Friday, September 13, 2002

Valuing the Chains that Bind Us Most of us consumers think of products as the object or service we hold in our hand or in our memory after the product is delivered. This is only the expression of the product, not the real deal. The main event is the Value Chain that has moved the product into our possession. Take a bag of Fritos. Frito-Lay is just the begining and the catalyst for a process that comprises scores of steps and thousands of people, most of whom don't work for Frito-Lay. Value Chains are the means by which originators get rich in a market economy - they are combinations of producers, distributors, middlepeople and retailers. Value Chains have always been hard to forge, defend, manage and collect from, which is why they're so profitable. The Internet is poised to combine productive individuals into value chains which reward their participants as richly as traditional value chains. the Xpertweb Manifesto You probably know that the real rewards in the Fritos product don't go to the farmers who produce the corn, salt and oil nor to the people in the hair nets who use the machines to produce the critters. That's because there are so many people ready willing and trainable to do those things. The money goes to the people who direct the tricky process by which a bag of Fritos* is in your face in so many places, and is recognized by you when you see it. corn grown by the farmer is combined by the combine owner is trucked by the trucker  to the Co-op which buys it in order to sell it to a distributor who  sells it to Frito-Lay (maybe through another distributor) where  it's made into little curls and  put into little bags made by a bag maker and  put into boxes made by a box maker and  shipped to a warehouse leased from a real estate investor  filled with equipment leased from a leasing company which is owned by an investment group, where it is  re-distributed to regional warehouses (same structuring) where it's bought by a local franchisee who sorts it into leased route trucks driven by their route driver who stops by each store to arrange the little bags and update the inventory with a  leased handheld computer  programmed by an ISV to make sure the bags and the signs are current and to train the shopholder about the special bonus he'll get if  you buy a little bag of salty curls this week. *Frito-Lay experts: Just an example - of course there are vertically integrated steps It seems like a lot of commotion just to feed your habit, and we haven't even mentioned the marketing ziggurat that makes sure the right synapses close when you see the red and yellow bag. Every step along the way the product changes ownership as it increases in price. If the baggie costs you a dollar and the corn and salt and oil cost a nickel, then the Gross Domestic Product increases by about 8 owners x $.45 average price = $3.60 because of the series of sales to get you your $1 bag. There's probably another couple of bucks in there when you add the pennies paid in marketing and leased real estate and equipment and their financing. Call it $5-6 of GDP to sell the dollar bag. None of this is news, but it's usually forgotten in talk about the Internet economy. We all know that productivity is the key to a successful economy, but each of those intermediaries is already as efficient as it can get. The next step is to remove some steps from the chain. But which company and its employees and owners and their congressmen do you think will volunteer to step out of the loop? That's why the next step in productivity will be as disruptive to existing value chains as file swapping is to the record labels. The other dirty little secret is that better productivity through disintermediation lowers the GDP. Which administration will get behind that initiative? Meanwhile, NetFlix has removed several steps from the delivery of movies to the movie watchers, eliminating a lot of jobs and profits. They are the model of how the Internet decimates value chains. Peer to Peer Value Chains What's in it for the Rest of Us? None of those eight transactions report on the satisfaction of the next owner in line. If they did, other distributors or jobbers or farmers would step up to prove their higher quality/lower cost.  Some of these might be loose alliances of experts working like the farmer's Co-op to consolidate several steps. Xpertweb requires each user to have a web server and to know how to use a series of specialized forms. It's no easier than setting up a blog, so it's still beyond the appetite of the average farmer, combine owner or snack jobber. So every Xpertweb user has a mentor who has used an FTP tool to upload the newby's files and configured his business preferences. In exchange, the Mentor receives a 1% fee from every transaction made by the new user and from transactions of other new users mentored by his users. Fees never total more than 5% of each transaction which is a lot less than any current value chains, but it's a little bit of automatic income that few individuals are used to. Mentorship puts each mentor at the beginning of a value chain of people doing whatever they can get high ratings for. Though the share is modest, the range of transactions is far greater than in any single business. Suppose the farmer mentors his combiner, his trucker, his son and his wife. He might start receiving fees on tasks they perform - combining soybeans, trucking pigs, programming Cisco routers and selling afghans over the Net. If he had become the King of Corn his rewards could only come from the corn business - a riskier kind of automatic income. So your Xpertweb Value Chain builds itself automatically, one user at a time, extending out over the horizon of comprehensibility: A microeconomy of people who always report quality, beginning to compete, one task at a time, with people and enterprises unwilling and incapable of demonstrating satisfaction at the task level. It's Darwinism at work. 12:21:20 PM    comment []

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