How Digital Technologies Shape the Value Chain

In recent years, firms have moved away from hierarchical integrated supply chains in favor of fragmented networks of strategic partnerships with external entities. While this pattern is well-known and visible in industries such as automotive, apparel, and textiles, recent empirical efforts show that it is now also taking place in industries where digital technologies play a prominent role, enabling work to be carried out across boundaries of time, distance and function. In a recent article titled Digital Business Strategy and Value Creation: Framing the Dynamic Cycle of Control Points, forthcoming in MIS Quarterly, Margherita Pagani (Department of Marketing) does in fact draw from a study of the U.S. and European broadcasting industry to argue that incremental innovations shift value networks from static, vertically integrated networks to more loosely coupled networks, while cross-boundary industry disruptions may turn the latter into two-sided markets.

In the paper, the author relies on a 10-month field study of the U.S. and European broadcasting industry, conducted through semi-structured interviews; moreover, data on broadcasting innovation challenges were obtained from leading industry journals in order to develop measures of the extent of challenges in core and edge capabilities for each technology generation. Finally, longitudinal data were collected on a sample of firms across the broadcasting supply chain, such as content providers, electronics suppliers, broadcasters, and so forth. The case studies analyzed yield three different control point constellations (CPC), i.e. network configurations of control points which comprise service transactions required to deliver a service: a vertically integrated one, a loosely coupled one, and one based on a multisided platform. Based on the available empirical evidence, the author posits that the closed, vertically integrated model emerges in market areas where customers are underserved by the functionality available from products in the market. When the demand for functionality is lower and an innovation appears, however, a horizontally stratified CPC structure becomes the dominant business model. Conversely, platforms are likely to arise when the dominant business model in a market tier shifts from vertical to horizontal because they allow for value creation by reducing distribution, transaction and search costs. Lastly, if performance gaps arise because of cross-boundary industry disruptions, then the CPC structure is bound to become vertically integrated again.

Results contribute to extant theory in both business strategy and research in that they illustrate how incremental innovations may shift value networks from static, vertically integrated networks to more loosely coupled ones, and how disruptions might favor the emergence of platform-based multisided markets. Moreover, digital ecosystems are found to evolve according to complex, nonlinear dynamics, which suggests that the firm has to transform its organizational intelligence into a new relational intelligence in order to successfully communicate with its shareholders. Finally, within interorganizational networks value can be created and captured along five main dimensions: customer access, common infrastructure, modularity, content access and orchestration.