We start with a brief review of the main ideas of the activity based perspective in strategic management, (Porter, 1985, 1996) and its value-configuration extension (Stabell & Fjeldstad, 1998) with particular emphasis on the value network configuration of mediating firms in Section 2. This is followed in Section 3 by a review of major findings in the literature on network externalities. In Section 4 we provide an analysis of the competitive dynamics of firms in network industries. More specifically, we develop six hypotheses about how industry structure, time evolution, and market penetration determine, (i) inter-firm cooperation, and (ii) the strategic actions of the mobile phone operators. In Section 5, after discussing the data collection process and methodology, we describe how we tested our hypotheses about competitive behavior in a longitudinal sample of 199 strategic moves. The results of the statistical analysis of the strategic actions taken by 28 phone operators over a period of 17 months in 12 European countries are presented in Section 6. We conclude the paper in Section 7 with a discussion of the main results and the implications for strategic management in mediating firms.
For almost two decades, the value chain has been the dominant model for describing the value-creation activities of firms (Porter, 1985). The basic premise of this model is that competitive advantage stems from the unique structural properties of the activity set whereby a particular firm creates value. The model describes value creation as a series of activities that transform inputs into products and explains performance as the result of the optimization of distinct production functions associated with each major activity category (Porter, 1985). As a tool for strategic analysis and decision-making, the value chain is used primarily for the strategic reconfiguration of a firm’s activities, including the scope, the choice of technology, the coordination, and the location of these activities.
In this well-known model value chains have five sequential primary activities (from inbound logistics through operations to after-sales service). In addition, support activities enhance the performance of the primary activities. The product is the main carrier of cost and value. Both are added to the product as it passes step-by-step through the primary activity categories. The long-linked technology modeled by the value chain is particularly geared toward efficiency, i.e. reducing the manufacturing costs of standardized products. Scale is usually the dominant cost driver with a downward-sloping effect on unit costs.
Stabell and Fjeldstad (1998) have proposed a broader value-configuration theory where the value-chain model is one of three generic activity configurations. The configurations are derived from the typology of technologies suggested by Thompson (1967). The activities of a value configuration are the procedural expansion of the corresponding underlying technology (Thompson, 1967). The Value Chain applies to firms using the long-linked technology in the manufacture of industrial or consumer products. Car manufacturers are an example. The Value Shop describes firms using an intensive technology to solve problems for their clients, e.g., hospitals and engineering firms. The Value Network models firms that use a mediating technology to link customers, e.g. telecommunication companies and banking firms. Each one of these three value configurations is based on significantly different logics and economics, which should determine how they compete in their industries. The Value Network is the relevant configuration for the study of mobile phone operators, and key properties of this configuration are reviewed below.
Value networks have three primary activities: Network promotion and contract management; Service provisioning; and Infrastructure operations. In contrast to the activities of the value chain, the activities are performed simultaneously rather than sequentially, and mutual adjustments are required with respect to network scope, capacity, and the technical properties of concurrent services. In a nutshell, a variety of layered services that link customers are provided over an infrastructure, which offers access and capacity within a contract set, which in turn determines privileges and obligations. The value of being part of a network is driven mainly by network size by way of direct and indirect network externality effects (Katz & Shapiro, 1985). Size also drives cost by way of economies of scale, which can be substantial when the mediating technology is digital (Varian, 2000). Value thus depends on the number of access points, on the nodes (users) that can be reached, and on the variety of links between users (the range of services provided). Internal growth and inter-firm relationships both serve to increase the value provided by the network either by providing access to a larger pool of users or by increasing areas of use by the layering of new services on top of the existing network.
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