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 Fjeldstad‟s chain and
shop configurations. The new 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 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 creation
descriptions 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 Fjeldstad‟s (1998) set of configurations
originated from realizing that Porter‟s (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 chain‟s 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 of
logics 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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Table 1 Overview of package and revised chain and shop value configurations. (Revised excerpt from
Stabell and Fjeldstad, 1998:415 plus the new package logic.)

Chain Shop Package

Value creation Transformation of (Re)solving customer Solving common

logic inputs into products problems problems
Primary Long-linked Intensive Intensive
technology
Primary activity Inbound logistics Problem- finding and Problem gathering
technologies Operations acquisition Problem prioritization
Outbound logistics Problem solving Problem decomposition
Choice Problem solving
Execution Control of parallel
Control/evaluation development
Marketing and support
Main interactivity Sequential Cyclical, spiraling Single to multiple point
relationship logic packaging funnel
Primary activity Pooled Pooled Pooled
interdependence Sequential Sequential Sequential
Reciprocal Reciprocal
Key cost drivers Scale Efficiency in referral Replication enabling
Capacity utilization Reuse of human Development capacity
resources utilization
Key value drivers Reputation Quality
Business value Interlinked chains Referred shops Packaging funnels in
system structure tree structure

Industrial organizations are most often associated with the value chain (Porter, 1985; Stabell
and 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 (Löwendahl,
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 (Løwendahl, 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 its
production 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 Løwendahl (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 Løwendahl (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 is
built 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 Porter‟s
(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.

Methodology
This 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-shore
and 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 study‟s 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 study‟s 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 theoretical
studies 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 Sköldberg, 1994).
The overall method is therefore abductive (Alvesson and Sköldberg, 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 as
their study originated from realizing that Porter‟s (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 customization
and 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 software
programs 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 can
be 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 is
pursued 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 Løwendahl in her book on professional service firms.
Løwendahl (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

6
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 of
tangibility. 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. The
solution 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 in
general 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 software
code. Software code can be stored in many different ways and easily replicated at next to no

7
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 that
Penrose (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 the
organization. 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 these
scale 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 value
created 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 customer‟s specific project at
hand, in accordance with a shop logic. However, the firm also manufactured the detail in large
series 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, Løwendahl (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 projects
similar to the one at hand. Another is by creating information depositories from which project

9
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 directly
among 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.

Decision point Sales point

to start project
Development of Initial
new product production

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

10
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 the
financial 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.

Decision point Sales point

for pre-study

Development of
customized delivery

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-à-vis customers in competitive
environments (D‟Aveni, 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 of
Woodward‟s 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.

11
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. Schumpeter‟s 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 includes
creating 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
Schumpeter‟s 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 of
resources 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 financing
of 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 the
activity type of the organization or to perform projects that correspond to some of the

12
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).

Delivery at
sales point
Finalized
delivery
Customization Development
from underlying solution of underlying
or previous project solution

Non-
finalized Customization
delivery
Target group
Single Market size
customer

Figure 3 Domain of strategic decisions of activity of the organizations. The delivery characteristic
corresponds to that of the point of sale. The horizontal arrow illustrates that for customization
projects, the underlying solutions, i.e. the output of development projects, is input for the
customization 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 same
customer.
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

13
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 underlying
solutions 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 several
customers, 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-term
projects 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 customer‟s 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 detailed
picture of the requirements of the members of a group, especially as the size of the group

14
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 of
gathering 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 the
demand 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 and
Ramirez, 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 Porter‟s 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 Porter‟s 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 the
intensive technology rests on the „custom combination of selected capabilities as required by the

15
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 for
alternative solutions.‟ (Stabell and Fjeldstad, 1998:422).

Problem definition

existing desired
state state

Problem solving

Figure 4 Problem definition and solving in moving from one state to another. (Illustration of the role of
problem 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 be
handled. 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 such
cases 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-à-
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

16
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 over
multiple 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 Løwendahl‟s (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 over
larger 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 shows
that the importance of the chain logic, as I define it in this paper, varies. Therefore, the chain

17
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 typologies
by 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-à-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 the
demands 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 paper‟s 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 include
access 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 firm‟s 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

18
be seen as related to Normann and Ramirez‟s 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 of
several aspects of Porter‟s (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.

19
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