Competitive Strategies in Emerging Markets (CSEM)

Emerging Markets & Global

Value Chains
Session 2
AY 19-20

Snehal Awate, PhD

Faculty of Strategy,
Indian School of Business

CSEM AY-19-20, Indian School of Business 1

Key takeaways from session 1
• An important characteristic of emerging markets is the existence
of institutional voids
• These voids appear when market intermediaries are weak

CSEM AY-19-20, Indian School of Business

• Such voids exist in all economies/markets (underdeveloped,
emerging, developed economies) in varying degrees
• Markets appear along the continuum of institutional voids
• Business groups (BGs) create internal markets to get past the
institutional voids – substitutive effect
• However, as the intermediaries develop and voids reduce, BGs
utilize the progress and grow faster – complementary effect of
institutional development and BG affiliation 2
Today’s agenda
• Concepts of value creation, value added, value chain
• Emerging market companies joining global value
chains (GVCs)
• Capability upgrade

• Supplier opportunity cost

• WTP
CSEM AY-19-20, Indian School of Business 3
Forest products industry operating a wood yard

Fleet of forklifts costing approx. $ 1 million Portal crane

Indian School of Business, AY 2018-2019 4

 Forest products industry operating a wood yard

Fleet of forklifts costing approx. $ 1 million Customer’s willingness

• Portal crane: less expensive to maintain
• Due to less labor, less fuel, less
to pay?
maintenance cost
Maximum amount of
• Each crane generates an NPV of $6.5 million
of savings in OPEX money a customer is
• What is the customer outlay in case of willing to part with, in
forklift, comparing to the crane?
order to obtain the
• $1 M + $ 6.5 M = $7.5 M
product or service.
If the crane company charges more than $7.5
M, the customer is better off buying a fleet of
forklifts for $1 M and paying the extra $6.5 M $ 7.5 M
to operate them.
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Supplier opportunity cost (SOC): smallest amount a supplier will accept to
supply the resources to make the crane = $ 2 M

Actual cost: $ 2.5 M

$8 M
WTP
Total value created by
Wood yard company’s
the transaction = value capture
$6 M
WTP – SOC
Price
= 7.5 - 2 = $ 5.5 M Crane maker’s value
$4 M
capture

Cost
$2 M SOC

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creati.st
csem-1920-hyd-section-a
PGID
ISB.edu email address

CSEM AY-19-20, Indian School of Business 7

Quick check
1. In an industry, where buyer power is very low, the buyers capture ---
---.
a. Very high value from the transaction.
b. Very low value from the transaction.

2. In an industry, where the supplier as well as the buyer powers are

very high, the focal firm captures -----.
a. Very high value from the transaction.
b. Very low value from the transaction.

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Total value created by the transaction = WTP – SOC
= 7.5 - 2 = $ 5.5 M
Value added by the firm =
Maximum value created by all participants in a transaction – Maximum value
that could be created without the firm
If only one crane
$8 M
maker in the world, WTP
Wood yard company’s
value added by the value capture
crane maker = $ 5.5 M $6 M

Price
Crane maker’s value
What is there is $4 M
capture
competition? Cost
$2 M SOC

CSEM AY-19-20, Indian School of Business 9

Value added by the firm =
Maximum value created by all participants in a transaction – Maximum value
that could be created without the firm
= Maximum value created by all participants in a transaction – Maximum
value by alternative transaction
$9 M Value added and value
Value created by
captured are correlated
$8 M
WTP
transaction 1 = WTP –
SOC = 7.5 - 2 = $ 5.5 M
$6 M
WTP
Value created by Price
transaction 2 = WTP – Price
$4 M
SOC = 6 - 2 = $ 4 M
Cost Cost
Value added by crane SOC SOC
$2 M
maker = 5.5 - 4 = $ 1.5 M
CSEM AY-19-20, Indian School of Business 10
Quick check
3. As competition increases, the value added by a firm settles at a
------.
a. Lower value
b. Higher value

4. In a competitive industry, a firm can increase its value added by -----

---------.
a. Adding more features to increase WTP without increasing the cost much.
b. Negotiating with the suppliers to reduce the cost.
c. There is no way to affect the value added.

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Value added
• By increasing the gap/wedge between WTP and cost relative
to the competitor, the firm increases the amount of value it
adds.

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Price and cost: generalization

$9 M Value added = Price - Cost

$8 M
WTP

$6 M

Price
$4 M

Cost
$2 M SOC

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Value chain
Product
Value added Value added Value added

Marketing,
R&D, Design Manufacturing
Sales

Input cost Output price

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The classic bread loaf example

Bread loaf
$0.80 $0.20 $1.50 $0.25

Farmer Miller Baker Retailer

$0.80 $1.00 $2.50 $2.75

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Value curve
1.6

1.4
Value added

1.2

0.8

0.6

0.4

0.2

Farmer Miller Baker Retailer

Activity
Value chain of a bread loaf

CSEM AY-19-20, Indian School of Business 16

Quick check
5. If the bread retailer wishes to enhance its value capture by adding
more value, the retailer should backward integrated.
a. True
b. False

CSEM AY-19-20, Indian School of Business 17

Acer Inc.

CSEM AY-19-20, Indian School of Business 18

iPhone Value chain
iPhone
Value added Value added Value added

Manufacturing, Marketing,
R&D, Design
Assembly Sales

Input cost Output price

Apple, USA Foxconn, China Apple, USA

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 Costs = $329.99

CSEM AY-19-20,
Source: K De Backer. 2011. Global value chains: preliminary evidence and policy Indian
issues. WPGI School of Business
Meeting. 20
 CSEM AY-19-20, Indian School of Business
21
Source: Mudambi, R. (2008). Location, control and innovation in knowledge-intensive industries. Journal of Economic Geography, 8(5), 699–725.
Stan Shih’s smiling curve

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