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Between chain and shop

Magnus Johansson

Lund Institute of Economic Research,

Lund University

Abstract: In their critique of the value chain, Stabell and Fjeldstad (1998) proposed a set of

value configurations and called for further research into combinations of value configurations.

This paper proposes a new value configuration and refines Stabell and Fjeldstads chain and

shop configurations. The new package logic fills a gap between the chain and shop logics andenables the establishment of a set of logics that is more appropriate for analyzing value creation

and cost efficiency in organizations acting on industrial markets.

Keywords: Value configurations, value logics, value chain, value shop, industrial markets


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Introduction

The value chain (Porter, 1985) still remains the main framework for practitioners when

analyzing value creation logics in firms. But during the last twenty years criticism towards the

value chain (cf. Payne and Holt, 2001) as well as propositions of alternative value creationdescriptions have emerged.

The alternative descriptions of value creation can be roughly divided into two streams:

value constellations (Normann and Ramirez, 1993; 1994 (1998); Ramirez, 1999) and value

configurations (Stabell and Fjeldstad, 1998; Haanes and Fjeldstad, 2000). The field of value

constellations (Normann and Ramirez, 1993; 1994 (1998)) focuses on the value creation

through co-production of value between supplier and customer as an alternative to the internally

oriented framework as provided by Porter (1985).

Value configurations on the other hand focus on the internal arrangement of activities,

and thus builds more directly on Porter. Stabell and Fjeldstads (1998) set of configurations

originated from realizing that Porters (1985) value chain was inappropriate to apply to all types

of businesses. In their paper they therefore proposed two more logics, the shop and network

logic, in order to better capture characteristics of different types of organizations. Their

complete set of value configurations thus consists of the chain, shop and network logic, whereof

the network logic is beyond the scope of this paper.

The value chains primary activity set is centered around the transformation of inputs into

outgoing products whereas product and technology development fall among the supportive

activities (Porter, 1985). Stabell and Fjeldstad (1998) contrast the value chain with the value

shop where the value creation logic revolves around the solving of customer problems in an

iterative fashion.

Having studied and worked within industries ranging from automotive and off-shore to

automations systems, IT and telecom, during the last ten years, I have found that the set oflogics proposed by Stabell and Fjeldstad (1998) has shortcomings when trying to analyze value

creation and cost efficiency in organizations acting on industrial markets. Stabell and Fjeldstad

promote further research on pure forms of value creation logics as well as hybrid forms in their

article. This paper accepts that challenge and identifies a distinct new logic, the package logic,

and refines the logics as proposed by Stabell and Fjeldstad in order to provide a better

understanding and a better basis for analyzing cost and value aspects of firms acting on

industrial markets. In Table 1 I present a revised set of logics with the addition of the package

logic. The package logic complements the chain and shop logics.


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Chain Shop Package

Value creation

logic

Transformation of

inputs into products

(Re)solving customer

problems

Solving common

problemsPrimarytechnology

Long- linked Intensive Intensive

Primary activitytechnologies

Inbound logisticsOperationsOutbound logistics

Problem - finding andacquisitionProblem solvingChoiceExecutionControl/evaluation

Problem gatheringProblem prioritizationProblem decompositionProblem solvingControl of paralleldevelopmentMarketing and support

Main interactivityrelationship logic

Sequential Cyclical, spiraling Single to multiple pointpackaging funnel

Primary activityinterdependence

PooledSequential

PooledSequentialReciprocal

PooledSequentialReciprocal

Key cost drivers ScaleCapacity utilization

Efficiency in referralReuse of humanresources

Replication enablingDevelopment capacityutilization

Key value drivers Reputation Quality

Business valuesystem structure

Interlinked chains Referred shops Packaging funnels intree structure

Table 1 Overview of package and revised chain and shop value configurations. (Revised excerpt fromStabell and Fjeldstad, 1998:415 plus the new package logic.)

Industrial organizations are most often associated with the value chain (Porter, 1985; Stabelland Fjeldstad, 1998) due to the activities of developing and manufacturing products. However,

for organizations working towards industrial markets, adapting, or customizing, its deliveries to

the specific needs of the customer and the project at hand is often an essential part of the

creation of value. And in fact, this is not a new phenomenon. Customization has always been

significant on industrial markets (Spring and Dalrymple, 2000). However, customization as a

topic in academic writings has, for instance from a manufacturing strategy perspective, received

rather limited attention (Spring and Dalrymple, 2000). Customization has, to some extent, been

implied in association with service and innovativeness (Spring and Dalrymple, 2000), but the

links between, for example, customer co-innovative activities and customization have been

established quite recently (Athaide et al, 2003). Of particular interest here are the higher levels

of customization, what Shapiro (1977) would refer to as custom-designed, Sharma (1987)

standard, modified to customer specifications and customized product, and Lampel and

Mintzberg (1996) tailored customization and pure customization. Through the activities of

adaptation and customization, industrial organizations share characteristics associated with

professional services firms among which engineering services can be included (Lwendahl,

1997; Stabell and Fjeldstad, 1998). And within industrial organizations with a strong reliance on

technology, the value created by engineering plays a significant part. Professional service firms

are in turn prime examples of organizations relying on customization (Lwendahl, 1997) and

which create value according to a shop logic (Stabell and Fjeldstad, 1998).

While an industrial organization might be customizing its deliveries, that does not mean

that it is not striving for reuse across its customization projects, and for repeatability in itsproduction function. Although the organization customizes its deliveries, it strives for reuse and


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repeatability so that it can utilize the scale benefits that we associate with the traditional value

chain logic. It is at the intersection of logics. In a similar fashion, professional service firms can

also strive for reuse and repeatability and thus a type of standardization for economies of scale,

which Lwendahl (1997) illustrates when she talks of ready solutions.

Unfortunately, few researchers have pursued these similarities from the perspective of

value creation logics. Within the field of value constellations Normann and Ramirez (1993;1994 (1998)) try to bridge the distinction between production and service activities through a

focus on co-production of value. But value configuration theories are, within this particular area,

concerned with either the logic of mass-production or the logic of iterative customer specific

problem solving (cf. Stabell and Fjeldstad, 1998). Therefore value configuration models do not

sufficiently bridge similarities such as those indicated by Lwendahl (1997). Thus, it is an area

in need of further research.

Another indication of the limitations of the set of logics as proposed by Stabell and

Fjeldstad can be found in the way that firms supply products of a low level of tangibility. For

instance, consider an organization working first and foremost with products of a low level of

tangibility, such as Microsoft when developing software programs. Since their core business isbuilt around a product with little or no replication costs, the prime value is created through

development efforts, not through transformation of inputs to products. Development thus

becomes the primary activity of value creation, rather than a supportive one as in Porters

(1985) value chain. In a similar fashion, several industrial firms within electronics and

telecommunication focus on development and then sell the rights to use the hardware design, for

manufacturing of products. Not surprisingly the payment models are similar in these cases as

they often rely on licensing fees.

Independent of the payment model chosen by these firms, their activity configurations are

difficult to describe with the set of value configurations as proposed by Stabell and Fjeldstad.

Neither the value chain nor the value shop capture the value creation and cost determining

configuration of activities in an appropriate way. This paper addresses the topic of value

creation logics, and in particular value configurations. Its focal point is between the chain and

shop logics (as defined by Stabell and Fjeldstad, 1998). The purpose of the paper is to identify a

distinct value creation logic and define its associated value configuration type positioned

between the chain and shop logics.

In order to do so I will focus on firms acting on industrial markets where customization of

deliveries to customer needs is a prerequisite. I will also pay attention to how the firms balance

their pursuit of customization with a search for reuse and replication of entities in order to be

cost efficient.

MethodologyThis paper is empirically based upon a case study (Yin, 1994), with multiple cases, where the

data gathering in the majority of the cases has been done through interviews and observations.

These have been complemented with cases where the data gathering has been done as an

observing participant (Alvesson, 1994). This has provided a combination of breadth as well as

depth of the empirical study. The study utilizes a multiple case study design in order to benefit

from comparisons, and it also contains synthetization and development of theoretical concepts.

The multiple case design facilitates the creation of more robust and testable theories, compared

to single-case research (Eisenhardt and Graebner, 2007).

The cases are from a wide variety of industries ranging from automotive, via off-shoreand automation to telecom. Common for all of the cases is that the organizations are acting on


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industrial markets and have a high level of customization of their deliverables. However, the

tangibility of deliverables varies significantly between the cases as does the level of reuse and

replication, and thus the search for scale efficiency. The varying levels and modes of reuse and

replication have provided a sound empirical basis for cross-case analysis, given the purpose of

the study. Although the study is limited to industrial markets it benefits from the wide variety of

industries in which the organizations act, as well as the varying character of the deliverables.

As for the studys interaction with the theories available in the literature the paper draws

on the similarities as well as the contradictions across several theoretical areas and viewpoints,

as they reveal problems that are of interest to explore. The idea has been to include differences

or conflicts between a number of theoretical views in the existing literature in order to

strengthen the confidence of the study (Eisenhardt, 1989). The theoretical studies that have been

conducted have two positions in the studys process. They have been the primary parts of

activity in the initial phase, especially in order to develop guidelines for the empirical studies

and to increase the precision of the case studies (Yin, 1994). In the following phases the

theoretical studies have been part of an approach where empirical and theoretical sections have

succeeded each other iteratively. Although the study has inductive features and the theoreticalstudies have aimed at refining questions in order to approach the empirical area (Eisenhardt,

1989), the approach is not entirely inductive. The theoretical study has also generated

propositions and a priori indications of key concepts (Yin, 1994), and has also revised

theoretical ideas in an abductive fashion (Alvesson and Skldberg, 1994).

The overall method is therefore abductive (Alvesson and Skldberg, 1994) in its

character. The prime example of the abductive nature of the study is the finding that the two

value creation logics shop and chain, as proposed by Stabell and Fjeldstad (1998), are not fully

sufficient for describing the case organizations. Therefore, I have had to revise the set of logics

and introduce a new distinct logic in order to provide an understanding of the character of the

organizations. The approach in its last stages is then not unlike that of Stabell and Fjeldstad astheir study originated from realizing that Porters (1985) value chain is inappropriate for

application to all types of businesses. In their paper they therefore proposed two more logics,

the shop and network logic, in order to better capture characteristics of other types of

organizations.

Reuse and replication

In the work by Stabell and Fjeldstad (1998), where they distinguish between chain, shop and

network logics, one of the foundations of their argument is the typology of different

technologies by Thompson (1967). The typology closely relates to the issue of customizationand standardization, and thus repeatability. It includes long-linked, intensive and mediating

technologies, whereof the two former are of particular interest in this paper. The long-linked

technologies are associated with the mass production assembly line and of transforming input to

output. The focus of mass production is the perfection of production of a single kind of standard

product, repetitively and at a constant rate. The long-linked technologies are what Stabell and

Fjeldstad (1998) associate with the value chain.

Intensive technology, on the other hand, signifies that a variety of techniques is drawn on

to achieve a change in some specific object (Thompson, 1967:17). Thompson also states: The

intensive technology is a custom technology. Its successful employment rests in part on the

availability of all the capacities potentially needed, but equally on the appropriate custom

combination of selected capacities as required by the individual case or project. (Thompson,


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1967:18) The intensive technology is what Stabell and Fjeldstad (1998) associate with the value

shop.

The most basic search for cost efficiency across customers and projects, for a firm that

customizes its deliveries, consists of an ad-hoc search for reuse of outcomes from previous

customization projects. Among the organizations studied for this paper such reuse could involve

using previous customer specific deliveries as early prototypes, or reusing blueprints or softwareprograms originally designed for another customer or project. The current project then makes

the changes or adaptations required to customize the new delivery to the needs of the customer

at hand.

When organizations search for cost efficiency in a more systemized, large scale fashion,

to facilitate the utilization of a chain logic, they are essentially trying to enable replication of

physical entities. For a firm acting towards an industrial market requiring customization, the

outcome of such replication must then be adapted to the specific needs of the buyer in a

following stage. It must be customized. The entity to be replicated is the outcome of an

investment into development resources that try to generalize the requirements from several

customers into a product, concept or platform from which customer specific solutions then canbe designed.

Modularity

Modular design of products and platforms may offer some of the options necessary for

providing customization. But the studied firms indicate that it is not sufficient to rely solely on

mass-customization. All of the organizations studied show signs of working with what can be

referred to as a higher level of customization (cf. the last row of the review table by Spring and

Dalrymple, 2000:442). Alterations or adaptations include in-depth changes in concepts or

previous deliveries and cannot be achieved primarily by combining different modules as is the

main feature of mass-customization (cf. Pine et al, 1993) where a certain degree of variety ispursued through modular combination (Kotha, 1995:22, with references to Pine et al, 1993). In

the organizations studied for this paper the goal is not to produce variety, but to tailor deliveries

to specific needs while trying to reuse experiences and concepts and to enable as much reuse as

possible. Thus, mass customization has a limited applicability due to the substantially varying

requirements from project to project and from customer to customer. The ability of modular

architectures to cope with technological changes at uneven rates has been questioned (Brusoni

and Prencipe, 2001) and in this case that may be related to the fact that for the supplier, each

new project seems to require innovative efforts as some requirements change beyond what can

be anticipated ex-ante. Modular designs in products and platforms may facilitate customization

to a certain degree, but some aspects will still have to be adapted in detail. These adaptations

can require in-depth changes in one or the whole of the delivery.

Underlying solutions

Thus, modularity is not able to fully solve the demands for customization. Rather, customization

projects require additional innovative efforts. However, organizations can find value in output

that enables reuse and repeatability. In order to describe this type of output I will use a modified

version of a concept proposed by Lwendahl in her book on professional service firms.

Lwendahl (1997) in the case of professional service firms shows how some reuse can be

reached through formalized development structures into ready solutions. The use of the word

solutions here denotes the outcome of work done in advance, by, for instance, an R&D

function, before approaching a client, in order to facilitate the service delivery and make it


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repeatable. I will henceforth denote output that is produced in advance of customization projects

in order to enable systemized reuse underlying solutions. The difference in denotation indicates

the expansion of the concept beyond the sphere of professional service firms. The term

underlying also indicates that it is a matter of output that is utilized in order to produce final

deliveries but that the deliveries are not ready in advance of application but require

customization efforts. Such underlying solutions can vary substantially in their level oftangibility. Some can be in the form of physical items, which resemble products, whereas in

other cases they can consist of blueprints, CAD-models, or for instance software code.

Developing underlying solutions resembles the ambition to create platforms from which

products or services more rapidly can be developed. Although the organizations studied for this

paper try to reach platform levels or produce underlying solutions they simultaneously maintain

the ability to customize beyond the modular combinatorics. The ability to do so varies. It seems

that technology and the level of novelty in the functionality to be delivered affects the extent to

which common platforms can be created and utilized. Underlying solutions that are expected to

be reused over longer periods of time are often formalized and developed according to internal

R&D goals which makes them quite similar to products, from a development perspective. Thesolution is aimed at a pre-defined group of customers or projects with a set of common

requirements.

Meyer and DeTore have discussed the benefits of the platform approach in product firms

but have also showed how a modular approach can be applied within the services segment (cf.

Meyer and DeTore, 2000). None of the organizations in this study have services as the main

delivery. Although services may appear as supplementary deliveries, the main output is systems,

parts or customized products of various kinds. It is important to separate the customization

activities from those aimed at longer-term, multiple case provisioning. Thus, what is input for

the customization process is output for the process that results in underlying solutions, if such

are produced. Thus, both underlying solutions and customized deliveries are output, one for

internal use and one for external use. That output can consist of many different parts, but ingeneral both customized deliveries and underlying solutions can vary in replicability. For

instance, an underlying solution largely consisting of a software system, requires little effort for

replication. An underlying solution of a more tangible nature, on the other hand, is likely to

require substantial effort to replicate. One needs to add raw material of significant cost to create

new copies of a tangible prototype. It is also necessary to utilize production resources in a

typically sequential production process. Since it is an underlying solution, it is a matter of

replication with small or great efforts or costs depending on the character of the solution. The

same principle applies for a delivery. It can be more or less easily replicated depending on the

character of the delivery. But for a delivery the replication is for a single customer and project.

Replication costs

What industries or organizations are then likely to have artifacts that are costly or require

substantial efforts in order to be replicated? That tangibility plays an important role is seen in

the value chain description by Porter (1985; and the value configuration description by Stabell

and Fjeldstad, 1998), not least with regard to inbound and outbound logistics. We can consider a

few examples of output, internally and externally oriented, and try to establish how replicability

will vary between them. The first example can be mechanical details. The process of producing

them is typically capital intensive or could possibly be labor intensive if wages were low. The

manufacturer will need raw materials as input as well as machinery in order to convert them.

Replication is therefore typically costly. The second example to consider is a piece of softwarecode. Software code can be stored in many different ways and easily replicated at next to no


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cost at all. Then, what about services? These are also outputs according to some. Well yes, but a

service typically contains human judgment of some sort during a process of interaction with a

buyer, thus a customization. It can therefore not be replicated in the same sense as the first two

examples. It is possible to replicate checklists or support systems for a service. But then we are

actually replicating an underlying solution and not the service itself. Replication is, therefore,

first and foremost related to non-human entities. This corresponds with the distinction thatPenrose (1959) makes between human and physical resources. Now, one may argue that

software code is not physical. But software code must be stored in some way in a much physical

sense, be it on a piece of paper or in electromagnetic representations of ones and zeroes.

Therefore, in this case replication is related to physical, non-human, items. And I find that

output based on these items is either easy or difficult to replicate, which incurs low or high

costs. Therefore I maintain that the level of tangibility serves as an indicator of the efforts that

need to be poured into replication activities. Thus, it is now possible to review the discussion of

output and more clearly specify its properties. I follow the distinction above and state that

output can be:

Human or Physical, thus non human, with either

o Low or

o High tangibility.

And it is the physical output which is of interest with regard to replication, for it is physical

output that can be directly replicated. I can now define reuse and replication in a more distinct

fashion. I state that:

Replication concerns the making of copies of a physical output, be it more or less

tangible.

Reuse is the act of utilizing an output of a prior activity.

Replication can only be done of physical output. Depending on its level of tangibility it is likely

to be more or less costly to replicate. Reuse, on the other hand, could be imagined to include the

reuse of human resources. But such reuse would require the individuals involved to devote time

and activity to the new task at hand. So if one reuses the experience of an individual it requires

the commitment, time and effort of that person. The other option is to reuse representations of

prior activities of individuals. But then they are physically represented, for instance in the form

of tangible products, checklists, computer systems, written descriptions etc. Is then reuse the

same as replication? If not, what is required to turn ad hoc reuse into replication? These are a

few of the issues addressed in the following sections when I look closer at activities in theorganization. But before I leave replication here I need to pin down a final important dimension

of output which is related to replication. Replication is, as we have seen, related to the

traditional industrial logic and consequently to the issue of scale benefits. Output replicated in

multiple copies is thus contrasted by the single item output of customization.

Replication can be done both internally, of underlying solutions, and externally, and of

customized deliveries. Why? How can a customized delivery be replicated? Is it not

standardized then? Customized deliveries that are replicated are supplied within the framework

of one single project. Replication can therefore take place in two different situations: internally,

of underlying solutions and towards external parties, of deliveries. Replication as such is

enabled through physical representation. Thus the characteristics of output play a vital role for

the type of reuse and replication that takes place.


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Cost drivers

The package logic produces underlying solutions which lay the foundation for replication, either

through a costly manufacturing process when the tangibility is high, or through low cost

replication when the tangibility of the underlying solution is low. The package logic creates

scale advantages in relation to the resources deployed to develop the underlying solution. Thus,the scale benefits of the package logic are typically related to the development resources of the

organization. Porter (1985) briefly mentions the scale effects related to cost drivers in

association with R&D and the dependence on scope. However, for firms where value is

primarily transferred through output of a less tangible nature coupled with the creation of value

through human resources in interaction with the customer, these scale effects on development

become one of the primary means by which to create cost efficiency.

For instance, in telecom and electronics the so called fabless firms strive to utilize their

human capital associated with development activities in a fashion that make their solutions

attractive to many OEMs. Fabless firms, having no manufacturing capacity in-house, try to gain

scale benefits based on their development efforts. On markets where the innovative pressure is

high and the continuous supply of new solutions is required it becomes essential to utilize thesescale benefits in order to be cost efficient. Directing all of the R&D activities at one customer at

a time is likely to be too expensive unless requirements differ substantially between customers

as to enable customer specific niche strategies.

The chain logic on the other hand enables scale benefits mainly in the direct process of

replication. Thus it is closely linked to the utilization of manufacturing resources rather than

development resources. In this discussion development efforts are associated with the value that

is delivered to customers (underlying solutions) and not with efforts that improve the replication

process in itself. Thus development efforts are the ones that create value for the customers

whereas efforts aimed at improving replication processes create internal cost-savings, i.e. cost

benefits for the chain logic. Thus, the package logic provides scale benefits when the valuecreated by development resources, through underlying solutions, is available to multiple

customers.

The way that the chain logic utilizes scale is quite different as it is most closely associated

with the replication of tangible entities. However, the package, chain, and also the shop

configurations may co-exist in various combinations and an organization might be related to

cost drivers of each of the logics simultaneously. The chain logic relies on the utilization of the

replicated entity in a specific setting. Depending on whether the buyer or the seller sets the

constraints of that setting, the chain logic can appear in combination both with the package and

the shop logic. In one of the firms studied for this paper, deliveries consisted of mechanical

details specifically tailored, through an iterative process, for the customers specific project at

hand, in accordance with a shop logic. However, the firm also manufactured the detail in largeseries but certifying the uniformity of the settings in which to mount the details was the

responsibility of the buyer, and not the firm it self. Therefore, the firm was depending on scale

effects related to its manufacturing ability but only to a limited extent to scale effects related to

creating systemized reuse across customers.

The distinction between the package and shop logic lies in the establishment of

underlying solutions, which is a physical representation. And therein we find the key to the

difference in cost drivers between the two logics. As Stabell & Fjeldstad (1998) point out, value

drivers rather than cost drivers are critical to the value shop. However, Lwendahl (1997) points

to ways of creating reuse efficiency in professional service firms. One is by creating referral

systems that enable rapid identification and access to the individuals with experience of projectssimilar to the one at hand. Another is by creating information depositories from which project


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specific information can be reused. A third way includes allocating development resources to

create models or solutions. If information and experiences are developed and packaged in this

fashion for systematic reuse into models or solutions, it is an example of a package logic based

on physical representation. If the information is not packaged for general application across

customers it is similar to the ad-hoc reuse discussed in the previous sections. The first example

does not include physical representation but consists of creating referral efficiency directlyamong human resources. Although the firms studied for this paper would not qualify as

professional service firms they have similar cost driver characteristics due to their strong

dependence on customization and creation of value through development efforts.

Package versus shop activities

Although an industrial organization creates much value through customization towards a

specific customer, in accordance with a shop logic, it is to a large extent relying on its

development activities, in accordance with a package logic. I will now compare these two types

of activity configurations and try to capture the prime differences between them from a strategic

perspective.

First of all, one can try to pinpoint the character of a development activity by looking at a

traditional R&D-function, developing items aimed for large scale production. Such an activity is

aimed at a market and the output, after manufacturing, consists of finalized goods with no room

for additional customization to the customer. Several consumer goods fit this description. For

instance, a product such as toothpaste is likely to have a low openness for customization after it

is delivered to the stores. We can of course imagine the same toothpaste packaged differently to

reach different groups but apart from that it has the same content. The design of the content is

the result of a process where customer requirements have been gathered so that an R&D-

department can develop a new type of toothpaste or improve an existing one. When the new

mixture is set, adaptations to manufacturing are done in order to produce the new toothpaste.Perhaps suppliers of a new chemical must be found, etc. After that the production starts and it is

not until the first delivery that the development will begin to pay off, if the new toothpaste is a

success, that is. That is the actual point of sales. For industrial products, a delivery that requires

a similar process is most likely an off-the-shelf product. Such products are produced to suit

many different customers, they can be manufactured in large series and, if necessary, stored

until orders come in. Basically the development process can be described as in Figure 1.

Figure 1 Timeline of R&D-project for large scale production.

The specific empirical setting of this paper always includes customization before the delivery to

an external party occurs. Product development in the studied organizations takes the external

needs into consideration but the outcome of development in the organizations studied never

reaches the final user before adaptations are made. Therefore, the outcome of development in

the cases can be referred to as underlying solutions, as defined previously, and the development

activities are in accordance with the package logic. The activities are internally oriented in the

sense that they need to be handled by another internal project before they reach the end-user.Many aspects of what is produced by the development project may pass the customization stage

Sales point

Initialproduction

Development ofnew product

Decision point

to start project


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unchanged but as a whole it needs to go through this adaptation process. Nevertheless, the

development project in this setting largely follows the same logics as that for the development

of standardized products. They both try to find and implement some common needs of a market.

A customization project, on the other hand has a quite different decision and sales point.

Both buyer and supplier have to make a commitment to the project early on in the process,

usually after an initial pre-study. At the sales point the buyer and supplier decide on thefinancial reward that the supplier will receive for his efforts. Although the supplier may not

fulfill his obligations and hence may not receive his payment, the continuous interaction

between buyer and supplier makes the strategic choice of the supplier quite different from a

development project. Also, the seller has the possibility of continuously mitigating investment

risks through the interaction with the buyer.

Figure 2 Timeline of customization project towards one customer.

With regard to payment, it is not unusual that this is modeled quite differently for a customized

delivery than for a standardized product. This is most likely due to the difficulties of clearly

anticipating all the obstacles of the project and the iterative interaction between the buyer and

supplier.

Strategic choices

For the industrial organization a strategic choice has to be made with regard to the balance of

development and customization efforts. These options and their potential profitability can be

related to the ideas of Frank Knight. According to Knight profits stem indirectly from the time

lag between when costs for productive services are set till the outcome is sold (Knight, 1921

(1957)). In this paper I have traveled quite far from the assumptions, or idealizations of the

world made by Knight. And this is especially true for customization projects. Working with

customization is an example of prioritizing customers and continuously listening as well as

helping them identify the needs that they have. That way of working corresponds to

contemporary descriptions of organizational behavior vis--vis customers in competitive

environments (DAveni, 1995). But the process in itself is not new. For instance, an illustrative

description of differences between customization and development can be found in the form ofWoodwards manufacturing cycles (Woodward, 1965 (1980)). Nevertheless, the Knightean

description helps bring the decision points to the forefront, although one has to be sure that the

differences in the specific contemporary setting are recognized. One of the key differences is

that, for customization projects, it is not a question of a market any more. Rather it is a matter of

acting towards a single customer with non-finalized goods. That deliveries consist of finalized

goods is as Knight (1921 (1957)) points out one of the assumptions of classic economics. The

deviation from that assumption becomes central here as customization projects are of a different

character than the sale of finalized goods. And it is mainly in different positions along these two

dimensions, level of finalization and target group size, that the organization, has to make its

choices. The characteristic of the delivery, whether finalized or not, is seen at the point of sales.

Sales point

Development of

customized delivery

Decision point

for pre-study


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When selling customized deliveries the selling point occurs after the pre-study, where the first

agreement is reached, rather than after developing and producing finalized goods.

A comparison with the Schumpeterian (1934:66) definition of development can also be

done. Schumpeters label does not exactly match the use of the word development in the

above sections, although the Schumpeterian definition largely includes development projects as

they can be seen here. Development in the meaning of the setting of this paper roughly includescreating new products or solutions, improving their quality or the production processes, in order

to increase value to the customers. Customization, on the other hand, rather corresponds to

incremental steps of development. Incremental steps of development are phenomena that are

difficult to find in Schumpeter. Indeed, the industrial logics of large scale production that colors

Schumpeters discussions (as well as those of Knight (1921 (1957)) and Penrose (1959)) do not

recognize such changes. Development in such settings means changes of the production

apparatus with impact on a large set of customers, often on consumer markets. Therefore,

changes that occur are either extensive enough to be recognized as development or so small that

they fall under day-to-day operations. Customization activities can involve alterations of what is

supplied (or the quality of it), new production methods, new customer(s), new utilization ofresources and new positions as a supplier, i.e. new combinations. But customization activities

do this one project, case and customer at a time. Therefore customization projects introduce

changes in a sequel that over time may constitute development in the Schumpeterian sense.

The gradual process of change that customization represents also means that change can

be financed incrementally. Customization projects are usually financed as customer projects, i.e.

the customer pays for a specific problem to be solved by the deliveries provided by the supplier.

Then for each step, in the form of a customization project, there is little need for credit (cf. the

notion that credit is necessary for new combinations that enable development in the

Schumpeterian sense; Schumpeter (1934)) or other financing beyond the ordinary business.

Development, on the other hand, in the Schumpeterian sense as well as in the sense of this

study, requires internal (corporate) or external credit, or the establishment and indirect financingof formal R&D functions, a characteristic of larger organizations. Thus, the two types of

activities have differing characteristics and choosing between them has different strategic

consequences.

Choosing customization projects over long-term market oriented projects usually means:

A shorter time-span between the time of agreement, allocation of project resources and

receiving payment for the effort ,

Agreement and preliminary price for delivery, hence the sales point, is set somewhere

into the process (usually after the initial diagnostic overview of the problem and the

outlines of possible solutions, but before implementation and production).

Continuous input from the customer and therefore, Iterative processes with more possibilities of adjusting cost structures along the way as

well as the design of the project,

And consequently, a smaller game to place your bet on (smaller costs per project) and a

greater possibility to anticipate as well as adjust for outcome of uncertainties.

Combining package and shop

But the firms studied for this paper always customize their deliveries, and thus their choice is

not between a customization project, i.e. what is ex ante a non-finalized delivery, and a fully

finished delivery. Rather it is a choice between relying solely on customization projects as theactivity type of the organization or to perform projects that correspond to some of the


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requirements of a market, or what could perhaps be seen as a group of potential customers. This

other type of projects is thus a matter of partial implementation of requirements over larger

groups. The need for customization in each final delivery is still vast. Customization

corresponds to the unique demands that each customer and project has and that fulfils the

second part of the implementation. Consider how the different activities relate to each other, the

sales point and the target group size (see Figure 3).

Figure 3 Domain of strategic decisions of activity of the organizations. The delivery characteristiccorresponds to that of the point of sale. The horizontal arrow illustrates that for customizationprojects, the underlying solutions, i.e. the output of development projects, is input for thecustomization projects. The vertical arrow represents a customization project that utilizes a prior

delivery towards the same customer and a similar case.

The varying activity sets of the organizations can be described as (compare with Figure 3):

A customization project that starts without any physical entities to build upon (with no

underlying solution or ad-hoc reuse) corresponds to the bottom left-hand part of the

domain.

A long-term development project that results in an underlying solution corresponds to

the top right-hand part of the domain.

A customization project that utilizes an underlying solution corresponds to the left-

hand side.

A customization project that utilizes a previous customized delivery for the samecustomer.

Bear in mind here, still, that the vertical dimension describes the delivery at the point of sales.

This means that an underlying solution, aimed at corresponding to some of the needs of a group

or a market, is to some degree more of a finalized delivery than a customization project that

starts from scratch. If underlying solutions are utilized as inputs to customization projects they

will then start at a higher level of implementation than a project starting with no physical input.

The underlying solution will also set a direction for choices of projects. When confronted with a

new assignment, customization projects are likely to be beneficial to pursue when part of their

requirements correspond to those of the underlying solution. Then, the customization project is

easier to evaluate and probably also to market and sell to the customer. A customization project

that utilizes an underlying solution (which in Figure 3 is illustrated by the arrow representing

that output from development projects is input for customization projects) still has to take into

Singlecustomer

Market

Non-finalizeddelivery

Finalizeddelivery

Target groupsize

Customization

Development

of underlying

solution

Customization

from underlying solution

or previous project

Delivery atsales point


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14

consideration the specific requirements of the customer that are not covered by the underlying

solution. The individual project still has pretty much the same characteristics as described in

Figure 2.

Longer-term development aimed at a common set of requirements across several

customers not only consist of innovation and the development of new products or underlyingsolutions but also of maintenance and quality assurance of existing products or solutions. Such

activities certify that utilization of underlying solutions in customization projects can be

performed efficiently. Although the development efforts may not be aimed at a large market,

consideration taken to requirements beyond a specific customization project introduces new

organizational activities that have to do with longer-term reuse goals. It is this distinction that is

important to make. However, be aware that it can be, as indicated in Figure 3, a move along a

continuum.

Balancing the package and shop activities

Balancing the package and shop logics is a strategic choice between approaching severalcustomers, and thus striving for cost efficiency, and focusing on one or a few customers and by

that reducing scope. However, it is not just a matter of choosing between a market, a smaller

group or a single customer in the selection of activities. It is also a matter of choosing your

customers depending on their importance and thus the chances of repeated business and

therefore reuse over time towards the same customer. Hence, the potential repeatedness and size

of future customization projects that a customer is likely to demand can grant him a position

that strongly influences how longer-term development projects are designed by the supplier.

Consequently, the choice of balance between shop and packaging that an organization faces can

be a very complex matter. Thus, a supplying organization has to take into consideration a wide

set of variables. The supplying organization faces choices between doing customization projects

in an ad hoc fashion for each new assignment and customer, or of performing longer-termprojects for one or several groups of customers at a certain level of implementation, plus

customization for each case on top of that. And when choosing to carry out longer term

development as well, the organization must select a number of requirements from the

combination of each customers set of requirements and implement them in one or a number of

different underlying solutions. Each underlying solution must correspond to some common

needs of a group of customers, but not all the needs of each customer. The choices should also

be guided by the potential profit that can be gained from each customer. The aggregated figure

generated from these variables should work as a weighting of the importance of the customer

and the specific project at hand. All of this would perhaps be possible in an ideal world, viewed

from the supplier.Working out in detail the balance between customization and development projects and

the content of the development projects in advance is, of course, impossible in reality. And in

real life most of the above information taken for given is impossible to retrieve. On industrial

markets, getting a detailed view of the requirements of customers most often calls for an

established relationship with the supplier. And also, collecting requirements is most often done

through the process of the customization projects, most of it through project specific pre-studies.

Even for experienced buyers it is virtually impossible to try to determine their own exact

requirements up front as they often need help from the supplier or from a third party in setting

them. Furthermore, requirements gathered through customization projects are an estimate, when

used as inputs for longer-term development. For future projects, although the customer may be

the same, the requirements are likely to change depending on the setting. Therefore, a detailedpicture of the requirements of the members of a group, especially as the size of the group


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increases, becomes very difficult to achieve ex ante. Still, bear in mind that this is valid only for

industrial deliveries that require high degrees of customization. If there were no demands for

individual customization, for each project and customer, or if such needs were not prioritized,

the establishment of detailed requirements up front would be somewhat easier, and more

importantly, inevitable. Some requirements in an underlying solution will, of course, be set as

time goes on. Every new project does not start completely from nothing. The prime way ofgathering requirements and implementing them across groups of customers is through the

experience drawn from previous interaction with customers. Consequently, requirements that

live longer through different deliveries become established in the reusable share of output

through the chosen customization projects. This, from the perspective of approaching a market

over longer periods of time, means an incremental approach to uncertainties. It is thus a way of

being flexible and open for a certain amount of changes on a continuous basis.

Customization projects can almost directly generate input for improving or creating new

underlying solutions that can be reused towards a larger group of customers. A customization

project does not only deliver in a specific case but opens up for utilization for other customers.

But remember that utilizing the new solution for other customers requires insight into thedemand for such a delivery among other customers. That is an insight which is most often

gained through interacting with other customers, for instance through other customization

projects, since many demands are based on specific problems. If, on the other hand, a more

conscious generalization over larger customer groups is pursued, the new solution often requires

standardization in the form of descriptions, documentation and continuous refinement, which is

a type of activity more closely related to longer-term development.

Knowledge of requirements is often gathered by the supplier through the stream of

customization projects that are executed. Consequently, the competence set of the organization,

which is shaped by the employees knowledge, will evolve alongside with the projects.

Similarly, the choice of customization projects to be pursued depends on the knowledge, and

thus the competence set, of the organization (which is similar to the argument in Normann andRamirez, 1993).

Problem solving

For the value chain the transformation of input into products is central, whereas for the value

shop the focus is on the solving of customer problems (Fjeldstad and Haanaes, 2001). It is now

possible to further explore the differences between a chain and a shop configuration and what

lies in between.

Stabell and Fjeldstad (1998) use Porters activity based view and the value chain as a

point of departure in their discussion. They especially oppose the view of Porter (1985; 1990)

that the value chain with its activity categories would be valid in all industries. As alternatives

to Porters value chain they then propose and describe the logics of the value shop and the value

network. Stabell and Fjeldstad (1998) also link the value chain and shop configurations to the

differences in technology, as introduced by Thompson (1967).

The main focus in this discussion alongside the value chain is the value shop, a category

which is exemplified by professional service firms. Problem solving is the central function in

the value shop configuration that is associated with, for instance, professional service firms

(Stabell and Fjeldstad, 1998). The value shop relies on intensive technology (Thompson, 1967)

to solve customer problems. The problems can be defined as differences between an existing

and a desired state. Both performance improvements and cost reductions are the outcome of the

activities of the value shop (Stabell and Fjeldstad, 1998), and the success of employment of theintensive technology rests on the custom combination of selected capabilities as required by the


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individual case or project (Thompson, 1967, p18) The selection, order and application of

resources vary due to the problems. The matching of problems and problem solving are

important and are the basis for the use of shop as a metaphor. The flow of activities in a value

shop configuration is cyclical and iterative and the diagnosis of a problem moves back and forth

between hypothesis and data collection: feedback both from trying to generate a solution and

from implementing a chosen solution might require redefinition of the problem or search foralternative solutions. (Stabell and Fjeldstad, 1998:422).

Figure 4 Problem definition and solving in moving from one state to another. (Illustration of the role ofproblem definition and solving in the value shop configuration.)

However, solving customer problems is not limited to firms working according to a shop logic.

Solving customer problems is also done by the product firm aiming at serving a whole market

rather than a specific customer. It is this problem solving sequence which Stabell and Fjeldstad

fail to distinguish in their set of logics. The value creation activity set which involves gathering

data on the needs of multiple customers, prioritizing among them and then solving the problems

in order to provide a product or, which is the case for the organizations studied for this paper, an

underlying solution, is what I refer to as a package logic. The difference compared to the shop

logic is that solving problems for a whole market is less iterative as multiple customers must behandled. The empirical material underlying this paper indicate that as organizations acting on

industrial markets grow, the gathering of customer needs and solving of problems towards a set

of customers rather than a single customer, i.e. according to a package rather than a shop logic,

become institutionalized in formal product planning and R&D functions.

A package logic, such as described above, shares some features with the value chain and

some with the value shop, as originally defined by Stabell and Fjeldstad (1998). However, it can

be distinguished from the chain and shop by returning to two items that I have discussed

previously, systemized reuse which enables replication, and level of tangibility. The low level

of tangibility in the output is what sets the logic apart from the value chain. The systemized

reuse and replication that is aimed for is what differentiates it from the value shop. Within this

logic there may very well be work that includes tangible items, such as prototypes, but in suchcases it is followed by a more typical chain logic. By and large, what is described is what would

usually be found in an R&D department. But the difference here is that it cannot be regarded

merely as a support activity. The logic can play such a vital role that it becomes the main

activity. As we see, the prime technology, using the meaning of Thompson, is similar to that of

the value shop, the intensive technology. This is actually in line with Thompson (1967:18): The

intensive technology is a custom technology. Its successful employment rests in part on the

availability of all the capacities potentially needed, but equally on the appropriate custom

combination of selected capacities as required by the individual case or project. What Stabell

and Fjeldstad fail to emphasize is that the intensive technology can be applied differently vis--

vis the market either towards single projects and customers or towards larger groups. Thus,one could say that the shop logic corresponds to applying intensive technology to the individual

existing

state

desired

state

Problem definition

Problem solving


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case whereas the package logic applies it to an individual project that incorporates many

potential customer cases. Stabell and Fjeldstad (1998: 434) actually indicate this when they state

that: A manufacturing company employs a long-linked technology to produce its products

whereas product development relies on an intensive technology. But they fail to recognize the

strategic importance of development and the fact that it should not only be regarded as a

supportive activity. As discussed above, it is the fact that the development project spans overmultiple cases that makes it strategically different. Therefore, it is important that this is

recognized as a different logic.

It is also by doing so that the key to the link between Lwendahls (1997) description of

an R&D-like function in professional service firms and the R&D function of a manufacturing

firm is revealed. The logic is quite similar. It consists of choosing a number of problems that

range across potential customers, decomposing the problems (if necessary) and solving them.

The outcome can then, independently of its level of tangibility, be packaged and marketed,

either internally or externally. Be aware, though, that decoupling this logic from associated

logics might be difficult depending on the circumstances.

The importance of identifying a logic that incorporates the prioritizing of demands overlarger groups of customers, i.e. aimed at developing underlying solutions, must be stressed. The

fact that such a logic can exist independently of what is referred to as the chain logic means that

it is with this logic rather than the chain logic that marketing activities must be associated, and

possibly also service activities (which, in this setting I choose to denote as support). The

marketing function is based on the idea of communicating with larger groups of customers and

is thus intrinsically linked with the process of identifying and choosing common demands to

implement.

Also, by the above distinction of logics we arrive with better means with which to

analyze different organizations. The organizations studied for this paper vary in their tangibility

of internal and external output. The presence of such a variance has been beneficial as I have

been able to establish that there may exist both development and customization processes in an

organization independent of the tangibility of the output. Hence, the balance between

development and customization, and thus the package and shop logic, is important independent

of the level of tangibility, and thus the cost of replication.

Discussion

Stabell and Fjeldstad (1998) called for further research into combinations of logics. In this paper

I have not only studied the combinations of logics but introduced the package logic and

redefined the chain and shop logic. The package logic fills a gap between the chain and shop

logics and enables the establishment of a set of logics that is more appropriate for analyzing

organizations acting on industrial markets.

The package logic should not be regarded as a combination of logics but as a distinct

logic of its own. And it is on industrial markets with demands for customization that it can be

distinguished from the chain and shop logic. When requirements that are common across a

market are implemented so that there is room for adaptations, the act of replication can be

separated from the act of enabling systemized reuse. And consequently, the shop and chain logic

can be singled out from the package logic. For consumer products or industrial off-the-shelf

products, the package logic is hidden within the chain logic (in its original definition by

Stabell and Fjeldstad, 1998).

A further clue to the distinction between the chain and package logics comes from the

difference in cost of replication between more or less tangible artifacts. That difference showsthat the importance of the chain logic, as I define it in this paper, varies. Therefore, the chain


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logic will be more or less prominent in comparison with the package logic. And consequently,

we need to separate the two and view the package logic as distinct in order to analyze firms on

industrial markets properly. The separation of the shop and package logic helps us understand

the difference of value creation and cost efficiency in applying human resources to solve

customer or market problems.

The logics proposed by Stabell and Fjeldstad (1998), which are based on the typologiesby Thompson (1967), are helpful but difficult to apply consistently across organizations where

the nature of deliveries varies. The proposed refined set of logics handles the issues of

customization, reuse and replication. The shop logic is the one associated with the task of

customization and it remains similar to the definition by Stabell and Fjeldstad, however more

distinctly defined vis--vis the package logic. The new package logic enables systemized reuse

whereas the revised chain logic is associated with replication of tangible artifacts. The

distinction between the chain and package logic stresses the difference between the activity of

gathering and implementing demands from a group of customers versus the activity of

replication of artifacts.

Through this new set of logics it is possible to explore the similarities of incorporating thedemands of whole markets or groups of customers, independent of whether the output is costly

to replicate or not. Thus the shop and package logics are different, independent of whether an

organization is working with production of details for the automotive industry or if it is

supplying software systems. Through these altered logics the means has been acquired with

which to pursue the strategically important balance between customizing deliveries and

standardizing them.

The redefined logics, and the package logic in particular, are therefore key findings of

this work. The paper confirms but also refines and develops the ideas of Stabell and Fjeldstad

(1998) (see also Haanes and Fjeldstad, 2000). It also provides a bridging of the division of

manufacturing and services in a fashion similar to Normann and Ramirez (1993, 1994). But

whereas Normann and Ramirez deal primarily with an external value constellation perspective,

this papers main contribution comes from an internal value creation perspective, that of value

configurations.

Value constellations (Normann and Ramirez,1993; 1994) deal with the way that industrial

as well as consumer oriented organizations can co-produce value with their customers. This

paper on the other hand deals specifically with firms on industrial markets supplying highly

customized deliveries, a setting where co-production of value occurs directly in association with

customization. The high level of customization and the close cooperation between buyer and

supplier means that the buyer accesses activities as well as the competences of the supplier,

besides the physical delivery. Offerings in the case of a highly customized delivery are not

limited to the physical aspects, such as a pre-specified underlying solution, but also includeaccess to competences and other resources of the supplying organization. Therefore, the close

interaction between buyer and supplier in a project is an arena where the configuration of the

delivery can vary from case to case.

The distinction between the shop and package logic indicates how the process of

changing the firms offering differs depending on whether a single customer or a group of

customers are considered in the design. The change may not be as radical as the reconfiguration

discussed in Normann and Ramirez (1993, 1994), but both the package and shop logics deal

with change and adaptation stemming either from external pressures or from internal

innovation. Since the final deliveries are highly customized, the package logic provides a basis

for the deliveries to be designed in interaction with the customers. The final deliveries are

therefore a combination of the direct application of the supplier resources, among them

competences, and the physical aspects of the deliveries. The combination of logics can therefore


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be seen as related to Normann and Ramirezs ideas of value constellations and interactive

strategies, similar to the view of Stabell and Fjeldstad (1998).

Moreover, in its focus on organizations that are associated with industrial characteristics,

but with value shop qualities, the paper contributes to the critique against the value chain

perspective such as reviewed in Payne and Holt (2001). But the critique is more balanced than

in for instance Normann and Ramirez (1993, 1994) as this paper recognizes the importance ofseveral aspects of Porters (1985) value chain. The findings are therefore important

contributions to the formal theory of value creation logics and to the field of value

configurations in particular. Thus, the paper also contributes to theories within the activity based

perspective.

Further research is called for within the same, rather narrow, empirical setting in order to

confirm, alter or refine the frameworks and models of explanation provided in this study. In

particular, there is a need for studying in greater detail how firms manage a combination of the

shop and package logics and when organizations choose to abandon or include one or the other

of them over longer time-periods. Further studies could also be aimed at integrating the revised

logics with the ideas of value constellations (Normann and Ramirez, 1993; 1994).But there is also a possibility of enlarging the empirical field in order to study whether the

difference in logics, essentially based on the distinction between customization, reuse and

replication, is valuable for other types of firms and more diverse populations. It would, for

instance, be interesting to examine the relevance of the refined logics for professional services

and consumer products.


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