Chain Patterns: Know What Your Neighbors are Doing
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.
Chain Squeeze Strengthing
the Weak Link Reintegration
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.
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.
do you do when you face Deintegration?
in and dominate an important cell of the new, broken-up value
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.
wanting to avoid succumbing to the squeeze have four choices:
an adjacent value chain step early in this pattern's evolution,
before the trap sets in.
new entrants into adjacent value chain steps, weakening their
a business design that exploits an opportunity more than one value
chain step away.
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.
do you do when you face a Value Chain Squeeze?
your performance faster than your neighors do.
Preempt or limit the strength of their position by encouraging
the Weak Link
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.
do you do when you need to Strengthen a Weak Link?
the weak link in an exclusive fashion.
Tie its success to the success of your business design.
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.
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.
do you do to profit from Reintegration?
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
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.