
partnerships (or alliances) with other organisations who offer capabilities and/or assets not otherwise
available.
Value drivers are not exclusive to a specific core capability or to key success factors. It is more likely
they influence one or some of these. If an organisation is to develop a strong competitive position it
clearly needs to identify the value drivers that are important to the end-user customer and to structure a
value delivery system that reflects these and the objectives of the other value chain participants.
It follows that the relationship between value drivers and cost drivers is important. Scott (1998)
commented: “Since time immemorial there have been two sorts of activities in companies; those that
drive value creation and those that drive unproductive cost ...” Scott suggests that the harsh reality of
globalisation and the accompanying increase in competition has forced most companies into making
efficiency gains. However, the persistence of competitive pressures makes the speed of efficiency gains
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in production and the speed of market responsiveness necessary to compete are increasing. And: “Cost
structures are shifting dramatically year by year as new producers come on line and new technologies
propel shifts in business processes.
Everything is moving faster and will continue to accelerate.
Today’s competitive “paradigms” will be tomorrow’s old hat”.
There are a number of implications for value chain structures arising from Scott’s comments. Value
chain structures are essentially virtual organisations and as such do have the flexibility to meet changes
either in customer value expectations or in the way in which value is delivered.
Meeting value
expectations and creating differentiation around important value drivers requires close and careful
monitoring of the consumption cycle and of the ways and means by which value can be created,
produced, communicated and delivered. The application of technology developments (process and
product technology as well as information communications technology) is an important aspect of how,
who, when and where value is delivered.
Phelps (2004) considers both value drivers and value builders from the perspectives of the customer and
the organisation. Identifying value drivers begins by asking “What drives value in your business? Who
are the competitors? What are the characteristics of the market?” How can a dominant share of market
value be captured? He suggests there are no generic answers or prescriptions; one company may derive
the greatest value from improving brand image while another may do so by improving its recruitment
policies. Identifying value builders “gives the ability to take advantage of risks and opportunities as
they arise”. Phelps suggests organisations take a strategic perspective by identifying potential market
developments and then addressing the scenarios with ‘positioning decisions’ (i.e., develop ownership or
access to processes and capabilities) that will enable the organisation to move rapidly into an
opportunity. Phelps suggestions are in fact, equally applicable to the value producer and the value
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consumer.
ISBN : 978-0-9742114-7-3
Figure two considers the features of value drivers and value builders in networked
organisations.
The value drivers in any business depend on the specific setting, competition and the market structure Their
time perspective is clearly short-term given they are factors that “drive present value” and as levers of present
value. Focus on adjustments to the value drivers results in short-term improvements in performance. Value
drivers include strategic adjustments and operational implementation characteristics such as:
Integrated and networked procurement and production operations
Synchronised cash and operating cycles
Access to relevant process and capabilities management
Agile/flexible production facilities and networks
Proactive and reactive service response networks
Market entry and management networks
Share of market value
Value drivers are measured by; the NPV of free cash flow, EVA (economic value added) and ROI.
Value builders help build future value. They give an organisation the ability to plan to take advantage of
opportunities as they arise and help avoid threats and risks. For this to be effective value builders are built on
positional characteristics (strategy, investment levels, and partnerships), the ability to capture value in a
dynamic market environment, building and strengthening relationships externally and internally, and
expanding (or at least maintaining) shareholder value. Among the characteristics are:
The ability to capture value in a dynamic market environment: “value led” management
Customer aligned
Innovative product-service solutions
Innovative processes
Adaptive organisational structure
Network modularity Network orchestration
Develop value chain loyalty relationships that encourage increased comprehensive customer
cooperation & commitment
Value builders are measured by the ‘value’ of future growth (the NPV of anticipated free cash flow), share of
market added value, customer perceptions and sales response, market reputation
Figure two: Value drivers and value builders in virtual (networked) organisations
Figure two is suggesting that the literature of the 1980s concerning critical/key success factors has been
influenced by the changes in organisational structures. Indeed much of the work on the search for the
key success factors had an implied assumption that once identified the firm should seek to create or own
those success factors, hopefully to the exclusion of its competitors. The strategic framework on which
this assumption is made is however shifting rapidly. In recent years the virtual enterprise model has
emerged as a popular approach to strategy. This model is based on a structure of networks between
value producers and customers. These networks potentially span what are traditionally thought of as
specific “industries”, and therefore require combinations of success factors potentially broader than
those traditionally identified. The implications of these changes for strategic management accounting
must now be addressed.
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STRATEGIC VALUE BUILDERS AND COST DRIVERS
Shank & Govindarajan op cit argued that; “cost is caused, or driven, by many factors that are inter
related in complex ways”; they argued that output volume influenced the cause of costs and the
‘thinking’ was dominated by the simple models of basic microeconomics whereas strategic cost
management was based, more in the thinking of the industrial economics of organisation, Scherer (1980)
being prominent in this respect. They made an interesting comment related to the Boston Consulting
Group’s “experience effect”, (a popular input into strategic management programmes), suggesting that;
“rather than seeing experience as one of many cost drivers, or perhaps a combination of effects, the
accounting literature sees it more narrowly as an explanation of how the relationship between cost and
output volume changes over time as cumulative output increases for one particular product or process”
And it remains that way today.
Shank & Govindarajan argue that structural cost drivers are, perhaps, a better approach citing Riley op
cit who proposed five strategic choices by the firm that reflects its underlying economic structure that
drives its cost position. These are; scale, scope, experience, technology, and complexity. They argue
that each structural driver involves choices that underlie product costs. Riley’s second category of cost
drivers, executional drivers, are ore operational and determine its ability to implement its productmarket strategy.
These comprise; work force involvement, total quality management, capacity
utilisation, plant layout efficiency, product configuration, and, exploiting linkages with suppliers and/or
customers. It is this last ‘driver’ that interests us as it introduces the notion of relationship management,
a concept that now drives many organisations in a networked world.
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Macri, Silvi and Zanoni (2000) agreeing with Shank & Govindarajan suggest that a broader perspective
is required arguing that: “The overall performance of a firm thus depends not only on its internal
activities and their efficiency, but also on the way it manages its relationships with its customers and
suppliers.” They further suggest that this puts more emphasis on transactions costs because in the
process of ‘vertical disintegration’ of traditional business model structures transactions costs represent a
sizeable and growing amount of overall costs that can only be understood by examining the firm as a
member of a value creating network.
Sawhney and Parikh (2001 contend that ‘value’ in a networked world behaves very differently than it
does in the traditional, bounded world. They suggest the elements of infrastructure that were once
distributed among different machines, organisational units and companies will be brought together.
Shared infrastructure (value in common infrastructure) will include not only basic information storage
and dissemination but common functions such as order management, and: “….even manufacturing and
customer service”. This is a similar view to that proposed by Hagel and Singer op cit.
They also suggest value in modularity as a trend. Here their concern is with the entire range of:
“Devices, software, organisational capabilities and business processes”. These will be: “restructured as
well-defined, self-contained modules and: “value will lie in creating modules that can be plugged into
as many different value chains as possible”. Examples of modularisation can found in automobile
production. And they conclude; “value in orchestration” will become: “…..the most valuable business
skill”. Modularisation will require an organisational ability and the authors suggest: “Much of the
competition in the business world will centre on gaining and maintaining the orchestration role for a
value chain or an industry”.
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While the concept of networked structures has been readily accepted the complications of cost
management are a problem. Coad and Cullen (2006) have recently published a literature based review of
the complexity of inter-organisational cost management. They cite Amigoni et al (2003), in arriving at
the view that: “… IOCM (inter-organisational cost management) may or may not involve methods
recognisable as management accounting, and may or may not involve management accountants. But,
whilst its practices are varied, its central concern is with cooperative efforts by members of separate
organisational units to modify cost structures and create value for its participants. In summary, the role
of information sharing has been presented as a way of understanding inter-organisational reality, as
enabling partner organisations to learn skills and identify cost reduction and value creating
opportunities, as the glue that binds collaborating organisations together, as a means of reducing
uncertainty, and as a basis for sustaining and renewing inter-organisational relationships “
It would appear that the concerns of the authors cited, and indeed others, there is a growing (an
important) requirement to revisit the topic of structural costs and do so from the basis of an inter-firm
organisational structure.
Strategic/Structural Value Builders
This has a strong message suggesting that rather than look for solutions based within the existing
discipline we seek other approaches based upon developments in other disciplines and upon assumptions
that recent organisational changes imply. A point of departure is to explore strategic/structural builders
from a network perspective. Figure three identifies a number of value builders by suggesting that for
long-term success an organisation should not lose sight of the underlying requirement to remain
customer focused; relationship management is the basis of customer loyalty and supplier and
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intermediary loyalty and strong working relationships.
Equally the acceptance of value –led
management (rather than value based management) becomes a central value builder; long-term growth
requires optimal returns for all stakeholders rather than maximum investor returns.
Identify the network positions
and the resource requirements
necessary for success and their
availability
Build or maintain stakeholder value by developing
sustainable competitive advantage based on market
acknowledged leadership (brand reputation) and
investor value (enterprise value)
Value Led
Management
Value Network
Creating value in modules Positioning
that can be applied across a
number of different
international industry value
chains.
Network
Customer
Aligned Responses
Develop supplier and
customer loyalty relationships
that encourage increased
comprehensive customer
cooperation & commitment
Innovative
Processes
Modularity
Orchestration
Relative
Competitive
Advantage
Product-service solutions offering
unique/exclusive customer value
characteristics Value in use and
Total life cycle approach
Structural
Flexibility
Strategic/Structural
Value Builders
Process designs that preserve
core IP characteristics but are
able to take advantage of the
advantages of low resource
costs offered in “offshore”
resource markets.
Innovative Product-Service
Solutions
Develop value chain loyalty
relationships that encourage
increased comprehensive partner
cooperation & commitment on
joint resources
collaboration
Network
Financial Structure,
Investment
and Risk
Management
Market Performance
Capital Intensity/Distributed Assets
Share of ∑Market Added Value
Considers the shift of added value (value
migration)
Value chain/network positioning and relationship
management (CRM, DRM, SRM)
Figure three: Value builders: pathways for
inter-organisational growth
Managing financial and operational gearing
through asset leverage partnerships with
selected partners
Returns Spread (∑(ROI
less WACC)
Financial Performance
Positive NPV on Anticipated Free Cash Flow.
∑ROAM Individual ROCE, ROE
Return on the incremental investment to achieve
an increase in added value is also a useful
measure
Financial gearing Operational gearing
Within the value chain/network value creation can occur in a number of locations Magretta (2002)
reminds us that: “a successful business model represents a better way than the existing alternatives. It
may offer more value to a discrete group of customers. Or it may completely replace the old way of
doing things and become the standard for the next generation of entrepreneurs to beat". Furthermore as
Slywotzky and Morrison (1997) suggests, value migration occurs as both economic and shareholder
value flows away from obsolescent (and obsolete) business models, arguing that new models offer the
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same benefits to customers but at lower cost by changing the model structure. This change often results
in a restructuring of profit sharing throughout the business model. Hence to optimise value capture
opportunities ongoing research is required to build familiarity with the industry value chain. It follows
that innovation becomes a principal value builder; value migration implies that both product and process
innovation leadership are essential if an organisation is to dominate its value chain positioning. The
three remaining value builders are ‘network based’; the ability to identify resource requirements and
their location is important. Figure three recognises the growth of value networks and reflects the
changes in the business environment that have encouraged the development of the value network
business model namely; the increased rate of introduction of new products that have short effective
lives, volatile markets resulting in uncertain demand, price competitive markets (and therefore
diminishing margins), increasing customer emphasis on service and evidence of decreasing brand
loyalty, pressures to maximise individual organisational ROAM (and therefore the growth of leveraged,
distributed, assets) and, increasing emphasis on global consumer and supply markets
Strategic/Structural Cost Drivers
Shank and Govindarajan op cit, having rejected volume as a cost driver argued that an understanding of
cost behaviour means understanding the “complex interplay of the set of cost drivers at work in any
given situation”. They added that it is more useful to explain cost position in terms of the structural
choices and executional skill required to create competitive strength. Within the current environment
figure four reflects this view, the value builders (figure three) identify activities that create costs and
focus on structural responses; it could be argued that this approach opens up an opportunity for an
innovative approach to managing production economics by prescribing an alternative business model
that combines the most appropriate processes of specialist partners in order to achieve balanced or
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optimal stakeholder value performance. It can be argued that Dell reflects this approach. Dell’s
business model is based upon an integrator/coordinator role in the value chain, innovative processes
(customer and supplier relationship management) and a developed inter-organisational network
structure.
Examples of how firms are responding to strategic market structure changes comes from Seely Brown
and Hagel III (2005) who discusses process innovation and the shift from business models dominated by
“push” philosophy towards “pull” models.
"Push" systems typically work on core assumptions,
demand is anticipated and the traditional process of mobilizing resources is the most efficient and
reliable way to meet it. Efficiency in push systems is expensive, they require organisations to specify,
monitor, and enforce detailed activities and tasks. By contrast “pull” systems adopt a more flexible
approach to resource management mobilising assets, processes and capabilities from outside the
organisation, as and when they are needed, to meet “real” identified demand.
Being more versatile and far-reaching, pull systems extend beyond production and, indeed, beyond the
enterprise itself and are now found not just in manufacturing and supply chain operations but also in
activities as diverse as pharmaceutical R&D and the media. These early pull models, are driven by
changing strategic and operational needs and facilitated by the Internet. The authors give examples of
exponents of the “pull” model:
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No of nodes No of processes No of standard processes
No of specialist processes No of “new” processes
No of demand points Demand available/Demand satisfied
∑Demand available/∑Capacity available (%)
Share of market added value/Total market added value
Number of network structures and paths
Location of demand nodes
Productivity of networks
Effectiveness of networks
Efficiency of networks
Asset utilisation and productivity
Transformation costs/operating costs
Economies of
Transaction costs/operating costs
Economies of
Integration
No of transformation process nodes
No of specialist transformation process nodes
No of transaction nodesNo of transactions
No of communications nodes
Required communications “reach”
Required communications “richness”
Coordination
Economies of
Interaction
Adding customer value by offering:
 “Product-service exclusivity” through
customisation and “mass customisation”
Specialisation, through asset leverage,
process and capability collaboration with
partner organisations.
Economies of
Differentiation
A significant (and constant)
decline in costs as volume increases.
 No of processes
 No of complex processes
Economies of
 No of standard processes
Experience
 No of standard platforms
and components
The Economies of
Transformation
Resource conversion
No of processes
No of complex processes
No of standard processes
No of standard platforms
and components
Location (distribution)
Time (delivery accuracy)
Flexibility (“change”)
Flexibility (“change”)
Reliability (brand promise)
No of “Service” programmes
 Information (“decision facilitating”)
Strategic/Structural
Cost Drivers

Economies of
Scope
Economies of Scale
Cost-efficiencies result from common use of facilities
No of products sharing the fixed costs of NPD, promotion,
distribution and service Increase in productivity of processes eg
procurement, production, marketing) No of products produced as byproducts from the production of the core product
A significant relationship between fixed and variable costs
with changes in volume
A significant difference between internal and external cost
structures and options
 No of standard processes
 No of standard platforms and components
Figure four: Strategic/structural cost drivers: managing effective growth
“Li & Fung, a Hong Kong-based apparel producer and distributor that works with 7,500 business
partners, in 37 countries, can call on any number of specialists to manufacture everything from high-end
wool sweaters to synthetic slacks. The company, one of the new model's most sophisticated
practitioners, has rewritten the rules of supply chain management. Traditional supply chain managers
focus on limiting the number of partners and on creating tightly integrated operations—the Wal-Mart
approach. Orchestrators like Li & Fung are rapidly expanding the range of participants in order to gain
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access to more specialized skills, as well as nurturing and developing relationships that help all parties
build their capabilities more quickly. Li & Fung sits at the hub of a network of specialist enterprises that
pull in resources in different combinations and configurations, depending on the nature of demand.”
And: Compal and Quanta Computer, (Taiwan) offer equally compelling examples of distributed product
innovation. These ODMs (original design manufacturers) creatively pull together highly specialized
component and subsystem suppliers in order to generate ideas for delivering higher performance at
lower cost in a broad range of digital devices, including digital still cameras, mobile telephones, and
notebook computers. Instead of designing products in detail from the top down, ODMs specify
ambitious performance targets and then rely on this diverse network of technology partners to find new
ways of meeting them.
OPERATIONAL VALUE AND COST DRIVERS
Operational Value Drivers
Operational value (and cost drivers) implement the ‘organisation’s’ strategy. They are a response to the
opportunities identified by market opportunity analysis, reflecting the selected value chain positioning.
Operations management as an activity is tasked with the cost-efficient coordination of the flow
materials, information and cash throughout the organisation. In achieving this it ensures that intraorganisational and inter-organisational processes interface to achieve forecasts and budgets. These are
determinants of both market place success and of financial success; clearly market success achieved
only by exceeding planned costs is not acceptable.
An operations response requires information input to enable it to reach decisions concerning design and
development of product, support services and production processes and support requirements.
In
addition it makes decisions on procurement and productions planning, information identifying volume,
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the range of product characteristics and the levels of service support are necessary if the capabilities and
capacity requirements are to be met. Service support decisions are made on the basis of information
concerning product application, where the product will be “working” (ease of access to service facilities
etc). Clearly at this stage of planning decisions can be flexible and servicing difficulties may best be
resolved at the product design stage.
Given these answers the organisation can move on to specifying the operations response approach that
will implement the organisations’ strategy efficiently and ensure the availability (or accessibility) of the
necessary assets, processes and capabilities, and production facilities and networks. The operations
response should include the planning and management of the market entry network and market
management networks.
A comprehensive (total) approach to an operations response requires an
evaluation of marketing and sales operations and decisions concerning appropriate a Market Entry
Network. The increasing acceptance of co-opetition describes the situation in which competitors work
together to meet individual objectives using mutual facilities and of co-productivity (a more operational
role by suppliers, distributors and customers in which they undertake tasks that hitherto were the role of
other channel/chain participants) has expanded the value delivery options, often adding both
effectiveness and efficiency to the final organisational structure. Market Management Networks are also
important, specifically the application of developing approaches to knowledge, technology, process and
relationship management. An important concern for management is the need to maintain market
communications with customers, distributors and suppliers.
Increasingly these are becoming as
important in terms of operational response as they are from a strategic analysis and planning perspective.
See figure five.
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Figure five has identified operational value drivers as the means by which strategic intentions are
implemented. The notion of partnered access to assets, processes and capabilities is an important feature
of the model. Two important value drivers for the organisation are synchronised operating and cash
cycles and logistics processes management. Another important ‘driver’ is a proactive and reactive
service response. Being both proactive and reactive enables an integrated service function that is able to
work with existing and potential customers to ensure a flexible and agile service offer by building the
ability to react to after-sale-service requirements in a planned way.
Customer/Market liaison- research;
product application/uses
location applications/uses
distributor sales support
physical distribution
service support
Product and service support
specification
 Process design to meet product
volume, performance, quality
characteristics
Customer involvement in
design and specification reduces
time-to-market and production
operating cycle – reduces
receivable time cycles Product
platform designs JIT
Postponement – BTO systems
Synchronised Operating
and Cash Cycles
Product Design and
Development
Inter-organisational
“Operations” Facilities
and Networks
Customer enquiries
Order processing and
management, processes,
capabilities, locations and
capacities  Inventory
service levels & locations
Delivery schedules
Reverse logistics
Logistics
Processes
Management
Inter-Organisational Production
Facilities and Networks
Inter-organisational process & capability
management Motivated and involved work
force – committed to continuous
improvement and acceptance of multi-roles
Synchronised capacity utilisation - planned
and realised resulting in efficient plant
operations Integrated service management
networks
Market Entry and Management
Networks
Operational
Value Drivers
Proactive (and Reactive)
Service Response Networks
Managing
Operational Risk
Access to Assets, Processes &
Capabilities Management
Value chain network location efficiencies
through partnerships economies:
managing the relationships with
suppliers, distributors and customers to
maximise the value of their inputs and the
total share of market added value.
Brand management Market reach
Market influence Market Segmentation
criteria Improve 'customer knowledge' and
sales response Improved customer
liaison improves receivables
Customisation improves customer
responses, loyalty and transactions
Marketing and sales operations designed
to lower infrastructure costs throughout an
‘organisation’
 Customise customer support services
to offer innovative, timely and
competitive responses Installation and
maintenance services Operator
training “End-of-life” support
Performance information “loops” for
product and process design and
production improvement Service
facilities: time response, capacity and
quality
Integrated Procurement
and Production Operations
Planning
Joint procurement and supply network
system design and management
Integrated production process system
specification, evaluation and implementation
Product component synergy – standardised
components, product platforms and modular
assembly Managed structures and
activities that meet quality requirements at
planned costs: economies of procurement
Financial Risk
 “Market”/Investor response
 “Shareholder Value” Management
 “Returns” Spread (ROA/WACofC)
Marketing Failure
Customer response
 “Stakeholder” response
Figure five: Operational value drivers implementing strategy and ensuring efficiency management
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Operational Cost Drivers
The concept of cost drivers is not new in management accounting and in this model the interpretation is
the same; a cost driver is any activity that causes costs to be incurred. The operational cost drivers in
figure six reflect the activities necessary to implement the organisation’s strategy. The two examples
that were mentioned in previous paragraph,
i e, synchronised operating and cash cycles, will identify activities such as; the number of supplier
contacts made, the number of orders placed with suppliers, the number of credit account contacts made,
progress reports requested by customers, etc: and logistics processes management will identify activities
such as the number of customer orders processed, deliveries (and re-deliveries) made, the number of
progress reports responses made, service call responses. Figure six offers a comprehensive range of cost
driver measures. These should only be considered as proposed drivers, more work is required.
No of joint procurement and supply network
system design and management agreements
No of buying exchange agreements No of joint
inventory management agreements  No of
shared production process systems
Management of Quick Response supplier
system network - no of responses TQM product
and process improvement managed to achieve
an acceptable defect rate
No of shared inputs No shared
specialist and non-specialist facilities,
equipment & processes
No of capacity and quality management
– communications across joint facilities
No of negotiations concerning shared
resources
No of interactions concerning materials
andInter-Organisational
component standardisation
Integrated Procurement and
Production Operations Planning
No of coordination visits
and communications:
managing interactions,
transformations and
transactions to optimise
materials inventories,
information and cash
flows
Production Facilities
and Networks
Synchronised
Operating Cycles
and
Cash/Cycles
Access to Assets,
Processes & Capabilities
Management
No of access to patents and
brands agreements No of
specialist processes and
services eg; design and
June 22-24, 2008
development negotiations
Oxford, UK "Access" agreements to
specialist facilities, equipment
& processes, etc No of
service management
networks No of
product/service performance
delivery and maintenance
Operational
Cost Drivers
Market Entry
and Management
Networks
No of customer databases No of
data base entries No of requests
for coordinated customer based
design and development No of
market liaison contacts made No
of advertising & PR ‘agency’ liaison
visits Transaction channels
(intermediaries) –no of liaison visits
Specialist processes and services
eg; design and development liaison visits and No of projects
28
Processes
Management
No of customer
enquiries No of
customer orders
processed No of
orders assembled No
of deliveries
No of progress
enquiries
No of complete orders
No of redeliveries
Proactive and
Reactive Service
Response Networks
No of service organisations No
of service agreements No of
installations No of training visits
No of product- service information
bulletins issued No of requests for
technical visits
2008 Oxford Business &Economics Conference Program
ISBN : 978-0-9742114-7-3
Concluding Comments
The growth of virtual organisations has added emphasis to the need for a new strategic perspective of
organisation. As attitudes towards business structure have taken a new approach, Normann (2001) has
suggested that managers need to be good at mobilizing, managing, and using resources rather than at
formally acquiring and necessarily owning resources. Thus we begin to see a new emphasis; vertically
integrated organisations (that were typically built using economies of scale, and later scope, as a central
platform) are rapidly making way to virtual (network) structures. The ability to reconfigure, to use
resources inside and particularly outside the boundaries of the traditional corporation more effectively is
becoming a mandatory skill for managements.
The New Economy has ushered in to the world of business planning two important concepts or
management perspectives. One concerns the notion that in order to be responsive to existing and
potential market-customer opportunities the corporate need is to be able to access relevant assets, not
necessarily own them. The organisational response has been to develop network partnerships in which
assets and processes, and to some extent capabilities are “shared”. Boulton et al (2000) expresses this
need when they contend: “The encompassing challenge that companies face in this new environment is
how to identify and leverage all sources of value, not just the assets that appear on the traditional
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balance sheet. These important assets including customers, brands, suppliers, employees, patents, and
ideas – are at the core of creating a successful business now and in the future … … But what assets are
most important in the New Economy? How do we leverage these assets to create value for our own
organisations in a changing business environment? What new strategies are required for us to create
value?”
The other concept concerns the increasing role in business models of intangible assets. The growing
importance of intangible assets has been identified by research by the Brookings Institution. Overtime
they have reported significant changes in the structure of large manufacturing and mining companies in
the US over the years 1982 - 2000. Since 1982 fixed tangible assets as a proportion of total assets has
declined steadily.
In 1982 fixed tangible assets, as a proportion of total assets, were some 67 percent.
By 1992 this was 38 percent and by 2000 the figure was reported to be less than 30 percent.
Virtual winery models have operated in Australia and New Zealand during recent years as a structured
response to business opportunities that involve changes to internal and external resources management;
resources in this context being considered to be assets, processes and capabilities. A characteristic of
virtual business models is that they are typically multi-enterprise in their nature and that ownership of
any specific resource is not seen as a necessary condition for the involvement of any participant in the
resulting organisational system. Virtual business models may take a number of structural options; they
may be represented by combinations of virtual or vertically integrated resources mix or some alternative
organisational structure. They use the concepts of leverage (outsourcing) to increase corporate and
organisational growth, to improve the productivity of all resources (internally and externally, often
increasing employment at the same time), in an endeavour to deliver greater added value – as well as
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generating opportunities to reduce overall costs. In a low-capital intensity (virtual winery) model the
investment/sales ratio is typically lower than that of traditional models by a significant amount – 30
percent compared with as much as 120 percent.
Assuming similar costs and product quality the
required EBIT/Funds Employed ratio becomes a much lower figure. For example with a Capital
Intensity Ratio of say 40/50 percent compared to the traditional level of between 100 to 200 percent the
required EBIT/Funds Employed figure can be as low as 10 percent, considerably less than the 30 percent
required for viability by the traditional model. It follows that target revenues are also lower, often by
some 30 percent – in retail terms this may be as much as 25 percent less per bottle for the same quality
wine! As a result the EBIT/Funds Employed ratio can show an impressive 75 percent for the ‘virtual’
model versus approximately five percent for the traditional winery model.
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Butler P, T W Hall, A M Hanna, L Mendoca, B Auguste, J Manyika and A Sahay (2001) A Revolution
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Magretta J (2002) "Why Business Models Matter", Harvard Business Review, May
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Shank J and V Govindarajan (1993) Strategic Cost Management: The New Tool for Competitive
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