Frame of Reference
In this chapter the theoretical frame used for the research is presented. The chapter starts with the theories related to value creation which is a major part of this thesis. Theory behind value creation will be presented both from the supply as well as from the de-mand side from the market. These are then tied together with the sub-chapter ‘consumer interaction’ which introduces consumers and participants in the value creation. After that, theory on the value chain and value network models are presented as well as stra-tegic networks and value constellations, which are similar on different tiers of corporate strategy. Finally vertical and horizontal integration and disintermediation will end the chapter.
The ultimate goal of any economic activity is to create value (Normann & Ramirez, 1994). Value is an estimate by comparing the utility benefits from acquiring a prod-uct/service less the total costs (Lancaster & Walters, 2000). The processes of creating value are often referred to as a value chain, which is a set of value adding activates that together generate value for an organization, its stakeholders and customers. By combin-ing the supply side of the organization and the demands of the market, an organization can configure value adding activities and processes which can improve the efficiency and output of the organization (Rayport & Sviolka, 1995). To clarify, information is not value adding by itself, it is rather how the information is used and gathered. What is considered value is not only monetary resources, but also knowledge and intangible as-sets such as brand name and customer loyalty (Allee, 2000). The perspectives have changed as products and services are losing their physical aspects and becoming more virtual, leading to a new interest in the concept: value network (Peppard & Rylander, 2006). A value chain has a more logistic and linear view while a value network can run parallel with other actors/activities and create more of an infrastructure consisting of multiple instances. To use Allee’s own description: “a value network generates eco-nomic value through complex dynamic exchanges between one or more enterprises, customers, suppliers, strategic partners and the community” (Allee, 2000, pp 1)
The value of a product is determined by the buyer purchasing criteria (Porter, 1985). Variations in the buyer purchasing criteria are what lead to differentiation in the market; the better the match with the product and the buyer, the better price of good can be at-tained. The value of a product for a customer is an appreciation of the additional pro-duction that the product can give to the customer, or the decrease in cost. Grewal, Mon-roe, Krishnan (1998) believe’s that customer perception of value is due to the physical packaging, technical support and the services that are included. Customer perceived value is the difference between perceived benefit and the cost, it is a cognitive process and cost is not necessarily a monetary value. The perceived value changes when the customer compares it to competition or a superior alternative (Eggart & Ualga, 2002).
Companies could change their focus from relieving a customer towards enabling a cus-tomer, and seeing them as a co-producer. Enabling is expanding the scope of what the customer is able to do rather than a focus asking them what they want. Customers can form their own community constellations where their interactions and cooperation are more of barter transactions than business transactions, but they still exchange value (Normann, 2001). Value which is strategically incorporated into activities of an organi-zation though the value chain (Lancaster & Walters, 2000).
Jöckel et al. (2008) acknowledge consumers as participants in of the value creation, making them a mix between a consumer and a producer; they call this new category of participatory consumers: ‘prosumers’. In practice this means that users are actively be-ing a part of the development through beta testing, supplying suggestions and feedback as well as after-market-service through participation in social media and forums related to the game. Some users even take their participation as far as creating content for the game to personalize the game experience. Game content can come in the forms of user created modifications (mods) and add-ons (Jöckel et al. 2008).
The value chain is an analysis tool that divides the organization into activities that are strategically important to maintain or create a competitive advantage and to understand which activities add value and cost (Lancaster & Walters, 2000). The activities that generate value generally have a strong focus on costs, cost drivers and they evaluate whether the monetary value created surpasses the monetary cost. The value chain en-compasses the organization, its suppliers and customers as part of the activities that cre-ate maximum value for the consumer and satisfies stakeholders. To utilize the value chain for competitive advantage an organization needs to identify their target custom-er’s priorities and adapt their processes according to them (Lancaster & Walters, 2000; Porter 1980).
Porter (1985) believed that the history of a company affects its processes and activities. Value chains exist everywhere: in all organizations, in consumers’ homes, in the market and industry. The linkages between the different participants are what connect the dif-ferent value chains together. Correct exploitation of linkages, both from within a firm and outside of the firm contributes to competitive advantage. Linkages within a firm are the different processes and if they are difficult to imitate, they become valuable re-sources that can greatly improve the output and competitive advantage of a firm (Porter & Millar 1985; Porter, 1985).
There are nine identified activities, though they may be independent in the organization, are tied together through linkages as one activated process affects the next, which in turn, affects the outcome.The activities of a value chain can be divided into two catego-ries, the first one is the activities that create value for the customer, the second set of ac-tivities are those that improve the performance of the first type of activities, also known as the primary and support activities (Porter & Millar 1985). The five primary activities are those involved in creating the product/service until the finished good is in customers hands, the processes are generic and can be applied to almost anything. The first activity is inbound logistics, which is about gathering and storing all parts needed to construct the product. Operations are transforming product inputs into finished products. Out-bound logistics covers everything regarding packaging and shipping the finished prod-uct. Marketing and sales enables and induces a customer to purchase a product. The last activity is service, which is to enhance or maintain the product/service, for example in-surance or a product warranty accompanying the product. The five primary activities are a collection of inbound logistical operations, main operations and the outbound logis-tics. The support activities encompass the entire firm, but they can also be applied spe-cifically for the primary activities, with the exception of infrastructure. With each activi-ty there are three subcategories of activities: direct activities which are involved in the production. Indirect activities which enable the direct activities and finally quality as-surance which controls the activities and products (Porter, 1985).
Each activity has a physical and information component. How they are integrated and what ratio of each component is integrated is individual to the businesses. The two func-tions: human resource management and information management have the greatest in-fluences on the value chain. These functions are involved in every activity in the value chain together with some sort of technology (Porter, 1985).
The model of a value chain is migrating from a physical to a virtual version. Different parts of a value chain are specific to different markets and organizations, a value chain can be individual to firms. Jöckel et al. (2008) proposed an alternate value chain for online distribution of digital games. Their basis is that consumers at the same time can be producers making them ‘prosumers’. Consumers are allowed to alter the content but not parts of the underlying software such as the physics engine and the source code. Their reasons for modifying the content are usually for their own value adding to in-crease the experience of the game, which is often shared with the gaming community surrounding the game. That is why there is a loop between the prosumer and content and value added services. These linkages are what form a network and the value of the service that a network can provide should not be underestimated (Jöckel et al. 2008).
The value network like the value chain can be within an organization and an organiza-tion can be part of a value network. Therefore an organization is not a value network; however it can provide or hold a service network, linking individuals to each other. An organization however, can also be part of a value network which will from now on be referred to as value constellation (Stabell & Fjellstad, 1998).
Value network as a service
A value network can be a service, like a phone, the value of the service is determinant of which the service can provide linkage to and if the customer can reach their desired end. A value network is a system of interconnected layered activities designed to medi-ate for a consumer, if faulty the system breaks down and loses its value for the consum-er. The value network functions also as mediation to other corporations, not as a suppli-er or customer but as a tool for co-operation. A value network also has to work with both horizontal and vertical integration and its strategic position determines its focus. Participants in a value network need to have relationships with both their competitors and consumers; a co-operative relationship is the nature of a co-producing system (Stabell & Fjellstad, 1998).
According to Stabell & Fjellstad (1998) the three primary activities of a value network are to first; gain customers though promotion and managing the contracts to ensure re-ceived value. Secondly, service provisioning which includes maintaining, verifying and terminating links to customers. It is important that the links are confirmed and secure for the customer. Lastly maintaining infrastructure operations which are the activities required to keep the service functioning, which vary depending on industry and service provided (Ibid)
There are two value opportunities with the service; a customer who uses a mediating service for both the opportunity of being able to link up to other services and also when using the actual service itself. Therefore it is important to have compatibility with a large proportion of the market, to ensure more users (Stabell & Fjellstad, 1998). Katz & Shapiro (1985) found a relationship between the size of a firms networks and the impact of their willingness towards compatibility, large networks tend to be against compatibil-ity while smaller networks tend to be for product compatibility as it extends their net-work. Smaller networks become more popular if they have higher compatibility, how-ever larger networks do not have the same need.
The value network treats all users as if they are customers even if they sometimes are suppliers, because all users are intermediaries of a service (Stabell & Fjellstad, 1998). A value network generates positive externalities through the amount of users it has; as the demand of the network increases it positively affects the service (Shilling, 2002; Katz & Shapiro, 1985). As the value of the network is determined through the amount of users, it is often initially setup as a free service to lure in users and then eventually it might re-quire fees, which at that point will hopefully not offset the value generated for the con-sumer due to higher transaction costs (Katz & Shapiro, 1985). Shilling (2002) further develops that a large installed base leads to a larger user network which attracts devel-opers of complementary goods which leads to a larger amount of options available to the consumer. Furthermore, a larger base of complementary goods attracts consumers to a network which is directly correlated to a networks perceived value. As Stabell and Fjellstad propose ”Size and composition of the customer base are therefore the critical driver of value in the value network” (Stabell & Fjellstad, 1998, pp 431), indicating that the size of the network is not the only value driver, but also the composition of the cus-tomer base emphasizing the importance of correct marketing segments and user scope. Another important aspect to consider is the relationships between the firms in a network and how they can be used to a strategic advantage.
1.2 Gaming industry – Actors and arenas
1.5 Research question
1.7 Thesis disposition
2 Frame of Reference
2.1 Value creation
2.2 Consumer value
2.3 Consumer interaction
2.4 Value chain
2.5 Value network
2.6 Strategic networks
2.7 Value constellations
2.8 Vertical integration
2.9 Horizontal integration
3.1 Qualitative research
3.2 Data collection:
3.3 Problems & weaknesses
4 Empirical findings
4.1 Scope and size
4.2 Companies included in the research
4.3 Specific overview and details of the market and its actors
4.4 Distribution strategies
5.1 How value is created for game developers
5.2 From value chain to value constellation
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