Business Models

Simple Rules for a

California Management Review
2019, Vol. 61(2) 84­–103
© The Regents of the
University of California 2019

Network Efficiency Article reuse guidelines:

sagepub.com/journals-permissions
DOI: 10.1177/0008125618825139
https://doi.org/10.1177/0008125618825139

Business Model: journals.sagepub.com/home/cmr

The Case of vizio

Sayan Chatterjee1 and Kurt Matzler2

SUMMARY
Business models that unlock efficiency across entire networks are becoming increasingly
common in the so-called sharing economy. However, the principles underlying these
models can also be used in B2B settings. This article proposes some simple rules that
managers can use in a systematic process to build similar disruptive business models.
It illustrates these rules by deconstructing the go-to-market strategy that resulted in
Vizio becoming the dominant flat panel TV vendor in the United States.

Keywords: business models, business model development, business model

innovation, case study, competitive strategy, value chains

T
hree steps to designing innovative business models are where to
play, how to win, and what to do.1 The roots of the three steps lie in
what Michael Porter calls the longitudinal problem.2 Current strat-
egy analysis suggests a winning strategy can only be delivered by
possessing critical capabilities that cannot be easily copied by others. The much
more difficult challenge is, given the initial conditions, managers need normative
rules to choose the option that will most likely result in the critical capabilities.
The longitudinal problem involves going down the chain of causality.3
The three steps mentioned earlier are steps in this chain of causality. At the
inception, “where to play” challenges managers to decide the attributes the firm
wants its customers to have given the initial conditions. Clearly, the implied
assumption is that the proposed attributes (such as reduced price) are different or
missing from the offerings available at that point in time. The next step, “what to
do” frames the challenge of designing the activity system (capabilities) that can
deliver the proposed attributes. Porter suggests that at this step, managers need to

1Case Western Reserve University, Cleveland, OH, USA

2University of Innsbruck, Austria

84
Simple Rules for a Network Efficiency Business Model: The Case of Vizio 85

isolate elements that drive cost/value for each activity and resource to make sure
the value chain results in a profit. However, this is not enough. The next step is to
determine whether this profit can be defended against current or future competi-
tors, or “how to win.” This step requires prototype value chain designs based on
the value capture logic4 of the business model.5 In effect, these three steps repre-
sent an iterative process that, over time, leads to the critical capabilities.
This article develops a set of simple rules to help firms overcome the unique
challenges posed by a business model that seeks to win by unlocking network
efficiencies. These simple rules will help facilitate making the correct decisions
along these three steps. To be useful, these rules (thinking triggers) should quickly
generate ideas about new (or modification to existing) activity systems. The rules
should also alert managers of the challenges in making such modifications and
suggest how to overcome similar challenges.

A Brief Review of the Network Efficiency Business

Model
Network efficiencies can be unlocked if there is excess capacity and/or
there are opportunities to improve the productivity of suppliers, intermediaries,
and customers by sharing data across the entire value constellation (the inter-
connected value chains from the supplier to the end customer).6 While it has
been widely adopted in the retail (Amazon Marketplace) and service industries
(Airbnb), it can work just as well in a B2B setting.
The first company that unlocked network efficiencies to disrupt an industry
is possibly Walmart. Stalk, Evan, and Shulman deconstructed the strategy of
Walmart.7 They demonstrated that contrary to the typical explanation that described
Walmart as an exploiter of suppliers, Walmart in reality worked very closely with its
major suppliers and was the very first to share point of sale (POS) data that unlocked
manufacturing and logistical capacity for the vendors and enabled Walmart to virtu-
ally eliminate inventory. Likewise, by shopping for the daily necessities under one
roof and ensuring their availability (no empty shelves), Walmart—with the help of
their suppliers—helped unlock efficiencies for end customers both in time and wal-
let. This became a virtuous cycle as consumers came back to Walmart, which
improved the predictability of what the upstream suppliers needed to manufacture
and deliver as needed. Ikea executed a very similar strategy.8
While most found the Walmart case study to be eye opening, this was still
a snapshot circa 1992. To address the longitudinal problem, we did some research
about the chain of causality and found that the initiative came from Procter &
Gamble (P&G). P&G convinced Sam Walton to give access to the POS data to one
Walmart store as a test case.9 Note that in order to utilize the POS data to improve
predictability, P&G had to make many investments, from EDI (electronic data
interchange) to hiring experts in predictive analytics. To get a return on this
investment, P&G had to count on Walmart giving access to all their sales data to a
supplier—something that was unheard of in the mid-1980s. This data interchange
86 CALIFORNIA MANAGEMENT REVIEW 61(2)

Figure 1.  Interconnected value chain that leads to network efficiencies.

became possible only because Sam Walton and P&G arrived at an alignment of
economic interest. The importance of alignment can be seen by the fact that it
took a long time for other retailers to adopt similar networks even though the
benefits of such network efficiency became readily apparent by the early 1990s,
helped in no small part by the 1992 Walmart case study.10
Value constellations are quite common today. In the business model litera-
ture,11 they go by names such as “network orchestrator”12 or “network efficiency/
hub” business model.13 Once it achieves alignment with the suppliers, a hub
informationally connects the suppliers to the end customers, sometimes in real
time. This leads to clarity about what, when, how much, and at what price would
make the end customer happy when buying from the hub. It was this knowledge
that aligned potential competitors such as Target to become vendors to Amazon
Marketplace. Figure 1 illustrates how a value constellation leads to the network
efficiencies for a hub and its partners.

The Unique Challenges for the Hub Model

In order to be successful, the hub business has to solve the chain of cau-
sality. However, unlike all other types of business models, the company that is
the hub cannot unilaterally decide on where to play and what to do. Designing
the hub model is a classic chicken and egg problem. The suppliers may not com-
mit unless they see customers are ready to buy. On the other hand, customers—
B2B customers in particular—would not commit to buying without assurances
of delivery. For these reasons, the first step for the hub model is communicating
the value capture logic—how to win. Most of the time it is the hub business that
starts the communication, but it is entirely possible that the supplier (P&G in the
Simple Rules for a Network Efficiency Business Model: The Case of Vizio 87

case of Walmart) initiates the conversation. The second challenge is dictated by

the time it takes for at least two of the parties (usually the suppliers and the hub)
to have a meeting of the minds. The typical sequence is a trial run, which dictates
what to do. If, as often happens, the full benefit of the hub model can be realized
only at scale, the trial run dictates a market segment that can demonstrate the
winning logic. This will drive the decision of where to play initially. Therefore,
P&G would ultimately sell all their products through the Walmart hub, but given
the trial run of only one store, it had to focus on the high-volume items such as
toilet paper. Using high-end men’s razors would probably lead to a failed demon-
stration because of a much lower volume of POS data.
At the end of a trial run, the two common goals for the company at the
center of the network (Walmart, Amazon) are to become the “supplier of choice”
for their customers and the “customer of choice” for their suppliers.14

Simple Rules to Become a Network Orchestrator/Hub

The following simple rules will guide managers how to overcome the
unique challenges for a hub model. Very simply, the hub and its network part-
ners must have clarity on return and risk.

How to Win (Return).  A vendor to Amazon marketplace always has the option of
reaching out to the end customer through its own e-commerce site and avoid
paying the 15% commission to Amazon. Amazon should be able to demonstrate
that the price and value discovery that the vendor gains through the marketplace
more than compensates for this commission by improving their inventory turns.
Further, the vendor can eliminate activities such as marketing or outbound logis-
tics from its own value chain. This dictated “what to do” for Amazon (develop
Amazon Web Services) and “where to play” (attract small businesses).

Simple Rule 1: The hub and partners should be able to see an immediate
profit boost at small scale.

What to Do (Risk).  Even with clarity about the profit logic, not every supplier or
customer should be invited to join the hub. The capabilities required of the suppli-
ers, and in some cases customers, depend on what the new activity system must
deliver for the incremental efficiency/value to manifest. In many cases, it is as
simple as delivering in large volume and on time. However, in some sophisticated
networks, the suppliers need the capability to modify, or even take over, critical
activities of their customer—the hub. In these networks, the full efficiency would
not be realized without such modifications. With the POS data, P&G’s demand
prediction engine proved to be so precise at full scale that it jointly managed the
inventory replenishment along with Walmart buyers. Walmart did extend this
arrangement to other suppliers but with very specific requirements—not many
made the cut. In many cases, the hub has to be cognizant of the capabilities of
their immediate and possibly the end customer for the efficiencies/value to be
realized. Uber would not be possible without the riders having a smartphone.
88 CALIFORNIA MANAGEMENT REVIEW 61(2)

Simple Rule 2: The hub and partners must be confident in their respec-
tive capabilities to extract the incremental efficiency/value from the rede-
signed critical activities.

Where to Play (Return).  Even if the hub has convinced the suppliers of the profit
logic and capability match, the supplier would still be reluctant to commit with-
out clarity of end customers. For the hub to get going, the choice of the initial
customer segment (where to play) is absolutely critical. What this means is that
the hub is better off targeting markets where it can get immediate sales wins,
even if these markets are not the ultimate markets it wants to play in. Of course,
this is not necessary in all situations. Amazon had a large customer base by the
time it decided to open Amazon marketplace.

Simple Rule 3: The Hub must convince the supplier that it has a high
probability of attracting a large and loyal customer base.

Where to Play (Risk).  Most hubs when they are starting out can rarely point to a
large and loyal customer base. However, by choosing a market segment that does
not require heavy additional investments by the suppliers is one way of reducing
the risks for the supplier.
In an interview with CNBC, Ken Langone illustrates how they used prod-
ucts that had no value to their suppliers when he started Home Depot.

Pat [Farrah, a co-founder] went out and persuaded the vendors, “OK, you won’t
give us any more merchandise because you’re afraid we will be able to pay you.
Give us empty boxes with your labels on . . .” So we put all over the store—all
these shelves 20-foot high—we had these boxes and everybody thought, “Oh my
God! Look at all this merchandise!” But there was air in the boxes.15

Michael Dell used this same playbook when he focused on small businesses
as his initial customer segment. Dell designed computers for small businesses
using older generation components that vendors were much more comfortable
supplying to a startup.

Simple Rule 4: One way to induce the suppliers to join the network is to
use excess inventory or parts that are of little value to the supplier but can
be used innovatively to attract the initial customer.

In the rest of this article, we illustrate these simple rules with the go-to-
market strategy of a completely unknown firm that became the largest flat panel TV
vendor in the United States. The firm is Vizio.16 We follow the firm from its incep-
tion and the choices that it made along the chain of causality to its present success.

Prologue
Launched in 2002, Vizio became the largest flat panel TV company in
the United States by the fourth quarter of 2010.17 Since then, it has maintained
Simple Rules for a Network Efficiency Business Model: The Case of Vizio 89

its prominence in the United States18 even after a failed acquisition attempt
by LeEco in 2016/2017. The business press has tried to explain Vizio’s success
by stating what we know after the fact—low price and acceptable quality built
around a follower strategy and outsourced manufacturing sold through the
mass-market channels.19 These stories simply do not do justice to the genius
behind the thought process by which Vizio conceptualized and executed this
strategy, and can be understood through the following questions:

•• How did Vizio decide on the limited features for its TV and why was the mar-
ket entry timing (2003) critical?
•• Why did Vizio make unorthodox choices about components (second-genera-
tion components in particular) and vendors?
•• How did Vizio align the economic interests from suppliers to consumers? This
alignment was critical for not only the initial execution but also future expan-
sion into the mass market.
•• Why did Vizio choose Costco as its initial channel instead of Best Buy or
Walmart? The importance of this choice is completely missing from the busi-
ness stories.

The Evolution of the Flat Panel TV

In 2002, the TV offerings had migrated into flat panel displays driven by
two technologies, LCD or plasma. Consumers were willing to pay for these dis-
plays even though the bulky CRT (cathode ray tube) TVs still had an advantage
in resolution and overall picture quality. However, these slightly superior attri-
butes were increasingly not visible to the consumer, and the convenience of
hanging the larger flat panel display on walls made it the dominant technology.
Figure 2 illustrates the generic value chain of a TV manufacturer.
In the early 2000s, most of the major TV manufacturers were vertically
integrated across all the elements of the value chain. For much of the twentieth
century, the major TV Brands tried to compete on product design and marketing
while relying on the underlying CRT display technology. With the advent of the
flat panel displays, the focus shifted back on the R&D part of the value chain start-
ing with the dueling technology of LCD and plasma. Therefore, the critical activi-
ties (circled) were R&D (in the flat panel era), design, and marketing. Service was
a major cost center but not one that was necessarily a basis for differentiation.

The Opportunity
Around 2002, LCD was beginning to move ahead of plasma mainly
because it was cheaper to produce and most customers were unwilling to pay
a premium for the superior picture quality or motion display of the plasma TV.
Within the LCD industry, it was well understood that the technology was com-
moditizing, especially since LCD panels were being used in other verticals such as
computers and billboards. In order to differentiate, TV manufacturers once again
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Figure 2.  The generic TV value chain.

started to focus on product design and minor technology tweaks such as backlit
LCD panels that they called LED and, of course, larger screen sizes. However,
customers resisted paying for the tweaks as demonstrated by the fact that previ-
ous year’s flat screen LCD TVs became the hot sellers during Black Friday promo-
tions. Despite this, the major brands were unwilling to introduce lower priced
LCD TVs as they needed to invest for the next generation of displays—OLED
(organic light emitting diodes). In this backdrop, Vizio’s founder William Wang
made two core assumptions about the initial conditions in the flat panel TV mar-
ket. LCD was going to be the dominant technology. There was a market space for
a low-price flat panel LCD TV with acceptable picture quality and reliability that
was temporarily immune from competition.
This assumption was not made in a vacuum. In 2001, Gateway computer
wanted to add a flat screen TV to their Retail Computer Stores. Wang was already
a monitor supplier to Gateway. Wang convinced Gateway that there was a latent
demand for plasma TVs at a significant discount to the major brands. Wang’s strat-
egy, discussed in the following, enabled Gateway to offer a $2,999, 42-inch
Gateway plasma TV through their retail stores. Gateway had good brand recogni-
tion for their computers, and the TV sold well.
Wang correctly assumed that most customers who wanted a 50-inch TV
would be happy with 42 inches if it were significantly cheaper. This was the
opportunity. To play in this market with a 42-inch plasma TV was the decision
that Wang made given the initial conditions. The challenge lay in understanding
what Wang had to do to build a plasma TV at a much lower cost than the major
brands.
Porter suggests that this is the point where the manager has to isolate the
drivers of cost and value for each activity in the value chain. Understanding these
drivers enables you to design the prototype activity system that can maximize
value and reduce costs. Porter has a feedback loop to the initial conditions that
suggests that managers need to check whether the prototype activity system is
consistent (e.g., if the offered attributes are valued by the customers given the
initial conditions) and, if it is not, they must go through iterations to make it so.
Since Vizio was not involved in any part of the TV value chain, it had to
unlock efficiency for suppliers. The question was which activities of the supplier
value chains had untapped capacity. Vizio’s challenge was to not only identify
these activities but also leverage them for unlocking efficiency. Wang focused on
the design and manufacturing activity in the TV value chain. In the traditional TV
value chain, design primarily focused on creating value by offering new features,
Simple Rules for a Network Efficiency Business Model: The Case of Vizio 91

chief among them a larger size. However, new sizes invariably increased manufac-
turing costs. Plasma panels were more exacting to manufacture, and costs went
up disproportionately with the size of the screen. Further, the low demand for
pricey plasma TVs implied that the majors did not enjoy economies of scale in
manufacturing. By designing the TV around one size (42 inches), Wang could
source the plasma panels from a single vendor that specialized on 42-inch screens.
Apart from the lower cost and ease of manufacturing 42-inch screens (improving
yields and reliability), this also helped the lone supplier with scale economies.
Wang redesigned the TV value chain by applying a simple rule that drives effi-
ciency: limit end customer choice to unlock supplier capacity.20 In simple terms,
this means designing a value chain that delivers more output (quantity and/or
quality) with the same activities and resources than industry incumbents do.
Unfortunately, as Gateway’s computer business suffered, they got out of
the retail stores and the TV business. At this point, Wang decided to sell flat screen
TVs on his own. However, Wang assumed that plasma was on its way out and
decided to focus on LCD TVs, although it used plasma to secure its first sales at
Costco. The following discussion is based on LCD TVs, which were the only type
that Vizio was selling after its initial success. Based on the Gateway strategy, Wang
isolated the drivers of cost and value in the LCD TV value chain to identify oppor-
tunities for creating efficiency by eliminating and/or modifying specific activities:

•• R&D: For the major TV manufacturers, this was a driver of future value while
increasing current costs. The opportunity for Wang lay in eliminating the
R&D activity by sourcing LCD panels from specialist vendors similar to what
he did for plasma. Of course, when the incumbents could offer a low-priced
OLED TV ($50K and up in 2002; $5K in 2018), they could drive Vizio out of
the market.
•• Design: Borrowing from the Gateway strategy, Vizio could save on design
activity by limiting TV sizes and features to the ones that were most in
demand. Vizio could also design the TV for ease of assembly, which would
also unlock supplier capacity.
•• Manufacturing: This possibly contributed the least to incumbents’ costs. How-
ever, because they manufactured their own components and were constantly
tweaking the attributes for new models, there was not much of an experience
curve or of scale benefits. Further, quality control is always more expensive
for newer models. By focusing on suppliers who specialized in the (limited)
desired sizes, Vizio’s suppliers could generate greater efficiencies than the
major brands.
•• Marketing: This is a major expense for the incumbents. The opportunity lay
in being able to eliminate the marketing activity yet create brand awareness.
This is not unheard of, as companies such as Chipotle have shrewdly used
word of mouth as their marketing vehicle in their go-to-market strategy.
•• Distribution: This is mainly a cost driver for major TV manufacturers. This was
of course unavoidable for Vizio. However, the showrooms did have some
92 CALIFORNIA MANAGEMENT REVIEW 61(2)

marketing value, especially if the sales persons were motivated to promote

your product. If Vizio could leverage the channel sales people to promote its
products, then it could eliminate marketing from its value chain.
•• Service: The major brands could not avoid this expense, as they had to stand
behind their TVs even outside the warranty period. Even if it wanted to, Vizio
could not offer a comparable service network since it had no in-house manu-
facturing or even assembly. The opportunity lay in being able to eliminate
service without affecting the customer experience. This has been done in
the past by framing the output of an activity not as an attribute but as the
desired outcome of the end consumer. While service is a critical activity for
the majors, the desired outcome is up-time. One of the classic examples of
how a company can eliminate service is that of Canon when it entered small
copier business by making the print drum disposable. The print drum was a
major reason for service calls for larger copiers.21 In general, by increasing
reliability, the need for service can be eliminated.

The popular business press seized upon R&D, design, and manufacturing as
the secret to Vizio’s success. What they failed to highlight were the challenges that
Vizio had to overcome.

The Challenges
The key to the Vizio value chain was to create efficiency and reliability
by limiting the product configurations and by designing for manufacturability.
Vizio also wanted to reduce cost by eliminating marketing, service, and R&D.
Eliminating R&D and outsourcing manufacturing was similar to the Gateway
plasma value chain. However, there were some major differences in the initial
conditions between plasma and LCD TV. The first difference was that LCD TV
prices were not as high as plasma so it would be a challenge for Vizio to attract
consumers without significantly lower prices. Second, the majors were likely to
defend the LCD market more aggressively compared to plasma. The challenge
for Vizio was to stay under the radar until it was established. Third, there was
much less excess capacity in the LCD panel industry compared to plasma. Finally,
Vizio wanted to sell through all the big box retailers, rather than just through
Gateway stores. If Vizio did succeed in getting orders from the big retailers, scal-
ing up would be a major challenge.
Consider Vizio’s starting capabilities. It knew how to make a low-cost
plasma TV. Both the Gateway venture and Wang’s previous company that sourced
video monitors from the Far East gave Wang the contacts needed to source LCD
panels. To date, these were in small volume. That was the sum total of the capa-
bilities that Wang brought to the table along with $600,000. Wang had no brand
name and zero retail presence except for some contacts in Costco as a supplier of
computer monitors through Wang’s company Princeton Graphics.
There were two critical challenges for Vizio. First, Vizio had to select the
right component vendors—in particular, for LCD panels. The component vendors
Simple Rules for a Network Efficiency Business Model: The Case of Vizio 93

would affect Vizio’s value chain in terms of cost, reliability, and scalability. Second,
Vizio had to figure out a way to create its brand without any marketing dollars.
The plasma vendors for the Gateway business had a lot of incentive to be
a good supplier for Wang as the demand for plasma panels was likely to decline.
This was definitely not the situation for LCD panels. Even if Wang managed to
identify acceptable suppliers, the balance of power lay with the suppliers com-
pared to the small and unknown Vizio. The first challenge for Vizio was to strike
a deal for components at much lower costs than what it was for incumbents.
Vizio managed to do this.22 We have not seen any explanation of why the com-
ponent makers agreed to this for an unknown company. Going down the chain
of causality, the selection of vendors could also affect possible warranty claims.
It was imperative that the outsourced panels, other components, and TV assem-
bly be bulletproof if Vizio was not going to be overwhelmed by warranty claims.
Finally, at some point, Vizio planned to seek out the big box retailers. What
the business press did not appreciate was the challenge involved in scaling up the
manufacturing to meet the demand for the mass market that materialized very
quickly around 2007. Both the capability and cooperation of the suppliers were
critical for this to succeed. In sum, the suppliers were key to the initial entry and
future expansion for Vizio.
With regard to the marketing challenge, the business press made the case
that Vizio’s success was driven by its ability to sell through the big box retailers
such as Walmart. However, what none of the stories addressed was why Walmart
would agree to carry an unknown TV? Furthermore, even before Walmart, how
would the unknown Vizio be able to convince any retailers to carry its
products?
How did Vizio overcome these challenges and how was the solution to the
first challenge crucial in overcoming the second?

Tools for Identifying Profit Drivers: Isolate, Leverage, and

Eliminate
Before building the complete activity system, Porter suggests that manag-
ers first isolate the drivers of cost and value of the existing value chain activi-
ties. To redesign the value chain, the firm then has to decide which activities to
emphasize or deemphasize to deliver value while cutting costs. At this point, it is
important to consider which activities in a value constellation can be eliminated
from the current value chain. Then, the new design can be more efficient and
possibly add value. This helps us understand the choices Vizio made in the early
2000s to redesign the LCD TV value chain.
Vizio could eliminate R&D by leveraging competitor technology (follower
strategy). For the major TV manufacturers, design supported by R&D is the driver
of value and leads to upstream demand for the latest generation panels and com-
ponents. By adopting existing TV features, Vizio could focus the design activity for
94 CALIFORNIA MANAGEMENT REVIEW 61(2)

Figure 3.  The conceptual redesign of the TV value chain for the Vizio disruption.

ease of assembly. This could simultaneously improve efficiency as well as reliabil-

ity that is commonly associated with simpler assembly. Further, Vizio could poten-
tially use contract manufacturers if the assembly is simple enough, thus eliminating
manufacturing from its own value chain.
With regard to the distribution activity, if Vizio can isolate the selling and
the educating (by floor salespersons) and magnify the education as a vehicle to
market to the end consumer, then it would have solved the marketing challenge
while eliminating internal marketing. The conceptual value chain for Vizio is
described in Figure 3.
The points of leverage represent nodes where the eliminated Vizio activi-
ties can draw from partner or competitor (for R&D) capabilities. We recommend
that managers take the time to make this conceptual redesign using the tools of
Isolate, Leverage, and Eliminate before seeking out suppliers or customers. This is
because not all suppliers or customers are suitable, or have the capabilities that
can be leveraged to execute this redesigned value chain (this is the second simple
rule that Vizio applied).

The Vizio Redesign: Clarity in the Profit Drivers (Simple Rule 1)

The profit logic of the redesign represented by Figure 3 is similar to the
Gateway plasma strategy with two exceptions—manufacturing and distribution.
There was not that much excess capacity for LCD panels as there was for plasma,
which was on its way out. Further, Vizio did not have access to the Gateway
retail stores so it had to find not only new distribution outlets but also ones that
would promote its TVs. Vizio solved both these problems by deciding to design its
TVs using earlier generation components (“good enough technology” according
to Wang) that the major TV designs no longer used. There was not much demand
for these components, and development costs had been amortized. Further, if the
TV was designed for assembly with older components, the yield rate was likely
to be higher as the bugs with these components had been worked out. Vizio was
so confident about the quality of the older panels that it provided a unique war-
ranty for its TV known as “no dead pixel.”23 Add it all up by isolating the output
from design that contributed to cost as opposed to value, Vizio could leverage the
excess capacity in older components with the component vendors as well as faster
assembly time with more reliability.
Simple Rules for a Network Efficiency Business Model: The Case of Vizio 95

Moreover, Wang chose to use panels (and vendors) that were used in mul-
tiple verticals such as computers and public displays and not just TV, reducing the
supply constraint. The end consumers and other B2B customers had been using
these panels for some time—some as billboards in public places. Vizio knew that
the panels were robust and the picture quality was acceptable. The result of the
second-generation components, panels that were widely available, and error-free
assembly was that Vizio TVs were low cost, met demand, and rarely failed. This
enabled Vizio to get by with a minimally staffed service department that would
simply replace defective TVs during the warranty period—a rare occurrence.
Finally, Vizio initially planned launching LCD with only one size so it could
place a larger order with one vendor that helped with scale economies.24 If the
output from the redesigned value constellation (Figure 3) is acceptable to the end
consumer, then Vizio has a way to tap into excess capacity in the LCD market.
Add it all up, Vizio now had clarity about how the redesign can improve profit-
ability by an order of magnitude, and this is possibly a story that he could con-
vince his network partners about. The logic for the older panels is captured in
Figure 4.

The Vizio Redesign: Matching Capabilities (Simple Rule 2)

The execution of Wang’s profit logic depends on the choice of the compo-
nent vendors and the assemblers. Let us briefly consider the timing of the market
entry. LCD panels had been around since the mid-1990s but in 2002 were getting
widespread acceptance as the default monitor for computers as well as outdoor
display panels. These types of displays got a lot more use than TVs and had to have
a higher threshold for failure. Therefore, Vizio’s decision to source older LCD pan-
els from vendors that also supplied the same panels for other verticals implied both
manufacturing capacity and robust panels made from well-established manufac-
turing process. Even if demand for the panels exceeded inventory, it would be rel-
atively easy to ramp up capacity as the manufacturing processes were well tuned.
Wang decided to source the panels from an intermediary. Wang came to
know AmTran, a Taiwanese-based major marketer of commercial LCD panels (to
multiple verticals), when it was a supplier to Princeton Graphics. Princeton graph-
ics sold monitors to Costco among others. It makes sense that AmTran had better
knowledge of who to source the panels from than Vizio—both in terms of quality
and demand. AmTran also had inventory in stock that allowed it to fulfill small
initial orders from a startup such as Vizio. Finally, by specifying panels that could
be used in multiple verticals, the risk of failure was minimized even though Vizio
did not have direct contact with the manufacturer.
Regarding assembly, Wang targeted Hon Hai Precision Industry, the world’s
largest contract manufacturing at the time with manufacturing facilities in Taiwan,
China, and Mexico. Wang was a superb sales person. Moreover, Wang could point
to the Gateway plasma initiative to demonstrate his capability for outsourcing the
assembling of a high-end TV. With AmTran and Hon Hai as the backend founda-
tion, Vizio was capable of executing the supplier side of the Figure 4 value chain.
96 CALIFORNIA MANAGEMENT REVIEW 61(2)

Figure 4.  The strategic impact of the choice of second-generation panels.

The more important challenge for Vizio was to leverage their retail channel
as its marketing arm and eliminate marketing from its own value chain. We know
that Wang wanted to penetrate the mass retail channels. However, the sales per-
sons at Walmart or Best Buy, even if they chose to carry an unknown brand,
would not make the cut for this purpose. Vizio decided to put all its chips in win-
ning over Costco. Why Costco? Costco had the reputation of carrying only the
highest-quality products that were often unbranded but at a significantly lower
price point than major retailers. Therefore, if Costco put the product on its shelves,
their customers would buy it. Moreover, there was more than just Costco’s repu-
tation. Costco provided a concierge service to help customers understand the
specifications of their electronic products. This helped a lot with an unproven
product like Vizio. Finally, Costco in 2002 had a no questions asked return policy
(amended to 90 days for electronics after 2006) and added an extra two years on
the warranty.25 This added even more peace of mind for the customer buying an
unknown brand. If for some reason Walmart or Best Buy were willing to carry
Vizio at the inception, they would not have the capabilities to offer any of these
services. Only Costco could supplement the needed marketing activity for Vizio.
In sum, by choosing AmTran, Hon Hai, and Costco, Vizio applied our second sim-
ple rule by choosing partners with the correct capabilities to leverage their con-
ceptual value chain.

The Vizio Redesign: Guaranteeing a Customer Base (Simple Rule 3)

Our third simple rule is to reduce the risk to the suppliers by demon-
strating large and consistent demand from the hub’s customers. The business
press correctly reported that Vizio managed to create supplier loyalty through
Wang’s prescient decision to create equity partnerships with two key suppliers
and leveraged these partnerships to introduce LCD TVs at Costco. What is miss-
ing is an analysis of why these suppliers agreed to take an equity partnership in
Simple Rules for a Network Efficiency Business Model: The Case of Vizio 97

a company that had no orders. However, once you consider the initial choices
that Wang made in his go-to-market strategy, it is possible to inductively reason
that the suppliers had minimal downside and a large upside in allowing Vizio to
become their customer of choice. Those initial choices were as follows:

•• In January 2003, Wang pitched a 46-inch plasma flat panel TV for $3,800 (a
50% discount to the major brands) to Costco.
•• However, Costco would not put its reputation on the line with a product that
was not reliable and acceptable to its customers. When Costco displayed the
Vizio models (just two) at just one store, customers loved it. The TV rarely
failed, and if it did, Vizio agreed to replace it within the warranty period. Very
soon, Costco expanded the Vizio brand to all 320 of their stores. The choice of
Costco also helped Vizio to stay under the radar until it was established.

AmTran was well aware that Wang had contacts with Costco, and Costco
of course knew about AmTran being Wang’s supplier for Princeton Graphics.
However, instead of asking AmTran to become a supplier for the LCD value chain
based on a promise that Vizio could secure Costco as a customer, by April 2003,
this was an established fact. So why plasma even though Wang himself had said that
he meant to move totally into LCD and indeed did so? Inductively, it seems to us
the reasons are the following:

•• In early 2003, there was still a demand for a low-price plasma TV.
•• Wang had an established supply chain for manufacturing and distributing
reliable plasma TVs.
•• The major TV brands were not interested in plasma TV. This allowed Vizio to
stay under the radar and supply a product to Costco that it could not get from
others.

Basically, Wang leveraged its existing supply chain and relationships with
Costco to become the supplier of choice for Costco plasma TVs. When Wang
approached AmTran for the LCD supply, the only risk was if the profit logic of
Figure 4 could not be executed for LCD. To ensure that Costco was not disap-
pointed with their LCD TVs, Vizio chose to offer the TV in a size (20 inches) that
was easiest to manufacture with design help from Hon Hai. Further, the majors
were busy selling 50-inch LCD TVs, and once again did not see the immediate
threat. The net result was that starting in September 2003. Vizio started selling
20-inch LCD TVs to Costco with components supplied by AmTran and assembled
by Hon Hai. In April 2004, Hon Hai and AmTran took an 8% stake in Vizio (later
expanded to 23%).26 Over time, Vizio came to represent 80% of AmTran’s reve-
nues—its customer of choice.

The Vizio Redesign: Using Excess Supplier Inventory (Simple Rule 4)

Vizio had correctly applied the first three simple rules for creating a value
constellation based on network efficiency. There was, however, still a missing
98 CALIFORNIA MANAGEMENT REVIEW 61(2)

Figure 5.  Vizio value constellation.

piece. There was plenty of demand for LCD panels, especially of the size (20
inches) that Vizio wanted to procure because these panels were used in the com-
puter industry. Even though AmTran was acting as an intermediary and could
guarantee supply in small lots, it would be hard pressed to discount prices below
what it could get from other verticals such as computers and display panels. This
is where the genius of Wang’s decision to use older panels really stands out. The
manufacturing/tooling and R&D costs for older panels had already been amor-
tized, and there might even have been excess inventory lying around. Therefore,
vendors had a higher incentive to discount the older panels. Add it all up, if sup-
pliers saw Vizio as a predictable outlet for their excess and/or amortized manu-
facturing capability, they had a strong incentive to grant Vizio the customer of
choice status and be willing to discount the price. This directly addressed the
issue of cost and scalability.
With AmTran supplying the capital, not only did it reduce the risk for Wang
but AmTran also had all the incentive to supply the components on time, as
demand materialized. Similarly, Hon Hai with its 8% stake in Vizio had incentive
for fast assembly as needed. Vizio worked with Hon Hai to design the TVs with
bare bone features that facilitated easy assembly and reduced the risk of failure.
With the Costco imprimatur in place, Vizio approached Sam’s Club, Walmart,
and other big box retailers. Vizio provided a price point that simply was not avail-
able from any other brand even in 2006 (Sony has only recently introduced its low-
price Bravia line). Given the interest from all these retailers, the only challenge for
Vizio was to be able to meet the demand. This is where the vendor strategy came to
shine. We submit that had Vizio approached the other retailers first, its model would
have failed. The value constellation of Vizio is illustrated in Figure 5.

Epilogue
Vizio’s entry and domination of the U.S. LCD TV market should be studied
not only for the design of the value constellation but also for the timing. Clearly,
Simple Rules for a Network Efficiency Business Model: The Case of Vizio 99

this model would not have worked if the major brands had already introduced
low-priced TVs. However, Vizio’s recent decision to sell the company also points
to Wang’s insight into the longevity of his strategy. Every entry strategy should
have an exit strategy. If the context of a successful entry changes, then it is time
for exit. The panel technology is going to evolve beyond LCD, and it would be
hard for Vizio to replicate the same value chain with OLED or QLED, which
remain proprietary to LG and Samsung. Our expectation is that Vizio will con-
tinue to try to exit this business.

A Template for Designing Disruptive Value Chains

A disruptive strategy has two broad components—opportunities and chal-
lenges. We recommend that managers frame both opportunities and challenges
by answering three questions: where to play, what to do, and how to win. Note
that the following steps are interdependent and iterative. Further, the starting
step can be different from the sequence below, as we saw for the hub model:

•• Step 1—Where to play: Identify the focal attributes you want to deliver to your custom-
ers and what you expect from your suppliers. Isolate different aspects of the attri-
butes that you want to deliver to customers or expect from suppliers into four
components. The four attributes (with the impact on the value chain in paren-
theses) are baseline (cost), premium (value), do without (eliminate), and do
for me (leverage). By creatively configuring these four components, the man-
agers can peek ahead to the next step—designing the value chain. Managers
planning to disrupt existing businesses should pay particular attention to what
customers can do without and what customers/suppliers will do for the firm
(in which activities can the firm leverage customer/supplier capabilities). In
the case of Vizio, their end consumer as well as the direct customer Costco
can do without a full-featured TV. Limiting choice allowed Vizio to design a
low-cost TV that was also reliable. By selecting Costco as the first retailer, Vizio
eliminated the end consumer marketing by leveraging Costco’s capabilities.
The whole purpose of isolating different aspects of customers through these
four attributes is to identify options for redesigning the value chain that can
simultaneously cut costs while delivering an acceptable value.
•• Step 2—What to do: Modify the critical activities and resources of the incumbent value
chain. Critical activities and resources are elements in the value chain that are
the primary profit drivers for the industry incumbents. To disrupt the indus-
try value chain, the redesigned value chain must have critical activities and
resources that can deliver an acceptable customer value at a lower cost. This
is where the twin components of what the customers can “do without” (elim-
inate) and “do for me” (leverage) pay dividends. However, the value chain
at this point is still an abstraction. In order to make it viable, you need to
answer the question of how to win.
•• Step 3—How to win: Ensure that the business is profitable. Once you feel comfort-
able with the focal attributes and a logically consistent value chain, you need
to ensure that it is profitable and/or executable. To arrive at a viable solution,
100 CALIFORNIA MANAGEMENT REVIEW 61(2)

you will need to have complete clarity about your profit logic and how to
operationalize this logic (capabilities needed), and you would most likely
need to redesign the value chain some more. Vizio had a lot of similarity with
the network orchestrator or the hub business. The simple rule for the hub is
to unlock ecosystem capacity, which is exactly what Vizio did.
•• Step 4—Ensure the strategy can scale if the initial go-to-market is successful. Not all
value chains can scale. Outsourcing the activities that can constrain scaling
to capable and loyal suppliers is the preferred way to do just this. The key
point here is that the suppliers should be few, have the right capabilities, and
be trusted. A number of companies such as Cisco and Dell in the 1990s, and
Apple more recently, have adopted this approach.

After the initial value system is designed, typically it may have to be modi-
fied once the profit logic for the sustainable competitive advantage is fleshed out.
Finally, a firm’s success will last so long as the activity system can deliver the profit
logic. Once the initial conditions change, management may have to make fresh
choices and start the process all over again. Recently, with OLED and QLED screen
technology looming, Vizio had gone down some side roads such as gathering
viewership data through their TV. However, the basic strategy is now suspect and,
therefore, the choice is likely to exit.27 The complete interactions between the
Vizio network partners using the focal attribute rules are described in Table 1.

Conclusion
In his 1991 Strategic Management Journal article, Porter urged manage-
ment scholars to develop frameworks to help managers make better initial deci-
sions that can lead to competitive success—the longitudinal problem. This does
not negate the many contributions that can explain firm success at any point in
time—the cross-sectional problem. What we suggest is managers have to imag-
ine what the cross-sectional success is going to look like in the future and then
decide the present actions that have a high probability of delivering the future
state. We have observed many great companies clearly embracing this process—
Amazon being one.
We need a framework that can put the initial conditions into discrete buck-
ets. The five-force model complemented by demand conditions and regulation is
a good starting point. Vizio faced strong competitors in a market where incum-
bents were enjoying high margins. The high-probability decision is to stay under
the radar. Likewise, we can put competitive success into discrete profit logic. Vizio
wanted to exploit the high margins knowing that the incumbents are constrained
from retaliating at the low end. Vizio focused on an efficiency-based profit logic
and went about developing a value chain that could deliver this future state.
Recognizing which bucket combination the manager is starting out with
can make the initial decision process more bounded. At this point, we need to
develop simple rules to facilitate decision making for each possible combination
 Table 1.  How Vizio Unlocked Efficiency and Aligned Interests across the Entire Network.

Focal

Objectives Baseline Premium Do Without Do for Me

Suppliers—Vizio becomes Reliable component Take equity stakes R&D to develop new Keep Vizio updated about new
the customer of choice Steady supply of components technologies
component
Reliable assembly

Vizio—create supplier Acceptable picture with Minimize warranty service The latest specs Design products for easy
loyalty and become the existing components Large sales using existing and feature assembly and older
supplier of choice to component enhancements components
Costco EDI for manufacturing

Costco—Create supplier Acceptable high The ability to supply on Brand names Expose my product
and consumer loyalty definition pictures time and scale Many product features Educate my end customer
Does not break down and sizes Create my reputation

Consumers—treat Costco Acceptable high Low price Brand names Keep coming back to Costco
as a supplier of choice definition pictures Technical advice peace of Latest technologies Tell Friends
mind

Note: EDI = electronic data interchange.

101
102 CALIFORNIA MANAGEMENT REVIEW 61(2)

(four types of businesses and five forces). Vizio could not create efficiencies on its
own. It, therefore, built a value constellation to unlock efficiency across the entire
ecosystem. This process was first applied by Walmart and is applicable in many
other industries.
Finally, we suggest a set of tools—isolate, eliminate, and leverage—as a
way of conceptualizing a redesign of existing value chains.

Author Biographies
Sayan Chatterjee is a professor of Strategy at the Weatherhead School of
Management at Case Western Reserve University. His research focuses on
business model innovation and capabilities for successful expansion (email:
sayan.chatterjee@case.edu).
Kurt Matzler is a professor of Strategic Management at Innsbruck University,
Austria and a partner of IMP, an international consulting firm with its headquar-
ters in Innsbruck, Austria. His primary research interests are in strategy, innova-
tion, and leadership (email: kurt.matzler@uibk.ac.at).

Notes
 1. Sayan Chatterjee, “Simple Rules for Designing Business Models,” California Management
Review, 55/2 (Winter 2013): 97-124. These steps have also been subsequently used in Geoff
Tuff and Steven Goldbach, Detonate: Why—And How—Corporations Must Blow up Best Practices
(and Bring a Beginner’s Mind) to Survive (Hoboken, NJ: John Wiley, 2018).
 2. Michael E. Porter, “Towards a Dynamic Theory of Strategy,” Strategic Management Journal,
12/2 (Winter 1991): 95-117. We have reordered the last two steps to conform to Porter’s
original thesis. However, in reality, “how to win” and “what to do” have to be considered
simultaneously in an iterative process.
  3. See the section on chain of causality in Porter (1991), op. cit., p. 98.
 4. The value capture logic is operationalized by a specific and measurable deliverable called
core objective. Typically, critical capabilities deliver these core objectives. See “Strategy
Execution Map” in M. Morgan, R. E. Levitt, and W. A. Malek, eds., Executing Your Strategy, p.
154 (Boston, MA: Harvard Business School Press, 2007), which is based on the COAR map
in Sayan Chatterjee, “Core Objectives: Clarity in Designing Strategy,” California Management
Review, 47/2 (Winter 2005): 33-49.
 5. For example, the business model based on creating exceptional value can capture part of
the value as profits by ensuring that the target customers “want” its products more than
competitors’ offerings. Chatterjee (2013, op. cit.) has a number of simple rules to design the
value chain elements, such as hiding attributes that distract (recall the iPhone/iPod) to guide
managers.
  6. Richard Normann and Rafael Ramirez, “From Value Chain to Value Constellation: Designing
Interactive Strategy,” Harvard Business Review, 71/4 (July/August 1993): 65-77.
  7. George Stalk Jr., Philip Evan, and Lawrence E. Shulman, “Competing on Capabilities: The
New Rules of Corporate Strategy,” Harvard Business Review, 70/2 (March/April 1992): 57-69.
  8. Normann and Ramirez (1993), op. cit.
 9. Matt Waller and P. V. Boccasam, “How Sharing Data Drives Supply Chain Innovation,”
Industryweek, August 12, 2013, https://www.industryweek.com/supplier-relationships/how
-sharing-data-drives-supply-chain-innovation.
10. Ibid.
11. Christoph Zott and Raphael Amit, “Business Model Design: An Activity System Perspective,”
Long Range Planning, 43/2-3 (2010): 216-226.
12. Barry Libert, Megan Beck, and Jerry Wind, The Network Imperative: How to Survive and Grow in
the Age of Digital Business Models (Boston, MA: Harvard Business Review Press, 2016).
Simple Rules for a Network Efficiency Business Model: The Case of Vizio 103

13. Chatterjee (2013), op. cit.

14. We did not coin these phrases. Some management practitioners especially in the supply
chain area use these. However, neither of these two terms is widely used, but we submit
they should be.
15. Catherine Clifford, “Multi-Billionaire Home Depot Co-founder Reveals Why the Company
Stocked Shelves with Empty Boxes in Its Early Days,” CNBC, June 1, 2018, https://www.cnbc
.com/2018/06/01/home-depot-co-founder-ken-langone-on-the-early-days-of-the-business
.html.
16. There are other firms presently using or that have used these rules for their go-to-market strate-
gies. Some of these will be mentioned briefly in the text, but it is not possible to do an in-depth
analysis of each. We believe the lessons from Vizio’s journey can be applied to many startups or
even large companies that are making a change in strategy. One inspiration for this article was
the in-depth analysis of Walmart by Stalk et al., “Competing on Capabilities,” 57-69.
17. Greg Tarr, “Vizio Tops Q4 North American TV Market Share Reports,” Twice: The Business of Consumer
Electronics, March 7, 2011, https://www.twice.com/product/vizio-tops-q4-north-american-tv-market
-share-reports-3607.
18. Vizio has a 20% market share in 2016 in the United States but only a 3.4% global market share.
See: https://www.pcmag.com/commentary/346488/leeco-buys-vizio-and-thus-the-us-market.
19. Peter Suciu, “How Vizio Conquered TV,” Fortune, July 25, 2012, http://fortune.com/2012/07/25
/how-vizio-conquered-tv/; Paresh Dave, “The Key to Vizio Founder William Wang’s $2-Billion
Business? Trust in His Employees,” Los Angeles Times, August 30, 2016, http://www.latimes
.com/business/technology/la-fi-tn-vizio-william-wang-20160827-snap-story.html; Eric A. Taub,
“How Vizio Went from Nowhere to No. 1,” The New York Times, August 26, 2009, https://gad
getwise.blogs.nytimes.com/2009/08/26/how-vizio-went-from-nowhere-to-number-one/.
20. Chatterjee (2013), op. cit. A number of businesses have applied this rule such as Aldi,
Southwest Airlines, and Amazon Web Services. For example, Southwest flew more flights
with fewer planes than other airlines. Note that limiting end customer choices is not always
necessary for unlocking capacity. In these cases, a process reengineering or application of
value stream mapping is required.
21. The case has been discussed in Ingemar Dierickx and Karel Cool, “Asset Stock Accumulation
and Sustainability of Competitive Advantage,” Management Science, 35/12 (December 1989):
1504-1511; Bob Johnstone, “Canon, Lone Wolf,” Wired, October 1, 1994, https://www.wired
.com/1994/10/canon/. The desired outcome framework is from Sayan Chatterjee, “Delivering
Desired Outcomes Efficiently: The Creative Key to Competitive Strategy,” California Management
Review, 40/2 (Winter 1998): 78-95.
22. Cliff Edwards, “How Vizio Beat Sony in High-Def TV,” Bloomberg Businessweek, April 23, 2010,
https://www.bloomberg.com/news/articles/2010-04-22/how-vizio-beat-sony-in-high-def-tv.
23. Cedric Demers, “TV Warranties & Proper Care,” RTINGS.com, October 2, 2015, https://www
.rtings.com/tv/learn/tv-warranties-care.
24. It started with Plasma but quickly launched LCD.
25. “Costco Tightens Returns Policy on Electronics,” MSNBC, February 26, 2007, http://www.
nbcnews.com/id/17350641/ns/business-us_business/t/costco-tightens-return-policy-electronics/
#.XE9hAVxKhPZ.
26. Christopher Lawton, Yukari Iwatani Kane, and Jason Dean, “U.S. Upstart Takes on TV
Giants in Price War,” The Wall Street Journal, April 15, 2008, https://www.wsj.com/articles/
SB120820684382013977.
27. AmTran has started selling its own branded TVs as Vizio sales are dropping.
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