The value chain and organizational structure

The value chain is a basic tool for diagnosing competitive advantage and finding ways to create and sustain it, the subject that will dominate the chapters that follow. However, the value chain can also play a valuable role in designing organizational structure. Organizational structure groups certain activities together under organizational units such as marketing or production. The logic of those groupings is that activities have similarities that should be exploited by putting them together in a department; at the same time, departments are separated from other groups of activities because of their differences. This separation of like activities is what organizational theorists call “differentiation.” With separation of organizational units comes the need to coordinate them, usually termed “integration.” Thus integrating mechanisms must be established in a firm to ensure that the required coordination takes place. Organizational structure balances the benefits of separation and integration.

The value chain provides a systematic way to divide a firm into its discrete activities, and thus can be used to examine how the activities in a firm are and could be grouped. Figure 2-5 shows a value chain with a typical organizational structure superimposed. Organizational boundaries are often not drawn around the groups of activities that are most similar in economic terms. Moreover, organizational units such as the purchasing and R&D departments frequently contain only a fraction of the similar activities being performed in a firm.

The need for integration among organizational units is a manifes-tation of linkages. There are often many linkages within the value chain, and organizational structure often fails to provide mechanisms to coordinate or optimize them. The information necessary for coordinating or optimizing linkages is also rarely collected throughout the chain. Managers of support activities such as human resource management and technology development often do not have a clear view of how they relate to the firm’s overall competitive position, something the value chain highlights. Finally, vertical linkages are often not well provided for in organizational structure.

Figure 2-5. Organizational Structure and the Value Chain

A firm may be able to draw unit boundaries more in tune with its sources of competitive advantage and provide for the appropriate types of coordination by relating its organizational structure to the value chain, and the linkages within it and with suppliers or channels. An organizational structure that corresponds to the value chain will improve a firm’s ability to create and sustain competitive advantage. While this subject cannot be treated in detail here, it remains an important issue in the implementation of strategy.

Source: Porter Michael E. (1998), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press; Illustrated edition.

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