Value Chain Patterns: Know What Your Neighbors are Doing

Companies are using new, nontraditional criteria for value chain moves which are driven by business design innovation and changes within the customer relationship, resulting in achieving strategic control. It's not just your traditional value chain that can effect you, but also those of your economic neighbors with strategic ideas.

Deintegration • Value Chain Squeeze • Strengthing the Weak Link • Reintegration

Deintegration

With the rise of outsourcing, companies realized that they save money by farming out parts of their operations, allowing them to raise their competency in a few steps of their value chains rather than in all steps. Recognizing where the strategic control rests in the value chain and concentrating the company's operations in those steps while contracting others to perform the rest has enabled many companies to dominate their industries.

As value chain deintegration creates new zones of profit and value creation, the pattern exposes each step of the chain to more scrutiny. When each step is forced to compete in a "market," each activity in the system can be more clearly evaluated on its own economic terms. One fact becomes apparent: value and opportunity are not distributed evenly along the chain. The challenge is to identify new arenas of profit growth as the effects of changing customer priorities, technology, regulation and information economics create new ways of serving customers.

What do you do when you face Deintegration? Specialize in and dominate an important cell of the new, broken-up value chain.

Value Chain Squeeze

When value chains are in flux, a no-win, no-escape scenario can occur as the growing strength of neighboring suppliers and customers can trigger a squeeze on the step where a company and its look-alike competitors are operating. This occurs due to relative scarcity of things like talent, a fast rate of performance improvement by those companies doing the squeezing or a consolidation of companies at the squeezing ends. In all cases, profits flow to the companies doing the squeezing, while those being squeezed find themselves trapped in a zone of limited returns or rapidly decreasing profitability.

Companies wanting to avoid succumbing to the squeeze have four choices:

1. Enter an adjacent value chain step early in this pattern's evolution, before the trap sets in.
2. Encourage new entrants into adjacent value chain steps, weakening their neighbors.
3. Create a business design that exploits an opportunity more than one value chain step away.
4. Stand and fight, hoping that superior operations and product innovation will rescue it. Although this may be the most appealing, it has low odds for success.

What do you do when you face a Value Chain Squeeze? Improve your performance faster than your neighors do. Preempt or limit the strength of their position by encouraging new entrants.

Strengthening the Weak Link

When poor performance by a value chain neighbor limits your ability to increase your value to customers and create value growth, a smart value chain neighbor can take action to improve the performance and quality of the overall system. Forming strategic partnerships and aligning objectives, coordination and information sharing can transform inefficiency into competitive advantage by fixing the weak link of the value chain in an exclusive fashion. When weak links remain damaged, they prolong dysfunctionality, block change and create risk for their neighbors and opportunities for newcomers. Strengthen the weak link in a way that creates a breakthrough position for your company.

What do you do when you need to Strengthen a Weak Link? Fix the weak link in an exclusive fashion. Tie its success to the success of your business design.

Reintegration

Over periods of time, small, incremental changes in economics, technology, customer relevance, investment levels and competitive performance can lead to enormous variations in profitability along the value chain. The behavior of some customer groups becomes more important in driving the behavior of the entire system and shifts the sources of power. When value shifts occur, the challenge is to expand the scope of the business model to include activities that were once viewed as upstream or downstream from your own position. As value migrates from one value chain link to anothe, players are being fored to reintegrate in order to maintain strategic control.

Currently strategic reintegration is most profitably focused on the customer as the critical strategic bottleneck. The focus is on access to and information about profitable customers and profitable customer purchasing occasions. If you capture the customer relationship, you will likely be able to source the products required to meet their needs. And, if you don't capture this information, you may not be able to wrest the customer away from competitors who have integrated the customer more closely into their business designs.

What do you do to profit from Reintegration? Reintegrate those parts of the value chain that matter because of profitability, customer information, or strategic control. Don't acquire unless you have to. Use contracts, relationships, or minority ownership instead.

Page content is based upon Profit Patterns, written by Slywotzky, Morrison, Moser, Mundt and Quella, published by Times Business, Random House, copyright © 1999 Mercer Management Consulting, Inc.