Analysis of IT news

Thursday, June 15, 2006

General theory: how technology influences the value chain

Technology influences the evolution of markets by having an impact on the value chain.

Now, what's a value chain? Consider the Personal Computer. PCs are assembled and sold by PC manufacturers (Dell, IBM, HP, etc.). But those companies do not create all the components themselves. They purchase them from 3rd party vendors (the operating system from Microsoft, the processor from Intel or AMD, etc.). Those vendors also rely on suppliers. On top of that, the PC manufacturers seldom sell directly. They often sell through retailers (e.g. CompUSA), service companies, etc. Each element of the value chain is a market, which has more or less weight on the end product.

Faced with this whole value chain, customers theoretically face countless choices. What hard drive? What processor? What PC vendor? What distributor? In real life, customers will only make a few key choices, and will let those choices dictate the rest. One customer might want the best PC for Windows, whoever sells it and wherever. Another might chose to buy HP because she trusts the brand, and find the first store that sells them. Another might go to CompUSA and buy what the sales rep tells him to buy.

At the end of the day, the customer looks at the elements of the chain that have the biggest impact on the end product. If a given element of the chain doesn't deliver much added value (e.g. only assembling parts), the customer doesn't care. That's why the main things customers look at for a PC vendor is the service. On top of that, it's also about competitive added value. If all the brands selling a given components are comparable, why bothering. That's why customers will care more about the graphic chip of a PC (as it can influence a lot performance) than the brand of the hard disk.

The constant evolution in technology thus can trigger changes in the decision process:
  • Standards: standards are a great thing for users, because one decision (the choice of the standard) includes a lot of underlying choices. When chosing VHS over Betamax, customers chose a standard over a VCR brand and simplifies their lives. The downside for lots of vendors is that a standard will turn some manufacturers into mere assemblers (see Vertical Integration vs. Horizontal Integration). The added value is then either moved upstream if some subcomponents can affect performance (that's how PC gamers care a lot about the graphic chip of their computers), and/or downstream as users will start to care about service.
  • A push towards what users really need: users don't need a computer per say, they need to edit their documents, access the Internet, etc. So if they can discard any decision involving technical details and focus on what really matters to them, they will.
  • Feature/performance overkill: There comes a point where components offer more performance and/or features than users need. Remember the time where we never had enough disk space? On the desktop, this era is gone. When this happens, customers barely care about the component anymore.
  • Sometime, an element of the chain can be replaced. That's how Dell was able to use the Internet to replace the network or retail stores.
Some non-technical aspects can also influence the purchase decision process:
  • Force of habit: that's how Microsoft Office is still the #1 office suite, even though there are some free office suites available, and even though MS-Office offers more features than anybody will ever use. But habits can die hard.
  • Hipness: Steve Jobs was able to come up with a very successful product with the iMac and its cool look. Apple was however able to pull that one off only after customers stopped to care that much about computers per say ("A computer is a computer").
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