Value Chain Configuration

How your firm’s value chain is configured is more important than how well you operate it for developing a competitive advantage.

Choosing value chain activities that create either a relative advantage in price or cost from competitors is critical. Too many firms operate legacy value streams that are not well-aligned with either the needs in the marketplace or the firm’s strategy for competing. These firms then tend to fall into the trap of thinking that the route to superior profitability lies in doing better what they already do, rather than creating valuable differences from competitors.

Value chains can be designed to serve target customers by creating relative differences in price or cost. A benefit-driven strategy requires a value chain which creates unique value for customers which commands a higher price. A cost-advantage strategy, in contrast, requires a value chain which operates at the lowest total cost relative to competitors. In either approach, a firm’s value chain activities must be well-selected to ensure they fit with each other and create a cumulative impact on either price or costs which is greater than the individual activities themselves.

Firms should also remember to consider what activities they should not perform. Knowing the target market, its needs, and the value that is required is the starting point for designing and configuring value chains. Activities which are not related to the value required should be designed out of the value chain. Knowing what not to do is as important as knowing what to do.

The real test of the strength of a value chain’s configuration is its sustainability. Firms need to assess how impervious their value chains are to competitive imitation and replication. A value chain configuration which can be easily copied or replicated by competitors will confer no lasting competitive advantage.

Finally, if your firm is considering launching value chain improvement initiatives such as Lean manufacturing or Six Sigma, that is a good time to step back and assess how well your value chain is aligned with the needs of your markets and customers. There is no point is improving value chains that are fundamentally incapable of producing the value customers require, or which fail to create the necessary price or cost differences which lie at the root of superior profitability and competitive advantage.

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