Source: Kippenberger, T. (1997). Do value constellations supersede value chains? The Antidote, 2(5), 29-32.

Abstract: Declares that strategy helps firms prepare for the future as it allows managers to identify, and then take, opportunities to add value to their customers. Advocates that the value chain concept is built around the idea that value is added — in sequence — by suppliers along the chain. Suggests however, that a better way to define where value lies is to recognize that it arises in the way the customer uses the offered product or service. Concludes that the fundamental shift in thinking is required to find ways of creating value in a ‘post-industrial’ economy.

Keywords: Customer satisfaction, Customer service, Post-industrial society, Thinking styles, Value chain
Article Type: Research paper

Do Value Constellations Supersede Value Chains? Arguing that the original value chain concept is far too restrictive for present day business configurations, Richard Normann and Rafael Ramirez have presented a case for "Value Constellations" as a more appropriate model.

Richard Normann was a professor at Lund University in Sweden before founding SMG, a European management consultancy firm. Rafael Ramirez is an associate professor at Groupe HEC, the French business school on the outskirts of Paris and began his connection with SMG in 1985. He was vice-president of SMG France S.A. between 1991 and 1993.

In the July-August 1993 issue of Harvard Business Review, Normann and Ramirez set out their basic argument that the value chain was an outdated concept, using three extended case studies to make their point. The views expressed in their article were sufficiently controversial to encourage nine "experts" to respond in the following issue of Harvard Business Review (see page 32). The following year, 1994, Normann and Ramirez extended their ideas in a book: Designing Interactive Strategy: From Value Chain to Value Constellation. It was so successful that it was reprinted in the same year.


RESEARCH

The origin of the authors’ views was a multi-client study undertaken for 20 European international companies, started in 1986 by SMG, called the "Business Logics for Innovators Program".


THE LINE OF ATTACK

In his foreword to the book, Donald Schön, Ford Professor Emeritus at MIT, points out that the book "is written in criticism of and opposition to the value chain idea. It might very well have been sub-titled, ‘Against Porter’." The authors deny that they are dismissing the value chain, but they do see it as severely limited in its applications. In their view, the idea, with its emphasis on upstream suppliers and downstream customers, is modelled on the old-fashioned assembly line. This restricts thinking because it is linear, sequential and unidirectional. They argue that value is not created within this model. Rather it is added at each step, like components on a production line.

While part of the value in a product or service does reflect the activities that have gone into producing or providing it, a large element is based on what the acquirer can do with it. "When customers buy a ‘good’ or a ‘service’ they are typically less interested in what went into it than in what it helps them achieve." To underline this, Normann and Ramirez point out that the reason premium prices are obtained is because the worth of what is on offer is higher, to a particular set of customers, than the cost of the activities that went into it.

The value chain concept is built around the idea that value is added, in sequence, by suppliers along the chain. Normann and Ramirez suggest that a better way to define where values lies is to recognise that it arises in the way the customer uses the product or service on offer. Value is determined by the value-creating potential provided for the customer in their business or their home. This means that value is not determined by what a supplier achieves in its own business, "but by what it helps its customer to achieve".

CORE CONCEPT The authors define business as "activities which create value" and management as "the organizing of those activities". Strategy helps firms prepare for the future because it allows managers to first identify, and then take, opportunities to bring value to their customers. In the authors’ view, many strategic models, such as the value chain, have become outdated because they are based on assumptions taken from the industrial economy. The mental models associated with these assumptions no longer help. In fact they obstruct managers who need to find new ways to reconfigure their businesses, or indeed redefine their whole industries. Strategy in the future will need to focus on ways to create, not just add, value.

THE CHANGING VALIDITY OF ECONOMIC MODELS

Successively, over the centuries, one valid economic model after another has been superseded. Generally, the authors suggest, this has occurred when a set of previous constraints has been removed as a result of technical progress.

For instance, the earliest economic activity was the extraction of, and then trade in, raw materials (vegetable or mineral), with any small-scale, craft-based, production of goods occurring locally. It was not until industrialisation started that location ceased to be the constraining factor, enabling wool to be made into sweaters more efficiently far from where the sheep were raised. But early industrialisation had its own constraints. The need for large-scale sources of energy meant that mills had to be sited near rivers. The steam engine removed that constraint but it too had its own limitations. While the steam engine enabled the separation of the factory from a natural energy supply, it was the invention of the electric motor that first allowed functional separation within the factory because, no longer limited to a single energy source, each machine became independent - able to undertake specific tasks at its own rate. To take advantage of this, production knowledge was developed which, through task specialisation and standardisation, ushered in the era of mass production and mass marketing.

Now, after a century of living and working with this basic functional separation, the microprocessor has introduced a completely different logic - the ability to perform many different tasks, simultaneously, in fractions of a second, all within the same machine. By doing so, it has lifted many of the earlier constraints of time, space and place. But, the authors contend, our mental and strategic models have not yet responded to this. Instead they remain rooted in the mindset of the mass production industrial economy with its emphasis on economies of scale (long runs of the same product) rather than economies of scope (short runs of a wide variety of products). Because the invention of microprocessor is a point of discontinuity rather than just another step in a long line of mechanical improvements, it provides an altogether better analogy for looking at ways in which companies can provide value in the future.


THE MICROPROCESSOR AS THE NEW ANALOGY

The microprocessor, the authors propose, is the epitome of of the way functions are re-aggregated. At its most commonly observed level, the microprocessor in a PC allows the same person to type and edit, do mathematical calculations and draw diagrams, as well as design and store their information, all on the same machine. In its compact form, a PC can be taken and used on, say, a flight from London to Paris. The user can spend travelling time to create value by, for instance, drawing up an investment proposal. Using a fax modem, this can be transmitted direct to colleagues around the world and their responses obtained in the same fashion. What is happening, the authors point out, is a dramatic shift in a whole set of previous constraints - time, space, place and interfaces. The potential is heightened by the ability to undertake concurrent activities - to travel and work, to write and calculate, to transmit and receive. This, they argue, is a far cry from the linear, physical, one task at a time, uncustomisable manufacturing model with which we are so familiar.


TWO IMPLICATIONS OF THIS DIFFERENT MODEL

Because the microprocessor, in all its different manifestations, is integral to what the authors describe as the "emerging economy", it provides the analogy that managers should use to think about how their business creates value in this new context. The authors suggest two significant implications:

New levels of density The microprocessor in the PC offers a vast range of options. The authors define this as a new level of density because so many possibilities are made available in such a small unit of time and space. Density also occurs because of the way the microprocessor in the PC enables access to many different "assets" (other colleagues, other information), even though they are spread out in time and space. It makes them available "here and now". The knowledge, resources and activities offered by this density mean that the computer creates high levels of value for the user. Increasingly, expectations raised by this will mean that successful companies have to recognise that the density of value in what they are offering is important.

The value of flow Beyond straightforward access, the computer’s microprocessor allows flow to and from these other "assets", enabling the value in them to be realised almost anywhere and any time. This new form of flow also "awakens" otherwise dormant assets. For instance, Benetton (see also page 11), the Italian fashion designer and producer, constantly analyses transactions in the main stores it supplies around the world. This enables it to have a very fast response time in product development because it can identify trends in fashion as they form. These simple customer transactions, which previously would have been used for accounting purposes only, have been transformed into a valuable asset. The critical point is that the flow is not unidirectional anymore, nor does it take place in a pre-arranged sequence. Flow in the new sense is at least two-way and often multi-directional. It also follows whatever sequence is appropriate and may include simultaneous flows.


WIDER RAMIFICATIONS

The concepts of density and flow have many ramifications when extended to new ways of operating.

1. Re-aggregating products and services Both products and services are the result of "activities that create value". One of the original reasons for separating them was that economies of scale were easier to achieve with those activities that were "packaged" into physical goods (or products) - such as a motor car or an electric cooker. Conceptually, a physical good is one in which these activities have been "frozen" (ie completed and already contained within the product) before purchase.

Economies of scale were less easy to find in services, not only because service itself can often be intangible, but because continuing activities are an integral part of the way value is provided in a service business (like a retail store). They cannot, therefore, be "frozen". The only exception is when services are "productified" - as in the case of costly financial advice on investments which, when repackaged, can be sold in identical, price-carrying parcels called unit trusts.

The concept of a product being a set of frozen activities is captured in the phrase ‘finished goods’ but carries with it the logic of the industrial economy, where all the value is added in stages and completed by the end of production. The reality is that there are few products today that are not part of a dense, "bundled" package which includes many services. Free installation, maintenance agreements, warranties, help-lines, after sales support, automatic upgrades, insurance, instalment payments and other finance packages are just some of the familiar services that are now included alongside physical articles. The old distinctions between products and services break down in other ways too. Services are being replaced by physical products - like listening to high quality sound on a CD rather than going to a concert, or buying a videotape rather than going to the cinema. Other forms of value creation have also changed concepts of ownership. Access to the use of a "good" is provided, rather than the actual transfer of ownership. This is the case, for example, in car-hire or use of the telephone network. Neither the car, nor the phone network, changes hands, but the user pays for access. Trying to determine whether the supplier is providing a product or service is increasingly irrelevant.

The point is that both products and services are the result of myriad activities that go into their creation. Whether these activities are physical, experience-based or knowledge-based, they are increasingly configured in such a way that the old distinction between product and service is outmoded. Rather than use the words ‘product’ or ‘service’ therefore, the authors suggest it is preferable to use the word ‘offering’.


2. Co-production This blurring of the boundary between product and service, heightened by the bundling of many different elements into a single offering, has a number of ramifications. Not only does it significantly increase the density of what is on offer, it also increases the degree to which co-production has to take place. For instance, even at a simple level, car manufacturers co-produce value with insurance and finance companies so that their customers receive a complete package when they buy a car from an appointed dealer. At the point of purchase, co-production takes place when the dealer arranges the finance on behalf of the customer. If the finance house cannot co-produce a finance package simultaneously with the sale, the value being created by the manufacturer and dealer is immediately reduced.

The authors point out that participants in co-production have complex, simultaneous and multi-directional relationships. They no longer buy an item, add value to it and sell it on (the concept inherent in the value chain). They find ways of adding value together to provide a competitive offering. In the process, they also find ways to create value for each other.


3. Configurations and re-configurations Because, as is generally accepted, value is created through a range of activities, undertaken by many different participants, usually in different locations, there is necessarily a division of labour in the process of delivering that value. This total set of activities is capable of being "unbundled" and "rebundled", something that has always happened, with bundles of activities being assigned to those who perform them most efficiently. Now, however, as increasing technical innovation removes earlier constraints (of time, space and location), completely new and different configurations of these activities between participants becomes possible. Such re-configuring makes the currently established allocation of activities increasingly volatile.

Not only has volatility increased, but the right allocation of activities has also become much more critical. To provide competitive offerings in this new environment, therefore, value should be created in whatever way is appropriate and should no longer be dictated simply by the organisational boundary of the last firm that supplies the customer (as in the value chain). Density, flow and co-production mean that the content of the offering itself now starts to act as a "boundary definer". It is this view, that the offering determines the boundary points where different participants come together to co-produce value, that suggests to the authors that ‘value constellation’ is a much more appropriate metaphor than ‘value chain’.


4. The code All offerings carry what the authors describe as a "code", which tells the user about the value-creating activities it makes possible. This code is essentially the set of instructions, verbal or visual, that enables the customer to appreciate how to obtain the most value from the offering. It can come in many forms, such as the instruction book itself, marketing material or a well-illustrated advertisement. Or it can even be subtly built into a pricing formula - options within the pricing structure may reveal possibilities the customer had not thought about. If this code is confusing in any way, the customer will not be able to understand the full potential of all the activities involved within the offering. At its worst, this will mean that the value the customer perceives within the offering is low or even non-existent. Given the complexity of the new environment in which offerings are co-produced, the simplicity and clarity of the code becomes crucial.


5. Relieving or Enabling The authors suggest that a key element in understanding how value might be created, and codified, is to appreciate whether the offering is a relieving or an enabling one. Much of the industrial economy was based, the authors argue, on the premise that the supplier’s role was to do something that relieved the customer of activities they did not wish to do themselves. More in keeping with the new business environment, however, is an offering that enables. One that provides customers with the means to do things they could not otherwise have done before or to do things better.

The point the authors make is that no offering is inherently a relieving or an enabling one - "these characteristics are a function of how offerings fit into the customer’s value creating." This makes the identification of which type of offering best fits the customer’s value needs a crucial process. In their view, offerings that enable customers have the potential to create more value but they also create the greatest problem with the code. In the relieving mode it is usually the customer who specifies what they want; with an enabling offering the providers often have to explain to the customer the new value they are creating. The denser and more complex the offering, the more difficult this is.


CONCLUSIONS

Normann and Ramirez seek to emphasise the fundamental shift in thinking that is required to find ways of creating value in a ‘post-industrial’ economy. In their opinion, those who cannot change the way they view value creating activities, to fit the new economy, will suffer.

THE EXPERTS’ VIEWS The nine experts who commented on Normann and Ramirez’s original Harvard Business Review article included academics, consultants and business managers. Some, such as Kees van der Heijden, Professor of Business Administration at Strathclyde University in Scotland, were supportive of the concept; some, like Jerrold Lundquist of McKinsey & Company, agreed with it "as far as it [went]". Others, such as Robert Lurie of the consulting firm Monitor, expressed considerable reservations. Much of this is to be expected. It is not in the nature of consultants to become enraptured by other consultants’ work, so it is not surprising to find Lundquist of McKinsey highlighting a "series of four systematic analyses" that should be used to find the right value configuration - all no doubt part of McKinsey’s own consulting armoury. It also is worth noting that Monitor is Michael Porter’s own consulting business and that Kees van der Heijden went on to collaborate with Normann and Ramirez in the production of their book. As always, expert views need to be set in context. Overall however, there is an acceptance that, at the very least, this is a new and interesting way to look at both strategy and value creation. One common thread in these critiques is that Normann and Ramirez present case study examples (IKEA, the Danish Pharmaceutical Association, Compagnie Générale des Eaux, and Lyonnaise des Eaux Dumec) in which the new configurations can be seen retrospectively, but they fail to provide a ‘prospective’ model for current use. Indeed one of the experts, Vincent Carroll of the Center for Applied Research in Pennsylvania, points out that "the very breadth of the framework itself makes it more difficult to use", though he quickly adds that just because it is cumbersome and difficult should not dissuade people from trying to apply it. By and large, despite the reservations, expert opinion agrees that companies will have to change their attitudes to value creation, and to their relationships with other companies and their customers, but that the value constellation model needs further refinement.

COMMENT

It is relatively common for an article in the Harvard Business Review to be used as the launch pad for a forthcoming book by established writers or ‘gurus’ (see Womack and Jones on page 11). Less common is a response to a Harvard Business Review article that prompts its author(s) to quickly put one together. The time lag between article and book is usually at least two years but Normann and Ramirez seem to have shortened the timescale considerably: an article in July 1993, expert reaction in September 1993 and their book published in 1994. It feels like a rush to print to capture the interest. If that is indeed the case, it would explain the semi-digested nature of the writing which, on occasions, makes it close to impenetrable. No doubt it was a trade-off between the time needed to write with care and a quick market opportunity. Such a rush to market is sad, if that is what it was, because the thinking underlying the book provides much food for thought. It is littered with new perspectives and valuable insights but is put together as if bits have been taken from lecture notes and consultancy presentations in a somewhat random, and frequently repetitive fashion, leaving a patchwork of ideas with few strong threads to build them into a logical, cohesive argument.

Of course, one of the problems with trying to shift mental models is that our vocabulary reflects the pervasive nature of existing models. Thus, when discussing a wholly new model a new vocabulary has to be found to express new concepts associated with it ("density", "flow", "offering", "co-production", "constellations", "code", etc). This inevitably gets in the way of understanding their ideas easily because it feels like new jargon.

We persevered with Normann and Ramirez’s work because the microprocessor analogy provides a critically different mental model from the ‘batch-and-queue’ assembly line. There are strong echoes of this in other work covered in this Issue - notably Womack and Jones on pages 11 to 14. The re-configuration of activities that Normann and Ramirez highlight also connects strongly to some of the thinking on alliances and joint ventures in our previous Issue. In particular, their use of the word "constellations" rings a bell with Benjamin Gomes-Casseres’s use of the same word when discussing multi-party alliances. (In fact Gomes-Casseres references Normann and Ramirez HBR article in his own book The Alliance Revolution and explains that he is, indeed, using the same word in exactly the same sense.) Normann and Ramirez’s view, that by bringing together many co-producers it is the point of purchase that defines the boundary between different firms, accords with Gomes-Casseres’s later view that multiple alliances are increasingly important in today’s competitive business environment.