Fragmentation of value chains: a brief note

In the Electronic Commerce literature, there a topic which is on why a value chain is more likely to be fragmented these days. The basic reasons are two: (a) the major functions in a business model are based on different economic logics, with different subcultures; thus, running them together in as a single business unit are always not easy (Hagel and Singer, 1999); (b) as the Internet lowers the transaction cost of meeting business requirements for various support services via the marketplaces, companies find it more attractive to do business process outsourcing than to manage these business processes in-house. In other words, the transaction costs of business process outsourcing are lower as compared with the administration costs of managing these processes internally within a business. As a result, value chains tend to be more fragmented and operate more like virtual organizations. The following diagram is illustrative:

In this case, a number of support and primary activities are outsourced to other companies to perform, while the company fthat manages the value chain as a whole focuses on what it is good at performing based on its core competence. The company in this case can still manage these other value chain activities without owning these business processes.


References

1. Hagel, J. and Singer, M (1999) "Unbundling the corporation", Harvard Business Review, March, pp. 133-141.
2. On core competency: http://en.wikipedia.org/wiki/Core_competency
3. On transaction costs: http://en.wikipedia.org/wiki/Transaction_cost
4. On value chain: http://en.wikipedia.org/wiki/Value_chain