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Mention the term value chain, and most managers will have visions of a neat sequence of value-enhancing activities. In the simplest form of a value chain, raw materials are formed into components that are assembled into final products, distributed, sold and serviced. Frequently, these activities span multiple organizations. This orderly progression allows managers to formulate profitable strategies and coordinate operations. But it can also put a stranglehold on innovation at a time when the greatest opportunities for value creation (and the most significant threats to long-term survival) often originate outside the traditional, linear view.
Traditional value chains may have worked well for landline telecommunications and automobile production during the last century, but innovation today comes in many shapes and sizes — and often unexpectedly. (See “About the Research.”) This argues for seeing value creation as multidirectional rather than linear.1 Given the constant tension between opportunity and threat, companies need to explore opportunities for managing risks, gaining additional influence over customer demand and generating new ways to create customer value. Mobile phone giant Nokia Corp., for example, is legendary for having had the foresight to lock in critical components that were in short supply, allowing it to achieve significant market share growth. However, Nokia suffered a setback a few years ago when competitors used that very same strategy to take advantage of shifts in the demand for LCD displays.
Protection against such fickle reversals calls for a more complex view of value — one that is based on a grid as opposed to the traditional chain. The grid approach allows companies to move beyond traditional linear thinking and industry lines and map out novel opportunities and threats. This permits managers to identify where other companies — perhaps even those engaged in entirely different value chains — obtain value, line up critical resources or influence customer demand.
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1. Jay W. Forrester provided one of the first systematic explorations of the complex dynamics underlying information and material flow in multiechelon systems; see J.W. Forrester, “Industrial Dynamics” (Cambridge, Massachusetts: MIT Press, 1961). It set the stage for exploring the linkages across parts of the value chain from an operations standpoint. Among other things, it provided an early look at the root cause for dynamic distortions in value chains, which was later expanded and relabeled as the bullwhip effect; see, for example, H.L. Lee, V. Padmanabhan and S. Whang, “The Bullwhip Effect in Supply Chains,” Sloan Management Review 38, no. 3 (spring 1997): 93–102. Since then, value chain dynamics have become widely explored, as researchers try to understand value creation and the sources of value. The “value chain” concept gained prominence in the mid-1980s as researchers looked for cost optimization and new sources for competitive advantage; see J.B. Houlihan, “International Supply Chain Management,” International Journal of Physical Distribution and Materials Management 15, no. 1 (1985): 22–38; and M.E. Porter, “Competitive Advantage: Creating and Sustaining Superior Performance” (New York: The Free Press, 1985). The efforts to understand value chains’ dynamics as a source of core competence and competitive advantage continue to this day. A key concern in our previous research has been, from an operations standpoint, how holistic value chain strategies can be leveraged to enhance responsiveness to customer needs; see M. Holweg and F.K. Pil, “Successful Build-to-Order Strategies Start With the Customer,” MIT Sloan Management Review 43, no. 1 (fall 2001): 74–83; and M. Holweg and F.K. Pil, “The Second Century: Reconnecting Customer and Value Chain Through Build-to-Order” (Cambridge, Massachusetts: MIT Press, 2004).
2. Martin Christopher observed that competition increasingly occurs between entire value chains, not individual companies; see M. Christopher, “Logistics and Supply Chain Management” (London: Pitman Publishing, 1992).
3. An approach that was developed jointly with Audi AG and Daimler-Chrysler Corp., currently under pilot testing. For a more general discussion on the advantage of small-scale operations in the value chain, see F.K. Pil and M. Holweg, “Exploring Scale: The Advantages of Thinking Small,” MIT Sloan Management Review 44, no. 2 (winter 2003): 33–39.