The value chain and organizational structure

The value chain is a basic tool for diagnosing competitive advan­ tage 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.  Organiza­ tional structure groups certain activities together under organizational units such as m arketing  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 w hat organizational theorists call “differentiation.” W ith separation  of organizational  units comes the need to coordinate them, usually term ed “ integration.” Thus integrat­ ing mechanisms must be established in a firm to ensure that the required coordination takes place. Organizational structure  balances the benefits of separation and integration.12

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 coordi­ nating or optimizing linkages is also rarely collected throughout  the chain. Managers of support activities such as human resource manage­ ment 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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