Value Capture: Aligning the Supply Chain Partners

In the PC industry, it is customary to talk about the “smiley curve.” The x-axis of the curve shows the various players in this supply chain, namely equipment makers, manufacturers of microprocessors and other components, PC assemblers, distributors, value-added resellers, and service providers. The y-axis reflects the margins made (i.e., the value captured) by each of these players. The “smiley curve” asserts that while both the upstream (e.g., equipment and microprocessor manufacturers) and downstream players (e.g., service providers) make healthy margins, PC assemblers’ margins are relatively thin. A similar challenge is also present in service industries. Consider, for example, the airline industry. Over the past few years, while airlines have been struggling to avoid bankruptcy or trying to climb back out of it, aircraft manufacturers, aircraft leasing companies, reservation systems, and airport operators have achieved respectable financial results. Hence, the value captured by different players varies drastically along this supply chain as well. There are many other examples where the value created by the entire supply chain is captured in an uneven fashion by the different players in that ecosystem.