At the simplest level, value created is the difference between the costs and investments required to produce goods or services and the prices customers pay for them. However, such cur- sory analysis misses the fact that not all costs and investments have equal impact on the final prices paid by end consumers. Often, it is only a few key ele- ments of cost or investment — value drivers — that make a company’s products and services worth their price. Exceptional performance in these parts of the value chain usually leads to exceptional profitability, while the same level of performance elsewhere leads to a lesser
reward. Companies should gener- ally focus on controlling the value drivers. Other elements — often the majority of cost or investment — can be outsourced.
The automotive industry presents some interesting exam- ples of “picking spots” as various players — online and otherwise
have infiltrated the automotive
value chain (see Exhibit 6). Given their control of the key consumer interface, automotive producers have long held the power — at least potentially — to seize most of the chain’s supe- rior value, and relegate suppliers to commodity status. Suppliers who continue to operate under the old mode of thinking are
Case Study: American Airlines
Once you have maximized the value created, you want to capture as much as possible, rather than giving it away to the consumer. Airline pricing used to have at most a couple of price tiers, which meant price-insensitive business travelers often paid much less than they would have been willing to pay, while a good many leisure travelers were priced out of the market. But American Airlines found a solution in yield management, powered by some of the most advanced information technology of its era.
With a new and bewildering set of price tiers, each with unique restrictions, American was able to price its tickets much closer to the maximum price each traveler would pay. For example, travelers who did not stay over a Saturday night and who bought tickets at the last minute — mainly business travelers — paid the highest fares, often considerably higher than before the era of yield manage- ment. At the same time, advance-purchase super saver fares were lower than the previously lowest price tiers, which expanded the market considerably on the low end. Yield management to capture consumer surplus is now applied in may other industries, but airlines are still the most advanced practitioners of the concept.
vulnerable to profit extraction. But suppliers who change their business models, hone their own understanding of the end-con- sumer, develop their innovation capabilities, and move strongly into modules and systems can both create and capture value.
The question a company must answer is which capabilities are core to value creation and capture and whether they should exist within the confines of the company’s corporate structure. Who should own which capabili- ties may be predicated on who is best positioned to create value in that particular context (e.g., by leveraging positional assets, lower labor rates, etc.).
Value drivers also evolve over time as changes take place in underlying technologies, mar- kets, and regulatory environ- ments. Anticipating and taking advantage of these changes is key to establishing or maintaining leadership in any industry. As we have seen with the evolution of the PC sector and the Internet economy, players who win are often those who correctly antici- pate changes in value drivers and build new business models that respond to these changes by uncoupling established link- ages and reconnecting them in different, and, often, unconven- tional ways.
These winning companies not only create value in their chains, they effectively capture it