The trade-off between value creation and value capture - industry profitability

Context - Question from the LSE

Thinking solely about your own organisation, or an organisation you have worked for previously, describe how your chosen organisation engaged in a strategic interaction with competitors or complementors on the buyer or supplier side. Identify the trade-off in value creation and value capture in that interaction.

My thoughts - Answer for the LSE

I previously worked at a large E-commerce Retailer in electronics, managing the TV P&L. I worked with large TV manufacturers (Sony, Samsung, LG, Panasonic). They were suppliers, we needed to work together to sell TVs on Amazon profitably. In terms of buyer and supplier power it was well balanced. The 4 manufacturers had dominant market share and as a retailer I had respectable market share.

The TV industry had forces pushing down profitability. Firstly, industry rivalry with low product differentiation and slow industry growth due to a 7-year replacement cycle. Secondly, significant buyer power meant customers would wait until Q4 to buy TVs in Black Friday (BF) deals.

Given I had challenging relationships with the other three manufacturers, I identified X was the best supplier to help me tackle the trade-off challenge. We collaborated on a strategic interaction that would improve profitability for both sides. We identified Netflix as a supply-side complementor and worked with them to design pre-installed Netflix on high-end Sony TVs, exclusive to Amazon.

During BF many customers are hunting for the best deal, this allowed us to differentiate. Leading up to BF we ran collaborative propositions on these high-end Sony models to boost their ratings. During BF we only ran deals on high-end. This was a trade-off as we sacrificed value capture at the commoditised low-end (£500) in attempt to create value and therefore customer volume at the high-end (£2000).

Brandenburger and Nalebuff (1995) consider how the Value Net Model can identify relationships and how competitors share customers and suppliers. At the end of BF the Sony account was my highest revenue and best margin (10%). The other three accounts were all negative margins. I had changed the rules of the game by introducing Netflix. I successfully created value at the high-end, therefore shifting overall margin mix.