ASIA FOCUS

The new global market ecosystem

How collaboration drives value-based management strategy

In its broadest sense, supply-chain management (SCM) must be viewed as the deployment of value-based management (VBM) strategies. VBM starts with value creation through novel business models that conceive and deliver innovative products and services. SCM plays a key role in value creation through the development of a high-performance network of suppliers, channel partners and complementors.

As an enabler of value creation, supply-chain design should therefore be considered as the capability to design and assemble assets, organisations, skill sets and capabilities for a series of competitive advantages, rather than a set of activities held together by low transaction costs.

While necessary, value creation does not guarantee that the value created in an ecosystem is actually captured equally by all the members of the ecosystem. For example, whereas air travel has created tremendous value for a wide range of stakeholders, value capture has been uneven across the industry.

Airlines have been fighting hard to avoid bankruptcy, yet aircraft manufacturers, airport operators and reservation systems have been quite profitable.

This phenomenon is driven by the fact that modern supply chains are ecosystems consisting of independent entities. In other words, vertically-integrated industry structures have largely been de-integrated, creating networks with no clear command-and-control structures - hence, no central decision makers.

Furthermore, these entities are economically rational decision makers, each with their own profit-and-loss responsibilities. It is therefore natural for such entities to act locally - perhaps myopically - in striving to capture the maximum amount of value.

Research clearly demonstrates that such myopic initiatives ultimately lead to value destruction for the overall ecosystem. In other words, the entire pie shrinks as the individual entities fight to maximise the size of their own slice.

Research further shows that the destruction can be stopped only through collaboration. In a decentralised environment with no central decision maker, however, collaboration does not occur naturally.

Relevant literature advocates the deployment of "trust-based relationships" to foster collaboration. From an operational perspective, trust has two very concrete dimensions: the capability of each collaborating entity, and the associated risks and benefits. As proving capabilities and quantifying the associated risks and benefits require due diligence, trust based solutions can be, at their best, long term enablers for collaboration.

In the short term, however, we need to design and deploy adequate incentive schemes that promote collaboration not only in running the day-today operations, but also in promoting further transparency and innovation.

In other words, adequate incentives not only allocate the risks and rewards in an equitable fashion throughout an ecosystem (value capture), they also enhance its overall competitiveness (value creation).

Such incentives pave the way for trust-based relationships, which would lead to the adoption of innovative processes, organisational structures and information and communication technologies.

This report discusses collaborative practices in modern supply chains, describes their impact on value-based management and provides a number of best-in-class examples. The studies contain invaluable lessons to entrepreneurs in Asia in designing their relationships with the established giants as they integrate their young organisations into global ecosystems.

Enver Yucesan is the Professor of Operations Research at INSEAD.

Bangkok Post

Saturday March 31, 2007