How to Pass Judgement Responsibly (Part 1)

The other day we said the key to hindsight was intent. Stuff is going to get messed up, but you want to look back and say you did what you did for the right reasons.

Before we can judge intent, we should look at the people (or parties) involved, and what their incentives and motivations were. Not in some Law & Order procedural way (although maybe a little), but in a Michael Porter way. Porter broadly described the value chain as a set of activities that deliver a valuable product or service to the market. Whomever completed those activities are the ones that we’ll eventually judge. For now, let’s just focus on the framework they exist in.

Building off of Ben Thompson’s work (see the Stratechery post “Aggregation Theory”), we can segment a very basic value chain into 3 parts: suppliers, distributors, and consumers (consumers includes users. Its semantics, but don’t fret about “using” Facebook versus “consuming” Facebook).

You always want to know which part you and your business occupy, as well as who else is in your value chain. Each part has its own layers. For example, imagine a necklace with charms that your daughter “just had to have.” You bought it from a fine distributor of jewelry, who sourced it from some manufacturer/supplier. If you wanted, you could visualize this series of markets that produced everything in your life. It’s deep.

The work of Ronald Coase is helpful here, but O’Reilly Media probably captures it best with their slogan, “create more value than you capture.” In the Coase-ian sense, the process of creating value is reducing some form of transaction cost for the party at the next step. Sometimes the cost is a commission, other times its search costs, information costs, or nearly limitless others. To oversimplify the point, buying the necklace from the jeweler is usually less expensive (and far more attractive) than making it yourself, right? They created more value than they captured, at least in your daughter’s eyes.

This catches us up to the last 20 years or so. Lest we forget, the internet didn’t just change everything, it continues to be a-changin’ everything. The supplier, distributor, and consumer value chain has gotten pretty shaken up, and there are still lots of opportunities in places where companies have only halfway realized this. Really.

Stay tuned, because next, we’ll tackle what’s been happening and where it’s going.