How Does Competitive Strategy Determine Value Chain Structure?

How Does Competitive Strategy Determine Value Chain Structure?

Organizations analyze the structure of their industry, and, using that analysis, they formulate a competitive strategy. They then need to organize and structure the organization to implement that strategy. If, for example, the competitive strategy is to be cost leader, then business activities need to be developed to provide essential functions at the lowest possible cost.

A business that selects a differentiation strategy would not necessarily structure itself around least-cost activities. Instead, such a business might choose to develop more costly processes, but it would do so only if those processes provided benefits that outweighed their costs. Jason at AllRoad Parts knows his large inventory is expensive, and he judges the extra costs worthwhile. He may judge 3D printing to be worthwhile, too.

Porter defined value as the amount of money that a customer is willing to pay for a resource, product, or service. The difference between the value that an activity generates and the cost of the activity is called the margin. A business with a differentiation strategy will add cost to an activity only as long as the activity has a positive margin.

A value chain is a network of value-creating activities. That generic chain consists of five primary activities and four support activities.