Today’s industry value chains are becoming more complicated every day – more components and services, more countries, and more suppliers, partners, and activities to manage when seeking to deliver differentiated value that customers will pay for. Companies such as Apple and Li & Fung that excel in creating customer value by managing their value chains of design, component production, assembly, and market positioning thrive. Companies that stumble – such as Boeing with fires from the batteries in its 787 Dreamliner and Dell with declining quality when it lost control of laptop assembly – suffer badly and risk failure. How to become a value chain star while delivering customer value, rather than allowing the value chain to become a black hole that sucks the value out of the business?
Build Borrow Buy Strategies
First, in growing with the markets, particularly in the dynamic global markets that are now central to daily competition, learn how to balance a strong mix of “Build, Borrow, and Buy” (BBB) strategies throughout the value chain. Know when to build internally, when to ally with partners, and when to buy other firms.
Most firms’ strategies emphasize just one type of growth – focus on organic growth (Build), others on alliances (Borrow), and some on M&As (Buy). When the favored strategy falters because it does not fit the needs of the changing market, the common response is simply to try again, working even harder to make the strategy work – but firms that fall into this one-trick pony trap commonly end up losing out to more multi-dextrous competitors.
Value Chain Strategies: Value Chain Identification, BBB Selection, Value Chain Integration
Second, beyond the basic BBB strategies in the tool chest, know how to coordinate the full set of internal activities and partnerships that carry value all the way from design to the customers’ hands and hearts.
CEOs need to master three key value chain skills: value chain identification, BBB selection, and value chain integration. Value chain identification is the ability to recognize each of the links that makes up the value chain delivering value to customers and will deliver future value – from design through delivery and service. BBB skill is the ability to choose effective BBB strategy for each of the links – which will be created internally (Build), which will be out-sourced through simple market relationships and basic contracts or via more complicated partnerships (Borrow), and which will be brought in-house through acquisition (Buy). Value chain integration is the ability to coordinate key sequences of links along the value chain so that they flow flexibly rather than become gnarled in a tangled mess.
Examples of Successful Value Chain Strategy
Consider Apple. The evolving value chains for the iPod and iPhone begin with design, include links for hundreds of hardware and software components, connect to links for assembly, continue with wholesale and retail ties, and then require connections with telcom, service, and accessory providers.
Apple excels at each of the three value chain skills.
First, Apple has outstanding ability to identify each step in the path from creating an idea to receiving payments from willing customers. The company understands the value chain that exists now and, even more importantly, has a keen sense of how the value chain will change in the future.
Second, Apple usually knows when to build, when to borrow, and when to buy. The company has internalized a few key steps, partly by leveraging its strong design and software skills (Build), partly by acquiring specialized software and applications providers (Buy). Apple also partners with hundreds of suppliers, assemblers, and distributors (Borrow), some for basic components and services, others such as Samsung, Sony, Intel, Amperex, Tianjin Lishen Battery, and Foxconn for specialized components and activities.
Third, Apple is one of the world’s most effective value chain integrators. Value chain integration requires that you manage not just relationships with individual partners and internal units, but also ensure that relevant groups of partners and internal personnel work together to coordinate their design, production, marketing, distribution, and service activities.
In Apple’s case, value chain integration means making sure that the design and production cycles at dozens of key suppliers such as Samsung, TSMC, and Cheng Uei Precision are synchronized with each other as well as with activities in the Apple’s internal staff. In turn, Apple needs to work closely with assemblers such as Foxconn and Quanta to ensure that their supply chains work smoothly, in sequence with other key steps along the design, production, and marketing chain. This set of value chain skills, particularly the ability to apply them dynamically as Apple adapts to and leads the creation of new market value, underlies the company’s ongoing success.
Other industry leaders around the world illustrate how value chain skills contribute to the firms’ sustainable success. Boeing, despite the problems with the batteries in the Dreamliner, has unusually strong ability to manage complicated value chains involving many years of lead time in development and production. Foxconn and Flextronics, the world’s leading electronics manufacturing services providers, operate sophisticated industrial parks in countries such as China, India, Latin America, Central Europe, and Southeast Asia that bring together customers and suppliers to facilitate rapid design, assembly, and delivery.
Li & Fung, the world’s dominant retail supply chain management firm, coordinates a sophisticated set of design, production, logistics, trading, and distribution activities in a wide range of emerging and developed market retail businesses. Toyota Tsusho, the general trading company within the Toyota Group, creates much of its value by coordinating development, procurement, production, logistics, sales, after-market service, and recycling in the automotive, metals, machinery, chemicals, food, and other sectors in more than fifty countries. Each of these firms has strong value chain identification skills, uses a sophisticated set of BBB strategies, and is a highly skilled value chain integrator.
Manage Your Value Chain – Or Fail
Value chain skills are central to business strategy in the 2010s. The lessons are critically important for firms leading their industries as value chain integrators. The lessons are equally important for the firms that work with the leaders, as value chain partners. Firms that embrace the skills of identifying dynamic value chains, evolving their BBB strategies, and coordinating the activities of value chain partners will lead their industries. Those that falter will fail.
Laurence Capron is the Director of the INSEAD Executive Education Program on corporate strategy and M&A; and Will Mitchell is a Professor at Duke University’s Fuqua School of Business, and the University of Toronto’s Rotman School of Management. They are authors of the book, “Build, Borrow or Buy: Solving the Growth Dilemma” (HBS Press, 2012).
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