Analysis of the Evolution and Influence on the Industrial Value Chain in Telecommunications

Dec. 2006Joumal of Electronic Science and Technology of ChinaVol.4 No.4Analysis of the Evolution and Influence on the Industrial ValueChain in TelecommunicationsWANG Xia0-ming，LI Shi-ming, TAN YangSchool ofManagement, University of Electronic Science and Technology of China Chengdu 610054 ChinaAbstract This paper discusses the evolution of telecommunication industrial value chain(TIVC), analyzes the influence of technical innovation and customer demand on TTVC, andestablishes the model The appearance of the circuit switching technology and packet switchingtechnology together with the diversity of the demand of customers change the structure of TIVC,causing vibration in value creation and distribution systems. With changes of the TIVC,enterprises in the chain will accordingly alter their business models, products (services) and theinternal organizational structures. All these changes will lead to the reconstruction andoptimization of the TIVC, and consequently, promote the development of the telecommunicationindustry.Key words customer demand; restructuring; technical innovation; telecommunicationindustrial value chainAlong with the development of integration of1 Value Chain， Industrial Valueglobal economy, telecommunication industry hasChain and TIVCdeveloped rapidly and become one of the focal points1.1 Value Chainof research. Economides analyzed the effects on theThe concept of value chain is proposed by Porterimplementation of the Telecommunications Act ofM.B. in his book Competitive Advantagelo. Through1996 on U.S.叫Omurahave studied the reason for thefailure of Japan's reform policy of telecoms(2l. Laffont,the theory of value chain, Porter defines the basicTirole studied the unilateral and bilateral access pricesvalue activities and the supportive activities of theenterprise, and also explicates the connection betweenof the operators under the regulation of goverment').them. It is believed that the company can gainLewis and Sappington studied the optimal design ofcompetitive advantage by divergence and low cost.access pricing with unregulated downstreamThe theory of value chain has developed and improvedcompetition'*. Teng, Tang explored the relationshipsignificantly in the past two decades, and has beenbetween the regulation on access price and the rationaladopted by the current scholars as an effective tool tocompetition'S.study the competitive advantage.In review of the former literatures, they focusedon the reform and the access pricing while lttle1.2 Industrial Value Chaininterest in TIVC. This paper discusses the evolution ofThe industrial value chain is the extension andTIVC and analyzes the infuence on it The appearanceenlargement of the theory of value chain, and theof the packet switching technology not only enablesorganization form of value creation in a more macrothe operators to provide the voice service, but alsoway". Although the value chains in differentprovide the mobile data service like video conferences,enterprises of the same industry will have variousimage etc. On the other hand, the diversity of theforms owing to different products and marketingdemand of the customers enriches the value-addedchannels, they are similar to each other viewed fromservice content, fostering various kinds of enterprisesthe level of the industryl. The integration of theengaging in value-added service. The influence ofindustry is an effective way of connecting the valuetechnology together with that of customer demandchains of the enterprises in some industry, thus formingchanges the traditional TIVC. Traditional operators inunif中国煤化rtalyzing synergistictelecommunications begin to cooperate with theeffecvalue-added services providers other than continue1.TYHCNMHGtheir single operation, thus, forming a new value chain.As pointed out in section 1.2, TIVC is a moreReceived 2006-09-15.No.4WANG Xiao-ming, et al: Analysis of the Evolution and Infuence on the Industrial Valuc Chain in Telecommunications413macro organization which connecting the value chainsInformation flow and cash flowof different enterprises in the telecomm industry. It isInformationInfomationalso an information chain. With information processingEquipmentCash flowand providing, the chain adds the value of theOperatorCustomermanufacturerinformation.ProvidingProviding.equipmentvoice service .2 Evolution ofTTVCProviding mobile phone2.1 Traditional TIVCFig.1 Traditional TTVCThe traditional TIVC is composed of three links:equipment manufacturers, operators, and customers, asshown in Fig.1. Among the three links, operatorsInformation flowoccupy the dominant position in the industry. Theypossess the network resources, provide voice servicesto the customers, and obtain most of the value in the岳馆equipmeqplatform serviceservice|CashNetwork platformindustry. In this period, because the government hasflowfunctionnotrelaxedthe regulation,thewholevalue-addedApplication/Content provider servicetelecommunication industry developed in a relevantclosed environment, and the operators monopolized theSystem ntegrator and softwara Information flowservices. This form of competition could facilitate thebrexider.unification of technical standers of telecoms, and wasFig.2 TIVC of value added servicehelpful to develop the scale effect of the network, toreduce the operative cost and to promote the3 Influence Analysis of TIVCdevelopment and increment of the telecommunicationThe evolution of the TIVC will be affected byindustry.many factors which can be classified into two kinds of2.2 TIVC of Value-added Servicefactors: the first is the internal factors, such as theRecently, the telecommunication market in chinainnovation of technology, the demand of customershas undertaken tremendous changes following theand the life cycle of products. The second is thereorganization of the industry, the relaxation of theexternal factors, such as the guidance of the industrialregulation from the government and the popularizationpolicy and the regulation of the govermment. The paperof the mobile service, forming a new situation in whichfocuses on the influence of the Technical innovationmany operators are competing. The fierce compettionand the demand of customers on the industrial valueforces the transform of the main service from basicchain in telecommunication industry.voice service to the value- added service. The operators3.1 Innovation of Technologyare seeking to cooperate with other companies, which[n general, industry is a comprehensiveleads to the formation of new value chain. In thintegration which is supported by a series ofvalue-added service value chain, based oD the platformtechnologies. In the integrated entity, there exists aestablished by system integrators and softwaredominant technology with other technologies to matchproviders, application/content providers offer theit. The innovation of technology can be the innovationultimate customers various value-added servicesof the dominant technology and also can be thethrough the network of telecommunication operators.innovation of the supportive technology. TheThe cash flows directly from customers to operators,innovation of the dominant technology belongs tothen, is divided by operators and all service providerssystemic innovation, which will cause the remarkable(SPs) according to the signed agreements. Thadjustment of each subsystem!9] and the formation ofoperators not only can obtain the profts from thenew industry. The innovation of supportive technologynetwork, but also from the value-added service.belongion, only influencesMoreover, upstream enterprises in the new TIVC pay中国煤化工”infuene on themore attention to the demand of downstreamindust:YHCNMHGaccumulation ofcustomers in the chain, which bring into the productsincremental innovation will lead to the appearance ofand services designed according to the demand ofthe systemic innovation.customers, as shown in Fig.2.As telecom industry is technology intense414Journal of Electronic Science and Technology of ChinaVol.4industry, the innovation of technology has greatCustomer value is a customer's perceivedinfluence on the development of the industry. Thepreference for and evaluation of those productdevelopment from fixed telephone to mobile phone,attributes, atribute performances, and consequencesfrom fax to the popularization of network all indicatesarising from use that facilitate (or block) achieving thethe promotion of the Technical innovation. Thecustomer's goals and purposes in use situations'l. It istraditional mobile telecom technology, with TDMalso the basis for the customers to select products andcircuit switching technology as the core, can solve theservices. Only when the customers consider that whatinformation communication problem of people whenthey have paid is less than what they have got from thethey are moving. The appearance of packet switchingproducts, the products and services have created realtechnology and the adoption in the TDM circuitvalue for the customers.switching network enable customers not only enjoyThe selection of value is the identification of thevoice service, but also enjoy value- added service suchdemand of customers. In view of the selection of theas multimedia Messaging Service(MMS)， Streamcustomer value, the telecommunication enterprisesMedia service(SMS)， Location Based Service(LBS)need to decide what to select while they must give upetc. The development of digital communicationothers. The demand of customers involves more andtechnology based on IP packet switching has greatmore uncertain elements. Customers have distinctattack on the traditional telecommunication technology.personalities and it is hard to find the regulation ofIt boosts the integration of the internet, telephone nettheir intention to buy the products, therefore, theand the net of broadcasting and television, reduces thetelecom operators are confronting much higher risks.Under this highly complicated and changeable externalcost and prepares for the coming of 3GThe breakthrough in Technical innovation whichcondition, the value activity can hardly satisfty thehas the feature of non-continuity changes the originaldemand of all customers and needs to be readjustedindustrial structurel10,causing changes in thestrategically. The operators should select the mostconnotation of the products and the scope of service ofsuitable customers according to their own ability, andthe telecom service"l. Therefore, the TIVC begins tocooperate with SPs to share risks and create value.When selecting the target customers, operatorshave temporary separation in some link. Thesynergistic effect of the industry will force theand SPs should evaluate their own position in theupstream and downstream enterprises to changewhole industrial value chain in telecommunicationscorrespondingly, and connect the separated chain.objectively, and judge whether they have the capacitiesMeanwhile, the corresponding change will lead toand resources to create better value for the customerschain reaction, causing the change of the wholethan their rivals. If the enterprise does not possess suchcapacity, it should give up such customers and reselectindustrial value chain.some others, or it can cultivate such capacity to create3.2 Demand of Customersexcellent value for the customerstsTelcommunication industry is the industry withThe operators and various SPs satisfying theinformation as the target of transmission, and has thedemand of different customers, changes the traditionalfeature of scale economy and network extermnality,TIVC and makes it more complicated. The new TIVCwhich has a high requirement of customer resources. Ingives more emphasis to the cooperation andthe primary period, because of the high investment andcomplement of strong points among every linksfew customers, telecommunication industry can onlytherefore can facilitate the integration and extension ofachieve the effect of scale economy through monopoly.the value of the whole telecommunication industry.Along with the advancement of the technology and theopening of the market, the competition in3.3 Synergistic Effect of Technical Innovation andCustomer Demandtelecommunication industry has escalated from thecompetition of price and quality to the competition ofThe innovation of technology and the demand ofvalue. The more and more violent competitions raisecustomers are not two independent factors. Theythe status of the customers and they are no longerpromote and coordinate with each other and influencepassive receiver of the service, but can select accordingthe中国煤化工the TIVC together.to their demand. As a result, enterprises in telecomIn geiYHCNMHG_rs is the starting andindustry should grasp the change of the demand of theHiviCiuivul innovation and thecustomers and create value for the customers withTechnical innovation is the way to meet the demand ofdiversified products and selective service.customers, which means that any innovation of the415 ._No.4technology should be carried out in light of the4 Reconstruction ofTIVCcustomers. The H-Mode miracle of NtT, the fall ofWith the combined motivation of the Dewiridium star, and the unsatisfied development of widetechnology and new demand of customers, the TIVCband internet and the WAP indicate that thewill have vibration and revolution, which can lead todevelopment of telecommunication industry cannotthe separation and reconstruction of the value chain.solely be relied on the innovation of technology, andThe reconstruction of TIVC will cause the followingthe perfect TTVC needs the efective connection of thechanges: 1) the form and structure of TIVC willinnovation of technology and the demand ofchange, for some enterprises will be absorbed into thecustomers.chain as new links while some original links willThe new technology itself is not what thedisappear; 2) to adapt the reconstruction, the links incustomers are pursuing. No matter what innovation thethe chain will readjust their business models,technology has brought out, its value is the atibutesproducts/services and intemal organizational structures;that can satisfy the demand of customers'. These3) after the reconstruction, the value contribution ofvalued atributes are supported by relevanteach link is defined in a new way, the core value of thetechnologies, and the products and services areindustry will be transformed and the distribution of thetransmiters which can transform the technologies ofvalue will be changed.enterprises to the value atributes. If the value broughtby the new technology cannot satisfy the demand ofOrganizationalstructurethe customers, the technology will have no use inapplication.ValueBusinessdistributionValue ChainmodelsrestructuringSystemicNetworckinnovationInfuence factorsJ extemalityIncrementalForm ofProducts/, Scalevalue chainServicesng Technia Smergistic fCustomereconomydemandFig.4 Reconstruction of industrial value chainNon-continuityJIndustrial. I , Choice efetAfter the separation of the traditional TIVC, somenew enterprises gradually join the telecom industry,like system integrators, software providers, applicationvalueproviders and content providers. Together with theValue chainoriginal links, these new enterprises form a new TIVC,as showed in Fig.4. In the process of the reconstructionof the main value chain, the new links themselves willFig.3 Model of the influence on industrial value chainalso atract some relevant enterprises and form a seriesof sub value chains. In addition, the participation ofWhile the fixed telephone appears to be more andnew enterprises will break the formal boundary of themore inconvenient, the mobile technology meets thtelecommunication industry, and integrate othercustomer need to communicate while moving. Whenindustries as education, financial indutry, and medicalvoice service cannot satify the demand of theindustry and so on. They will offer the customerscustomers, the packet switching technology promotesvarious special services, such as long-distancehe development of the value-added service. Theeducation, electronic bank, and long distance medicaldemand of customers for new products and servicestreatment.boosts the development of new technology and theThe IP technology and the transform of theinnovation of the products and services in telecomdemand of the customers have fierce impact on theindustry. The innovation of technology lowers the costvoice service. In order to adapt to the reconstruction ofof various services and expands the original demand ofthe value chain, the operators gradually begin to adjustcustomers. On the other hand, it is also changing thetheir中国煤化工n voice service todemand structure of customers by new products andCN M H Gle operalors begintoservices. The synergistic effect of Technical innovationpay armnu wLr paialun with the other linksand customer demand changes the form of TIVC,other than single operation pattem, establishing arcausing value chain restructuring (see Fig.3).open and cooperative business model in which they416Joumal of Electronic Science and Technology of ChinaVol.4 .participate in the development of the value- addedcompettion in the telecommunications industry[J].services together. The new model is more oriented toTelecommunications Policy, 1997, 21(2): 127-141.the customers， can acquire the demand of the[3] LAFFONT J J， TROLE J. CompetitionTelecommunication[M]. Boston: MIT Press. 2000.customers timely, and emphasizes the experience ofthe customers. Moreover, the organizational structures[4] LEWIS T R, SAPPINGTON D E M. Access pricing withunregulated downstream competition[J]. Informationof the operators will also take changes accordingly. OnEconomics and Policy, 1999, 11(1): 73-100.the one hand, the new organization forms are more[5] TENG Y, TANG X W. Analysis on access pricing andflexible to respond rapidly to the changes of therational cometition in telecommunications markets[J].extemal environment. On the other hand, the newSystems Engineering Theory Methodology Application,forms can meet the need of the two sideshsl and suit2003, 12(3): 214-217. (in Chinese)he coexistence of voice service and value- added6] PORTER M E. Competitive Advantage[M. New York:service.The Free Press, 1985.The reconstruction of the value chain will also[7] DU Y F, L S M. Industrial value chain: the innovativeaffect the contribution of each link to the industry. Informat of value strategy[J]. Studies in Science of Science,the traditional TIVC, operators contribute most of the2004, 2(5):552-556 (in Chinese)value. However, in TIVC of value-added service, the8] YU J, FANG X. Analysis of value chain statue afctingcore value is transforming to the downstream side ofindustrial technological leapfrogging[J. Studies in Scienceof Science, 2002, 20(5):497 499. (in Chinese)the chain- the service side. The SPs begin to join theoperators to create the core value together. Along with[9] DOSI G, TEECE D J， CHYTRY J. Technology,Organization, and Competitivenes: Perspectives onthe improvement and development of the industrialIndustrial and Corporate Change[M]. Oxford: Oxfordvalue chain, SPs will play a more and more importantUniversity Press, 1998.role, and make more and more contribution, even[10]DAY G s, SCHOEMAKER P J H, GUNTHER R E.developing into the dominant factor in the future TTVC.WHARTON on Managing Emerging Technologies[M].In addition, the equipment manufacturers of theNew York: John Wiley & Sons Inc., 2000.terminals will acquire higher position because of the[11]FANG X, YU J. Systemic innovation and value chainincrease in the demand of mobile phones, and mayrestructuring[J]. Quantitative and Technical Economics,probably take part in the creation and distribution of2002, (7): 5-8. (in Chinese)the core value.[12]WO0DRUFF R B. Customer value: the next source forcompettive advantage[J]. Joumal of the Academy of5 ConclusionsMarketing Science, 1997, 25(2): 139-153.Through the analysis above, we can find out that[13]WU Y H, FAN X C. Ressarch on the customer-value-basedintegrated model for competitiveness of enterprise[J. Chinathe technical innovation and customer demand canSoft Science, 2004, (11): 86-92. (in Chinese)influence the form of TIVC. The synergistic effect of[14]TUSHMANM, ANDERSONTechnologicalindustry will force the upstream and downstream linksdiscontinuities and organizational environments[J.to change correspondingly and lead to theAdministrative Science Quarterly, 1986, 31(3): 439465.reconstruction of TIVC. The reconstruction will[15]CHRISTENSEN C M. The Innovator's Dilemma: Whenchange the form of TTVC, change the business models,New Technologies Cause Great Firms to Fail[M]. Boston:products/services and intemal organizational structuresHarvard Business School Press, 1997.of the enterprises in the chain, and change the creationand distribution of the core value of the telecomBrief Introduction to Authorsindustry. It should be noted that only the evolution andWANG Xiao-mlng (王晓明) was bormn in Jiangsu, China,reconstruction of TTVC is explored in this paper from ain 1982. He received the B.Sc. degree from the University ofqualitative point, The quantitative analysis of the valueElectronic Science and Technology of China (UESTC),distribution between the upstream and downstreamChengdu, in 2004. He is currently pursuing the Ph.D. degree inlinks (operators versus SPs) will be explored in furtherenterprise management with UESTC.research. .LI Shl-mlng (李仕明) was bom in Sichuan, China, in1953His research interestsReferencesincud中国煤化工ization and promotion,[1] ECONOMIDES N, The telecommunications act of 1996enterpTCHC N M H Gnanagement.and its impact[]. Japan and the World Economy, 1999,TAN Yang (谭杨) was bom in Sichuan, China, in 1966.1(4): 455-483.He is the manager of China Unicom Chengdu Branch. He is[2] OMURAHAVE T. Japan's stumbling policy fornow pursuing the Ph.D. degree with UESTC.