Framework library · International strategy

Global value chain configuration

Michael Porter described international strategy as two choices for every activity in the value chain: configuration (whether it is concentrated in one or a few places or spread across many) and coordination (how closely the activities in different places are linked). Recording both for each activity, with who performs it and why, shows where the business gains from scale, where it needs to be close to customers, and where one site or supplier could stop it.

LevelAdvanced
TimeHalf a day with the operations, engineering and commercial leads; longer if supplier data has to be gathered
Who to involveThe heads of operations, engineering, supply chain and sales, with finance for the cost of each alternative.
Also calledconfiguration and coordination, global value chain analysis, GVC governance, global operating footprint, international value chain

Use it when

  • You are expanding into new regions and must decide which activities to replicate there and which to keep in one place.
  • A tariff, export control or supplier failure has shown how exposed the chain is, and you need to see where else that could happen.
  • Costs have grown with each new country and you suspect activities have been spread out that would be cheaper in one place.
  • You are choosing between doing an activity yourself, contracting it out, or relying on a partner in another country.

Avoid it when

  • You operate in one country. Use value chain analysis to find where margin is made and lost.
  • The question is how much authority countries have over products and strategy rather than where activities sit. Use the integration-responsiveness framework.
  • You need detailed supply chain process design and measures. Use the SCOR model once the configuration is decided.

How to run it

  1. List the activities

    Follow the chain from design to after-sales: research and design, key components, assembly, testing and certification, software and hosting, sales, installation, support and repair. Split any activity that is done differently in different places.

  2. Record where each is done now

    Name the countries, sites and companies. An activity done by one contractor in one country is concentrated, even if you never see the plant.

  3. Mark configuration and coordination

    Concentrated or dispersed; high or low coordination between locations. Concentrated with high coordination buys scale, dispersed with low coordination buys local fit, and the mixed cases need a stated reason.

  4. Name who runs each activity

    Your own operation, or a supplier whose tie to you is captive, relational, modular or a plain market purchase, in Gereffi, Humphrey and Sturgeon's terms. Each brings a different kind of dependency.

  5. Score exposure

    Score from 1 to 5 how badly one site, supplier or border closing would stop the activity. Concentration combined with a single supplier is where most exposure sits.

  6. Write the alternative and its cost

    For each exposed activity, the second site, second source or different set-up, with the time and money to put it in place. Decide which to pay for now.

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Mistakes to avoid

  • Spreading activities to win local favour and losing the scale that made them economic. Every additional site needs a reason a customer or regulator will pay for.
  • Counting a contract manufacturer as diversification. Two plants owned by one contractor in one country are one point of failure.
  • Forgetting the cost of coordination. Dispersed activities that must be tightly linked need systems and people to link them; price those in.
  • Treating the configuration as settled. Tariffs, export controls and labour costs move; set a review date for the exposed activities.

Where it comes from

Michael E. Porter, "Changing patterns of international competition", California Management Review 28(2), 1986, and Competition in Global Industries, which he edited (1986), set out configuration and coordination as the two dimensions of international strategy. For activities performed by other firms, Gary Gereffi, John Humphrey and Timothy Sturgeon, "The governance of global value chains" (Review of International Political Economy 12(1), 2005), distinguish market, modular, relational, captive and hierarchy governance. Source.

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