The package logic: A study on value creation and knowledge flows

European Management Journal (2012) 30, 535–551

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The package logic: A study on value creation andknowledge flows

Magnus Johansson *, Anna Jonsson

School of Economics and Management, Department of Business Administration, Lund University, P.O. Box 7080, 220 07 Lund,Sweden

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KEYWORDSKnowledge flows;Industrial organizations;Value chain;Value shop;Value configurations;Value creation;Customization

Summary The analysis of how value is created is often associated with the value chain, aframework that aligns resources and activities into deliveries. However, it is questionablewhether the value chain logic is applicable to all firms. As a consequence, the value shopmodel has been suggested to meet the critique of the chain logic. This article addressesthe topic of value creation logics and value configurations by challenging the value chainand the value shop perspectives. The aim is to identify a new value configuration, anddefine its associated value creation logic positioned between the chain and shop logics.By bringing in research on knowledge flows we identify a distinct new configuration andlogic in order to provide a better understanding and a better basis for analyzing costand value aspects of firms acting on industrial markets.ª 2012 Elsevier Ltd. All rights reserved.

Introduction

One of the most influential frameworks when analyzingvalue creation within firms is the value chain suggested byPorter (1985). However, criticism towards the frameworkhas emerged and alternative value creation descriptionshave been suggested in various forms (cf. Payne & Holt,2001). The reason for this is mainly due to globalizationand changing conditions for firms to compete. The alterna-tive descriptions often take more consideration to thebuyer, partner and supplier relationships and the networksthat firms take part in, in order to create value. One suchstream builds directly on the activity based view withinthe field of strategy: i.e. value configurations (Christensen,

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Grossman, & Hwang, 2009; Haanes & Fjeldstad, 2000; Sta-bell & Fjeldstad, 1998). Value configurations focus on theinternal arrangement of activities to fit external interac-tion, and thus build directly on Porter. Stabell and Fjelds-tad�s (1998) set of configurations originated from realizingthat Porter�s (1985) value chain was inappropriate to applyto all types of businesses. In their paper they therefore pro-posed two more value configurations, the shop and networkconfiguration (and two value creation logics, which are atthe core of configurations), in order to better capture thecharacteristics of different types of organizations.

Having studied and worked with and within a variety ofbusiness-to-business organizations during the last ten yearswe have found that the set of configurations and logics pro-posed by Stabell and Fjeldstad (1998) has certain shortcom-ings when trying to analyze value creation and costefficiency. The studied organizations, which are presenton industrial markets ranging from automotive and

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536 M. Johansson, A. Jonsson

off-shore to automations systems, and telecom, providegenerically designed products to their buyers but also relyon customization of deliveries to specific buyer needs. Thisis in line with Stabell and Fjeldstad�s (1998) call for furtherresearch on hybrid forms of value creation configurations,i.e. combinations of value creation logics. Although anindustrial organization might customize its deliveries doesnot mean that it is not striving to exploit repetitive deliveryacross its customization projects, i.e. its products and pro-duction process. It strives to exploit previous deliveries andproven solutions so that it can utilize the scale benefits thatwe associate with the traditional value chain logic. But atthe same time it tries to utilize the advantages of customiz-ing its deliveries to specific buyer needs, in accordance withthe shop logic, i.e. to explore new solutions. It is thereforeat the intersection of configurations and value creationlogics, i.e. between the chain and shop logic, as they areoutlined by Stabell and Fjeldstad (1998). Industrial organi-zations that customize their deliveries could therefore beviewed as similar to professional service firm (PSF), i.e. atype of firm that is often seen as the prime example of shoplogic firms (e.g. Woiceshyn & Falkenberg, 2008). PSF:s mayalso strive for exploitation and repeatability and thus a typeof standardization for economies of scale. Løwendahl (1997)illustrates this when she talks of �ready solutions� in PSF:s.Unfortunately, few researchers have pursued these similar-ities from the perspective of value creation logics, i.e. be-tween an industrial business-to-business organization anda PSF, a type of firm closely associated with knowledgeintensiveness (cf. Alvesson, 2004; Morris & Empson, 1998).

In parallel with the criticism towards the value chain aknowledge-based view of the firm has emerged that recog-nizes knowledge as an important source of value (cf. Boisot,1998; Spender, 1994). One reason for this is that an increas-ing number of firms are knowledge intensive firms, meaningthat knowledge is both an important input as well as outputin terms of services delivered. Maier, Prange, and vonRosenstiel (2001, p. 14) specifically state that; ‘‘This interestin organizational learning is fueled by social and economicchallenges confronting organizations: the globalization ofmarkets and ever keener competition, the shortening ofdevelopment cycles for individual products’’. The role ofknowledge as a basis of competitive advantage is a recurrenttheme in the literature and seen by some researchers as themost important source of core competences (e.g. Aranda &Molina-Fernandez, 2002; Davenport & Prusak, 1998; Grant,1996; Spender, 1996). In order to understand how to managethe exploration – exploitation dilemma (March, 1991), i.e.when to explore or search for new knowledge and new busi-ness opportunities, and when to exploit existing knowledgeor proven solutions, replication as strategy has emerged asa theme in strategy research (Winter & Szulanski, 2001). Inorder to develop our understanding for how knowledge as aresource contributes to the discussion on value configurationit is important to look into research on knowledge flows. Thisarticle adheres to the discussion of exploration – exploita-tion in association with customization versus repetitivedelivery across customers and projects.

This article aims to develop our understanding of valuecreation, by proposing a distinct logic positioned betweenthe chain and shop logics. Since the studied organizationshave shop logic features, we will adopt Løwendahl�s (1997)

theories on PSFs, being clear shop logic examples, to enrichthe field of value configurations and value creation logics. Inparticular we discuss recent research on value creation andvalue creation logics and incorporate a knowledge-basedperspective when outlining the discussion on how knowledgeflows between the client and the contractor. We do this byincorporating a knowledge-based perspective to the valuecreation logic discussion (a similar approach as Woiceshyn& Falkenberg, 2008) which contributes to our understandingof how value is created through the flow and utilization ofknowledge in association with each logic. By doing so weidentify a distinct new logic which is at the core of a newconfiguration, and refine the configurations as proposed byStabell and Fjeldstad (1998) in order to provide a betterunderstanding and a better basis for analyzing cost and valueaspects of firms acting on industrial markets.

Theory

The theoretical section of this article initially discusses valueconfigurations and outlines the intersection of the chain andshop logics. In particular, focus is on problems of creatingvalue through customization of deliveries, while simulta-neously striving for repetition and efficiency in transforma-tion. We then move on by introducing the concept ofunderlying solutions and link the discussion to the role ofknowledge flows. By incorporating the discussion on knowl-edge flows, originally discussed within the differentiatednetwork literature, we contribute to the understanding ofhow value creation logics rely on knowledge.

Value configurations

Stabell and Fjeldstad (1998) use Porter�s activity based viewand the value chain as a point of departure in their discus-sion. They especially oppose the view of Porter (1985,1990) that the value chain, with its activity categories, wouldbe valid in all industries. As alternatives to Porter�s valuechain they then propose and describe the logics of the valueshop and the value network. They also link the value chainand shop to the differences in technology. One of the founda-tions of their argument is the typology of different technolo-gies suggested by Thompson (1967). The typology includeslong-linked, intensive and mediating technologies, whereofthe two former are of particular interest in this article. Thelong-linked technologies are associated with the mass pro-duction assembly line and of transforming input to output.The focus of mass production is the perfection of productionof a 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 isdrawn onto ‘‘achieve a change in some specific object’’(Thompson, 1967, p. 17). Thompson also states: ‘‘The inten-sive technology is a custom technology. Its successfulemployment rests in part on the availability of all the capac-ities potentially needed, but equally on the appropriate cus-tom combination of selected capacities as required by theindividual case or project’’ (Thompson, 1967, p. 18). Theintensive technology is associated with the value shop inresolving unique customer problems.

The package logic: A study on value creation and knowledge flows 537

Stabell and Fjeldstad (1998) place Thompson�s (1967)technologies at the center of each configuration togetherwith descriptions of the value creation logics. The value cre-ation logics (shop, chain and network) describe the valuecreation type of the configurations. The configurations arein turn models of firms from an activity based perspective.In this paper configurations are therefore related to busi-ness models for firms (cf. Christensen et al., 2009) whereasvalue creation logics may constitute the core of a configura-tion but they can also be combined into hybrid forms.Although this article recognizes the links to business modelsit mainly focuses on value creation and pays limited atten-tion to several value capture aspects, such as pricing, whichalso constitute key parts of a business model (cf. the over-view of elements in Teece, 2010).

Customization

Industrial organizations are often associated with the valuechain due to the activities of developing and manufacturingproducts (Porter, 1985; Stabell & Fjeldstad, 1998). How-ever, for organizations working on the industrial market,to adapt or customize its deliveries to the specific customerneeds is often an essential part of the creation of value.Although customization has been significant on industrialmarkets the topic in academic writings has, for instancefrom a manufacturing strategy perspective, received ratherlimited attention (Spring & Dalrymple, 2000). Customizationhas, to some extent, been implied in association with ser-vice and innovativeness but the links between, for example,customer co-innovative activities and customization haveonly been established quite recently (Athaide, Stump, &Joshi, 2003). Of particular interest here are the higher lev-els of customization, what Shapiro (1977) would refer to as�custom-designed�, Sharma (1987) as �standard, modified tocustomer specifications� and �customized product�, andLampel and Mintzberg (1996) as �tailored customization�and �pure customization�. Pure customization illustratesthe depth of customization involved for higher levels of cus-tomization. Pure customization involves the whole of theproduction process including the design stage in order toindividualize offerings as far as possible. Pure customizationis in its character in stark contrast to mass-customization(cf. Spring & Dalrymple, 2000), which provides options forcustomization but where these options must be decidedex-ante across the line of offerings.

Industrial organizations involved in higher levels of cus-tomization share this characteristic with PSFs, among whichengineering services can be included (Løwendahl, 1997).And within industrial organizations, with a strong relianceon technology, the value created by engineering plays a sig-nificant role. PSFs are in turn prime examples of organiza-tions that create value according to a shop logic (Stabell& Fjeldstad, 1998).

Repetitive delivery and transformation

The most basic search for cost efficiency across customersand projects, for a firm that customizes its deliveries, con-sists of an ad hoc search for exploitation of outcomes fromprevious customization projects. Such exploitation could in-

volve using, for example, previous customer specific deliv-eries as early prototypes, or reusing blueprints or softwareprograms originally designed for another customer orproject.

When organizations search for cost efficiency in a moresystematic, large scale manner it is important to facilitatethe utilization of a chain logic. In other words, firms areexploiting repetitive delivery (Løwendahl, 1997) through aproven solution, which facilitates transformation (Christensenet al., 2009; Stabell & Fjeldstad, 1998) processes. The pur-pose of systemizing repetitive delivery is to enable scale ef-fects across several customers and customer projects. Thiscan be achieved through pre-specified service solutions,solution concepts or products. For a firm acting towards anindustrial market that requires customization, the outcomeof transformation processes facilitated by such solutionsmust then be adapted to the specific needs of the buyer ina following stage. It must be customized. The pre-specifiedsolution which enables transformation is the outcome of aninvestment into development resources that aim to general-ize the requirements from several customers into a product,concept or platform from which customer specific solutionsthen can be designed.

Transformation can takemany forms depending on organi-zation and industry. It can be represented by a generic man-ufacturing function (Stabell & Fjeldstad, 1998) by focusing onthe transformation of tangible input to output. It can also berepresented by service firms with an ability to serve its cus-tomers according to a pre-specified model. Christensenet al. (2009) provides examples from the healthcare industrywhere patients are treated according to pre-specified valueadding models for particular problems. The particular doc-tor-patient situation may involve additional problem solv-ing/service provisioning beyond the pre-specified situationsbut the prime part of the value creation process revolvesaround a chain like model. This is an important insight byChristensen et al. (2009) as it identifies a chain-like characterwithin an industry that often serves as an example of the va-lue shop.

Christensen et al. (2009) also argue that a PSF like BostonConsulting Group (BCG) may be identified as a value shop.This is in contrast with Løwendahl (1997) who illustratedthat this was not the case when BCG disrupted the consult-ing industry through the establishment of attractive readysolutions. This indicates that there is a lack of distinctionin value configuration models between providing customerspecific solutions, establishing generic solutions, and work-ing according to a chain-logic in transformation. Further-more, there is a lack of detail in the value creationanalysis where firms are boxed into one of the available con-figurations without the recognition of hybrid formations andthe balance between logics within an organization. Thus, wewill contribute to this by introducing a new logic which ad-heres to Løwendahl (1997), and by clarifying the details in-volved in balancing value creation logics.

Underlying solutions

In order to understand the creation of pre-specified solu-tions and how they provide a link between the shop andchain logics we need to look further into how customization


can be pursued while still trying to enable scale advantages.We will eventually do this by incorporating research onknowledge flows but first we need to clarify how systematicrepetitive delivery is formalized in organizations, throughthe concept of underlying solutions, as opposed to workingsolely with customized deliveries.

The focus of this article is on higher levels of customiza-tion, such as pure customization (Lampel & Mintzberg,1996). Much research on the topic of customization hasbeen related to the ideas of mass customization (Spring &Dalrymple, 2000) and modularity for flexibility (Kotler,1989, Sanchez and Mahoney, 1996). Mass-customizationand modularity is an important factor but it is often not suf-ficient in order to solve customer unique demands on indus-trial markets. Alterations and adaptations to customerunique demands include in-depth changes in concepts orprevious deliveries which cannot be achieved primarily bycombining different modules, as is the main feature ofmass-customization (cf. Pine et al., 1993) where a certaindegree of variety is pursued through modular combination(Kotha, 1995, p. 22, with references to Pine et al., 1993).The focus in this article is therefore not on producing vari-ety through modularity, but on how organizations tailordeliveries to specific needs while trying to exploit experi-ences and concepts as far as possible.

Organizations can also create output that will enablerepetitive delivery and transformation processes. In orderto describe this type of output we will use a modified ver-sion of a concept proposed by Løwendahl (1997). In the caseof PSFs, she illustrates how certain exploitation can bereached through formalized development structures intoready solutions. The use of the word solutions denotesthe outcome of work done in advance before approachinga client, in order to facilitate the service delivery and makeit repeatable. We will henceforth denote such outcome pro-duced in advance of customization projects, in order toenable systematic exploitation as underlying solutions.The difference in denotation indicates the expansion ofthe concept beyond the sphere of PSFs. The term underlyingalso indicates that the solutions are utilized in order to pro-duce final deliveries but that the deliveries are not ready inadvance of application but require customization efforts.Such underlying solutions can vary substantially in theircharacter. Some can be in the form of physical items, whichresemble products, whereas in other cases they can consistof blueprints, CAD-models, software code or frameworks forstandardized service execution.

Developing underlying solutions resembles the ambitionto create platforms from which products or services morerapidly can be developed. However, underlying solutionsdeal with the generalization across customers and customerprojects and not with generalization across different prod-ucts. The underlying solution is aimed at a pre-definedgroup of customers or projects with a set of commonrequirements.

Applying underlying solutions across a range of customerscan also to some extent be compared with the concept ofreplication as strategy (Winter & Szulanski, 2001). Replica-tion as strategy may consider the replication of certain busi-ness models or the entire business strategies (Rivkin, 2001).The basic idea is that both exploration and exploitation are

important but that at some point a template is frozen andreplicated in order to achieve scale effects. The repetitivedelivery pattern across customers, facilitated by underlyingsolutions resembles the ideas of replication. However, thereplicating unit could in comparison instead be a productor solution concept within a single organizational entity,as opposed to the replication of a business model acrossentities. We will return to this comparison as we in the nextsection discuss how knowledge is transferred within theorganization in association with customization as well asin utilization of underlying solutions. The link to replicationas strategy is important to make as it leads us further to thediscussion on a knowledge-based perspective and knowl-edge flows in particular.

Knowledge flows

Several attempts have been made to combine the activity-based view and the resource-based view (cf. Mathews, 2006a,2006b). Such attempts correspond with the notion that re-sources and activities are two sides of the same coin: ‘‘Re-sources and activities are, in a sense, duals of each other’’(Porter, 1991, p. 109). In addition, several researchers haveattempted to link activities to resources and especially toknowledge and competence (Haanes & Fjeldstad, 2000;Løwendahl & Haanes, 1997; Nordhaug, 1993). The resource-based view of strategy (Barney, 1991, 2001; Wernerfelt,1984), drawing on researchers such as Penrose (1959), fo-cuses on internal resources. In parallel to the emergence ofthe resource-based view, a knowledge-based view (e.g.Grant, 1996; Spender, 1996) of the firm has appeared. Tell(1997, pp. 108–109) recognize that from a knowledge-basedview of the firm it is important to acknowledge and considerthe concepts of competence or capability (cf. Haanes &Fjeldstad, 2000; Løwendahl & Haanes, 1997; Nordhaug,1993). With reference to Foss (1996) and Grant (1996) it isnoted that themain factor for achieving a competitive advan-tage, in the knowledge-based view of the firm, is competenceon how to integrate and utilize resources. von Krogh and Roos(1995) also discuss knowledge, competence and strategy.With reference to Hamel and Prahalad (1990) the conceptof competence denotes the ability of a firm to act. Normannand Wikstrom (1994, p. 15) argue that; ‘‘Competence em-braces knowledge in all its forms, but it also concerns specificpersonal capacities’’. Løwendahl (1997), who introduced theconcept of ready solutions, utilizes a similar view on knowl-edge, as a fundamental part of competence.

Within strategic management, and perhaps particularlywithin the knowledge-based view, knowledge transfer,i.e., how knowledge is transferred within an organization,is one of the research themes discussed. It is important tounderstand how knowledge flows and how knowledge istransferred within an organization (and between organiza-tions). The discussion about different knowledge flows haspotential to provide a developed understanding of how valueis created when firms try to combine customized deliverieswith generic underlying solutions. From research on the dif-ferentiated network we understand that multiple knowledgeflows are important (e.g. Bartlett and Ghoshal, 1989). Am-bos, Ambos, and Schlegelmilch (2006, p. 296) discuss for-ward, reverse and lateral knowledge flows. ‘‘Forward


knowledge flows’’ refer to knowledge from HQ to subsidiar-ies, ‘‘reverse knowledge flows’’ refer to knowledge fromsubsidiaries to HQ and ‘‘lateral knowledge flows’’ refer toknowledge flows between subsidiaries. We adopt the ideaabout forward, reverse and lateral knowledge flows to thecontext of studying how knowledge flows between projectentities, and between project entities and central entitiesthat develop underlying solutions in an organization.

Learning and knowledge development in association withthe value shop is directly related to problem solving. Cus-tomer problems to be solved by value shop activities canbe defined as differences between an existing and a desiredstate (Stabell & Fjeldstad, 1998). The selection, order andapplication of resources vary due to the problems. Thematching of problems and problem solving are the basisfor the use of shop as a metaphor. Activity sequences in avalue shop are cyclical and iterative and the diagnosis of aproblem moves back and forth between hypothesis and datacollection: ‘‘feedback both from trying to generate a solu-tion and from implementing a chosen solution might requireredefinition of the problem or search for alternative solu-tions’’ (Stabell & Fjeldstad, 1998, p. 422). The process isalso iterative in that it repeatedly requires interactionbetween customer and supplier. But the interaction withthe customer also involves a learning process where the sup-plier develops its knowledge and competence for futureapplication.

This knowledge development process is also visible inLøwendahl�s (1997) three stage process of value creationand learning. The first stage involves selling a credible prom-ise to the customer, the second delivering according to thepromise and the third consists of learning from the projectand institutionalizing these experiences (Løwendahl,1997). Thus, the part of the organization involved with solv-ing a specific customer problem develops its knowledgeaccordingly. However, spreading the newly acquired knowl-edge to other parts of the organization for potential reuse infuture projects requires flows of knowledge. The most basicreuse involves knowledge flowing internally from one cus-tomer project entity to another, which resembles lateralknowledge flows. Creating and maintaining underlying solu-tions to certify efficient reuse on the other hand, involvesgathering and distributing knowledge from a central pointof the organization (in Løwendahl (1997)) in the form ofR&D-like functions. This can be linked to the discussionabout replication as strategy and the role of the center or fo-cal organization (Winter & Szulanski, 2001). Thus workingwith underlying solutions should indicate a stronger relianceon forward/reverse knowledge flows within the organiza-tion, from a central entity to project entities.

Methodological considerations

The empirical study underlying this paper is primarily ofqualitative nature consisting of four case studies (e.g.Merriam, 1998; Yin, 2003), whereof one has been studiedfrom the viewpoint of a participant observation. Followingour aim with this article a qualitative case study approachwas considered as most appropriate. Ghauri and Gronhaug(2002, p. 90) discuss observation as a method that allowsanalytical interpretation. The major advantage is that data

is collected in a natural setting and that it is possible tomore accurately capture the dynamics of the phenomenonthat is in focus for the study. The organizations studied rep-resent a wide variety of industries (see Table 1).

Data collection has been conducted primarily by meansof interviews, as well as through studies of documentationin order to offer rigor to the study (Adler & Adler, 1994).The study includes a number of in-depth interviews as wellas several group interviews and workshop sessions. Eachinterview lasted from 1 to approximately 3 h. In additionto this, observations were made in order to study manufac-turing related activities and thereby complement interviewdescriptions. The analysis has been iterative in that it hascombined within-case and cross-case analysis (Eisenhardt,1989). Data collection in each case was conducted as de-scribed in Table 1. Case A and B were studied first and mostextensively with the greatest number of interviews percase. From these cases a new value creation logic wasdrafted. Case C was then added and studied in order to ver-ify and improve the new logic in a setting from a differentindustry and with a different delivery characteristic. CaseD was finally added to increase case variation further andto add more material with longitudinal aspects. This processalso serves as an explanation for why Case A and B werestudied at more depth. As the research process developed,we felt that we had reached a deeper understanding for ourresearch question and Case C and especially Case D were notstudied with the same exploratory approach.

The empirical data will in this article be used to illustratethe theoretical discussion but it will also serve as a basis forour development of a new logic. We will through key quotesand descriptions highlight different value creation types andhow knowledge is utilized within and flows between differ-ent parts of the organization. In the next stage we identify anew value creation logic with a specific activity sequenceand knowledge flow character.

Logics explaining value creation: findings fromthe cases

In order to suggest a new value configuration and its associ-ated value creation logic we will focus on firms acting onindustrial markets where customization of deliveries to cus-tomer needs is frequent and involves a substantial part ofsupplier efforts. We will also pay attention to how thesefirms balance their pursuit of customization with a searchfor reuse of entities in order to be cost efficient and how thisis reflected in the experience and knowledge set of staff.

Case A – Shop logic value creation

Common for all of the organizations studied is that they areacting on industrial markets and have a high level of cus-tomization of their deliverables. Each delivery has a unique-ness stemming from the specific customer and project athand. Customization projects, which are vital in all of thestudied organizations, have a quite specific character. Themost evident example in our study is represented by CaseA. But the case also shows some chain logic characteristicsand the utilization of a basic concept in order to solvecustomer problems.


Case A consisted of a small unit working primarily to-wards the automotive industry. The unit was part of a globalmanufacturing firm�s business area and supplied dampingsystems, a delivery that required specific customizationfor each new project and customer. Often the unit enteredthe customer�s development and production process at alate stage and had to design and supply deliveries rapidlyin accordance with the problem at hand. Customers werespread geographically but were mostly located within afew national markets.

The staff consisted mainly of production personnel,development and design engineers of various kinds, and pro-totyping staff. The ratio of engineers over production staffwas relatively high. Projects usually included individualsfrom all of the staff groups. Engineers were mainly focusedon calculations and design tasks within the field of mechan-ics. Of particular importance in the interaction with cus-tomers were senior individuals who combine commercialand technical knowledge in order to lead the work in solvingcustomer problems.

The following quote comes from a manager of the busi-ness area which included the Case A unit. He discussedthe solutions that the Case A unit supplied in comparisonwith other units within and outside of the business area:

‘‘The more complex the solution, from having a processto having a very application oriented solution, where youmust know even perhaps a little about the product/thecomponent and where it goes, the more you need tech-nical competence. . .If you imagine, as an example, the product area of [UnitX] which produces several products based on given[requirements]. That�s quite a lot of determined require-ments then . . . That�s not more than [the issue of] havinga general competence, engineering competence, of howto construct products in elastomers. Then we have . . . themost extreme application oriented solutions, where it isreally a solution. You make solutions where you do no noteven know what the requirements are for the product.The fact really is that although you develop a solution itis, in the end, an integration. A qualified owner ofrequirements at the customer, and the engineers whoare specialists at that, meet with our engineers. We alsorecruit engineers from our customers.’’Thus, some types of deliveries seem to be different thanothers in the way that producing them did not onlyinclude design of the production process but also thedesign of the product itself. Furthermore, in theseinstances the requirements were not set fully by the cus-tomer organization. Rather the firm needed to be awareof and actively influence the requirements of the deliv-ery. Therefore the deliveries had a unique characterdepending on the customer and the specific project.‘‘Our product may not seem very complex on the sur-face, but it has a functional requirement which is uniquefor every application’’, explained the Product Managerat Case A. Supplying these deliveries required not onlyadjusting the manufacturing process based on a numberof product specifications but also helping set the productrequirements together with the customer. Therefore, akey issue was the interaction with the customer in orderto design the delivery properly. It is thus a matter of

customizing not just the manufacture of the deliverybut also the delivery itself. And the customization alsoseemed to be done by providing knowledge as a supplierin a way that affects the requirements. What kind of cus-tomization are we then talking about?To further understand the type of deliveries, consider howdelivery projects were initiated. The Prototyping Managerdescribed the start up of projects at Case A: ‘‘Often it�sthe customer who comes to us with a problem, and westart by trying to show that we can find a resonancedamper, in our case, which can solve the problem forthe customer.’’ We can also consider how the ProductArea Manager of Case A, expressed the nature of requests:‘‘It is very rare that we get a request for quotation, whichis out there for anything else in the car industry. At large itdoesn�t exist [for us]. Instead you are depending on quicklygetting within the customer and that the customer callsyou when they have a problem.’’The statements illustrate how customer ‘‘problems’’serve as bases for projects and that the customer did notknow exactly what type of delivery it needed. Thus, thecharacter of the business largely resembled that describedby the value shop, where resources are allocated based onthe problem diagnosis (Stabell & Fjeldstad, 1998).The iterative character of shop logic value creation isalso visible in this statement from the Prototyping Man-ager: ‘‘And it can involve quite a number of prototypes,testing and verification before we can show that we havesomething that�s worth anything.’’ Thus, the process ofsupplying a customized delivery is highly iterative andmany adaptations and changes must be done beforeany value is reached for the specific customer and theirspecific problem.The starting point for Case A:s deliveries was based on ageneric concept which could be applied across a ratherwide range of customer projects. The Product Area Man-ager illustrated the flexibility of the concept and the pro-duction facilities: ‘‘Well, we base it quite a lot on thisconcept. So the production of this, if it�s larger or smal-ler, round or squared or oval, we have quite flexibleequipment, so it works. It�s not a big problem. The onlyproblem that one may have here is capacity. Since theseare mounted quickly there�s a much shorter lead-time intaking a deal and getting on with it than what you�ve gotin buying a new production-line. So you have to, or wehave chosen to, have an overcapacity in order to takeon these really urgent ones, where you can charge a littlemore.’’This account shows a certain amount of production flex-ibility and how it relates to what is delivered. It also indi-cates how the �concept� was a starting point for a newproject and production. Thus, manufacturing wasdesigned to produce a type of delivery but the final prod-uct could take different forms and fulfill differentrequirements within the limits of the concept. Conse-quently, the unit could take on projects within theboundaries set by its concept and its production, as faras the concept and the production could be �stretched�.The Application Expert commented on the issue of flexi-bility: ‘‘The basic philosophy or the basic theories aresimilar. Independent of the application, if it�s a smalldamper, a large damper or a complex shape of the dam-


per, it still is, the problem analysis, measurements, cal-culations are similar, or very much the same. Design-work is similar . . .Production, well we produce everythingbetween a hundred grams to five kilos today, but I don�treally see that we, even if someone would request 15kilos, which is within reasonable limits that someonecould get, then we adapt the production to it.’’Thus, a generic concept was the basis for the deliveries.However, no formal fulltime resources were allocatedfor further development of the concept, or other con-cepts, on a continuous basis. Instead the primary focuswas on customer projects as described above. Withinthe concept boundaries the unit also utilized �ad-hoc�reuse from one project to another. Thus suitable priordeliveries were reused as bases for early prototypes.Such exploitation also involved reusing staff for similarprojects.Despite the shop logic character, the organization alsodisplayed some chain logic traits, primarily in the formof flexible manufacturing apparatus, set up to produceprototype series and small batches of damping productswithin the scope of the solution concept. This produc-tion arrangement provided the organization with arepetitive, standardized ability within certain bound-aries. But, the exact specification of the damper to beproduced was set by the customization project, result-ing in customer and project unique specifications ofthe dampers. Therefore, given the concept boundarieswithin which manufacturing could act in accordancewith a chain logic, the unit largely depended on its shoplogic activities to generate the customized deliveriesrequired.

Common for all of the cases of this study is the high levelof customization and interaction with the customers in solv-ing project specific problems. But although an industrialorganization creates much value through customization to-wards a specific customer it often also relies on activitiesaimed at enabling reuse. In Case A this was shown in the uti-lization of a generic concept. However, the Case A organiza-tion did not allocate resources to continuously develop andmaintain the solution. In the next cases we will look closerat organizations doing so.

Case B – Continuous investment in underlyingsolutions

The next case that we will consider is Case B. Case B is sim-ilar to Case A as it supplies highly customized deliveries toits customers. But the Case B unit also directs resourcesto continuous maintenance and development of its underly-ing solutions.

Case B was a medium sized supplier of industrial prod-ucts. It had a wide variety of deliveries and served sev-eral markets, among them automotive, off-shore andthe defense industry. The deliveries that Case B suppliedto the off-shore industry were of particular interest forthis study since the level of customization in this areawas particularly high. Among the deliveries that Case Bsupplied, several were in fields that had to do withprotection from mechanical or chemical strains. Case B

first and foremost had a regional presence, but also sup-plied some of its deliveries through sales offices andother organizations of the same corporation.The Case B main site consisted of production facilities,storage and office spaces within the same productionsite. The site in itself was a rather traditional factorythat one may associate with conventional manufactur-ing. However, the ratio of engineers to staff workingdirectly with production was high compared to tradi-tional manufacturing. Consequently, deliveries weretechnologically complex and required substantial effortsin research and design. The production in itself was alsoquite different from traditional manufacturing. Althoughthe factory had its share of heavy machinery that couldproduce large series of products, much of the work wascharacterized by craftsmanship-like tasks where workersadapted deliveries to customers� details. The shifttowards off-shore and higher levels of customization alsomeant a shift towards smaller series.The organization could be roughly divided into two parts:Materials and R&D/application-related. Materials pro-duced or mixed different substances in order to turn outmaterials with certain qualities. R&D/application modi-fied, combined and applied these materials in order toproduce a final delivery. The engineering part of the orga-nization largely followed the two parts of the organiza-tion. Although there were several different groupsfocused on different markets and functions, one of thekey divisions of tasks came from a focus on customerapplication and underlying solution development, respec-tively. The R&D-section, which most clearly workeddirectly with customer projects, relied on staff such asthe Development Manager to lead interaction with cus-tomers through a commercial and technical perspective.The Development Manager showed that he had two busi-ness cards: one displaying him as head of R&D and one as asales and marketing manager.To understand the character of deliveries, consider thefollowing statement from the Business Unit Managerregarding its offshore products: ‘‘If you look at this it�snot one product. You do things that the customer wantsfor every occasion. You may say that some of the appli-cations are the same but the product doesn�t look thesame from one time to another.’’ Thus, every deliveryhad a unique character due to customization, but someaspects of deliveries were repeated between customerprojects.The way that the organization exploited similaritiesbetween different customer projects was described bythe Development Manager in the following way: ‘‘Onephilosophy of mine is to utilize as much as possible ofalready developed materials. Or to adjust a developedmaterial that exists. That way is a lot shorter. And thathas to do with response time to the market. So one needsto take what exists: �Can I use anything of what exists ora variant of what exists?� And if one can�t, you need tostart on a new thing. And then it�s stuff that we discussin a larger forum than in my office. Then it is [TheBusiness Unit Manager] and [The Materials DevelopmentManager] too, who often cooperate on that. [TheBusiness Unit Manager] is then the one who coordinates


in the end or says that here is such a large market basethat we will add resources.’’The above statement illustrates that the part of theorganization that worked with customer projects had arather high degree of freedom in pursuing new projects.The limits were largely set by the applicability of previ-ously developed materials. When approaching projectsthat go beyond existing materials, the apparatusinvolved grew substantially. It then included both in-depth materials competence and a higher level managerin order to make a decision to add more resources. Thus,the existing materials served as a basis for applicationprojects, i.e. as underlying solutions. The existing mate-rials were often the outcome of previous customer pro-jects, which is similar to ad hoc reuse in Case A. Butsome materials were moved over to continuous mainte-nance and some materials were developed for long termcustomer wide application.How were then these materials developed and main-tained? The responsibility of this lay with the departmentof materials development. The Materials DevelopmentManager described three prime tasks of the department:‘‘We call one [task] lab operations, and that goes for allthe control of batches and delivery control, calibrationand process improvements and improvements of existingsystems.’’Later she addressed the second task: ‘‘Then there�s thepart that�s often linked to the different departmentsand application support. That�s what I refer to as projectrelated development or testing.’’ And finally the thirdtask: ‘‘Then there�s our own development projects.And that�s a bit larger projects.’’ And with regard tothe time spent between these: ‘‘There�s a little too muchtime here [points to lab operations], since we have somany mixtures, up towards 200, and so large variationsand varying requirements. So there�s a lot of focus there.If I have to number it: forty percent, thirty percent andthirty percent.’’Thus, quite a lot of effort was put into lab operations,which not only included tasks related to production butalso the maintenance of the systems and mixtures them-selves, and the processes. This was an established andmature part of the activities of the organization.Furthermore, the third task involved development thatwas not directly linked to a specific customer projectbut had a generic function. It implies that close to 70%of the time spent was related to generic developmentof underlying solutions and maintenance of existingsolutions.This was also reflected in the experience and back-ground of the staff working with developing and main-taining the solutions. The Materials DevelopmentManager stated: ‘‘It takes, perhaps five years for amaterials engineer here before he begins to be fullytrained. The older, the better.’’ Thus, not only was asignificant amount of time spent on development andmaintenance of underlying solutions, but working withunderlying solutions required technical specialists, i.e.staff with a long-term experience of the field and within-depth technical knowledge needed to solve genericproblems.

Throughout all of the cases the character of deliverablesvaries significantly as does the level of reuse, and thus thelevel of scale efficiency, but common for them is the highlevel of customization and interaction with the customersin solving project specific problems. However, although anindustrial organization creates much value through custom-ization towards a specific customer it often also relies onactivities aimed at enabling systematic reuse. We will nowcompare these two types of activity sets and try to capturethe prime differences between them from a strategicperspective.

First of all, one can try to pinpoint the character of anactivity set aimed at enabling systematic reuse by lookingat a traditional R&D-function, developing items aimed forlarge scale production. Such an activity is aimed at a marketand the output, after manufacturing, consists of finalizedgoods with no room for additional customization to the cus-tomer. Several industrial deliveries fit this description. Forinstance, the organization in case B alongside customizeddeliveries also supplied some off-the shelf products. Sucha product is likely to have a low openness for customizationafter it is manufactured. We can of course imagine the sameproduct provided alongside varying services but the productitself has the same content independent of customer. Thedesign of the product is the result of a process where cus-tomer requirements have been gathered so that an R&D-department can develop a new type of product or improvean existing one. When the new design is set, the set-up ofmanufacturing is done in order to produce the new product.After that the production starts and it is not until the firstdelivery that the development will begin to pay off. Thatis the actual point of sales. Products of this kind are pro-duced to suit many different customers, they can be manu-factured in large series and, if necessary, stored until orderscome in.

The difference between customization and generic prod-uct development is not a new phenomenon. For instance, itcan be compared to variations associated with batch sizes inWoodward�s manufacturing cycles (Woodward, 1965) orDrucker�s (1973) distinction between unique product pro-duction versus rigid and flexible mass production. However,one of the key distinguishing characteristics of customiza-tion projects is that it is not a matter of working towardsa market or a segment. Rather it is a matter of acting to-wards a single customer with non-finalized goods. And it ismainly in different positions along two dimensions, levelof finalization of delivery and target group size that theorganization has to make its choices. When providing cus-tomized deliveries the selling point that occurs after apre-study, where the first agreement is reached, rather thanafter developing and producing finalized goods.

Furthermore, an organization relying on generic solutionsrequires internal (corporate) or external credit (cf. thenotion that credit is necessary for new combinations thatenable development in the Schumpeterian sense; Schum-peter (1934)), or the establishment and financing of formalR&D functions, a characteristic of larger organizations.Customization projects on the other hand are usually fi-nanced as customer projects, i.e. the customer pays for aspecific problem to be solved by the deliveries providedby the supplier. Thus there is little need for credit or other


financing beyond the ordinary business. Thus, the two typesof activity sets have differing characteristics and choosingbetween them has different strategic consequences.

Case C – A clear distinction between customerprojects and underlying solutions

With a continuous and long-term investment in underlyingsolutions follows organizational structures and formal inter-faces between customer projects and activities aimed atdeveloping and maintaining underlying solutions. In this sec-tion we turn to Case C.

Case C consisted of a large scale organization with a glo-bal presence. It developed and tailored automation sys-tems for factories and other industrial plants. Thisstudy focuses on one of the prime development unitswhere the automation systems� IT-content was devel-oped. The system also had important hardware partsbut it is the software parts that evolved most rapidly.Furthermore, the core of the functionality was locatedin the software components. The study also took intoconsideration implementation units that adapted the sys-tems to the needs of the final users. The implementationunits were either part of the business group or externalorganizations.We begin by considering what The Application Consultantsaid about implementation units that work with custom-izing the automation systems to customer needs: ‘‘Myexperience is that those who are here, they often haveexperience of either a certain market; grocery retailing,power plants, mining or whatever it may be. Or they havespecific experience of, for instance, switchgear, that�ssomething that Case C sells a lot of, and then you havea background in switchgear or high voltage equipment,they also sell a lot of high voltage stuff, and then youcome from a producer of high voltage equipment . . .Butmy experience of the staff at the sales unit is that theyknow a lot of the product, the market and so on.’’Implementation units are thus application oriented, i.e.they were mostly concerned with the application of theproduct or solution. Consequently, their experience fromthe industry where the product is to be applied was cen-tral. We can compare this with the background and expe-rience of staff that work with developing and maintainingthe underlying solutions. One of the interviewees, theproject manager stated: ‘‘The people at our unit actuallydo not have anything to do with control systems but theymight as well come from [Telecom firm Y].’’, and he fur-ther elaborates on this: ‘‘One may say that at the devel-opment department it�s embedded systems that everyoneis good at. That�s the big thing. Embedded systems. Andthat�s the same that [a telecom firm] looks for.’’Thus the prime factor with regard to the experience andknowledge of the employees working with underlyingsolutions had to do with the technical specialist knowl-edge required to develop and maintain the solutions,not the industry or the applications. This was alsoreflected in the formal structure. The development unithad a formal interface towards customer oriented unitsin the form of a support organization. Consider the fol-lowing description of the support lines that were

between the development unit and its customers (the cus-tomers in this statement are final users, external imple-mentation units or internal implementation units): ‘‘Ifthe customer has a problem he calls Case C. Then youget into the Case C world and you reach something that�scalled [Regional] support . . .And if they can�t help you,which they basically never can, then this matter moveson. Regional support then contacts something which iscalled support line. And if they have problems they havesomething that�s called support line level three. And ifthey can�t handle it, then you talk to R&D. So the guys,the 150 men in [City X], and the women too for that mat-ter . . ., they are extremely protected from this customerover here. He doesn�t exist in their eyes. And these,[Regional] support, they hardly exist. So they�re very,it�s almost like a sheltered workshop, like at the univer-sity. And this is a problem of course. His problem up here[pointing to the customer at a sketch] is not the same asthe one he has here [pointing at R&D]. And I think it�swrong to protect these guys so hard. But at the same time,they have their project manager here . . .and they need tomeet their deadlines and if they are constantly inter-rupted by external issues, well, that won�t work. Thennothing will be developed. So perhaps it�s not wrong.’’The customization and underlying solution developmentactivities were separated from each other and questionshad to pass through a number of support levels. More-over, the problems that customization and solutiondevelopment faced were quite different from eachother, and it could be difficult for staff working withindevelopment to get the whole user picture. Rather,development staff handled a number of delimited prob-lems and solved them by utilizing their technology com-petence. The following quote indicates how input wasgathered for further development of underlying solu-tions: ‘‘Then we have product managers who run aroundand find out what people want the next time. Gatherrequirements and check what works and what doesn�twork.’’ Customer requirements were thus gathered bydedicated staff which then generalized them in orderto hand them over to development for implementation.

Thus in Case C the distinction between customizationactivities and activities of maintenance and developmentof underlying solutions is much clearer than the other cases.This is evident not only in the organizational structure, the‘‘interface’’ between the two activity sets, but also in theknowledge and experience base of the employees withineach group.

Case D – Balancing shop logic and underlyingsolutions

Our cases indicate some correspondence between size andunderlying solutions. Firms may very well struggle withhow to integrate these two activity types and where toput the focus between them without it being only relatedto growth. Case D, a larger firm, can exemplify this balanc-ing act further:

Case D offered telecom systems combining hardware andsoftware through generic as well as customer specific


design. Customer adaptation was of a varying leveldepending on the involvement with the customer. Thedevelopment of new products combined market genericrequirements with customer specific demands. The repli-cating character therefore varied but was often largelyapplicable to central parts of the hardware.The organization had a rather extensive formal R&D unitin place, which continuously was working with the devel-opment of new generic products. It also had resourcesdedicated specifically to customer adaptations for spe-cific deliveries. However, the organization displayed anongoing balancing act in applying its formal R&D-resources to generic development versus developmentaimed specifically for an important customer. This ledto internal debates on which customers to prioritizeand the amount of effort to be spent on generic develop-ment versus customer specific development, i.e. a typeof customization. This was also apparent in managementaccounting terms as the organization struggled with howto define semi-variable cost aimed at specific customerprojects as opposed to generic R&D efforts. Differentparts of the organization applied different business mod-els towards their specific market segments but this couldnot be monitored in detail from a cost perspective, dueto unclear distinction of different cost types.

The firms studied for this paper always customize theirdeliveries, and thus their choice is not between a custom-ization project, i.e. what is ex ante a non-finalized delivery,and a fully finished, pre-determined, delivery. Rather it is achoice between relying solely on customization projects asthe activity type of the organization and to perform devel-opment and maintenance activities that support require-ments of a market, or what could perhaps be seen as agroup of potential customers. This other type of activitiesis thus a matter of partial implementation of requirementsover larger groups. The need for customization in each finaldelivery is still vast. Customization corresponds to the un-ique demands that each customer and project has, and thatfulfills the second part of the implementation.

Problem solving

For the chain logic the transformation of input into productsis central, whereas for the shop logic the focus is on thesolving of customer problems (Fjeldstad & Haanaes, 2001;Stabell & Fjeldstad, 1998). It is now possible to further ex-plore the differences between a chain and a shop logic andwhat lies in between with regard to problem solving.

Solving customer problems is not limited to firms workingaccording to a shop logic. Solving customer problems is alsodone by the product firm aiming at serving a whole marketrather than a specific customer. It is this problem solving se-quence which Stabell and Fjeldstad (1998) fail to distinguishin their set of configurations. This activity set, which in-volves gathering data on the problems of multiple custom-ers, prioritizing among them and then solving them, aimsto provide a product or, which is the case for the organiza-tions studied for this paper, an underlying solution. The dif-ference compared to the shop logic is that solving problemsfor a whole market segment is less iterative as multiple cus-tomers must be handled in the same process.

Particularly in case A, the organization relied on previousinvestments inawideconceptandhadnocontinuousactivitiesdirected towardsmaintenance anddevelopment of underlyingsolutions. If new opportunities arose outside of the concept,they were pursued within the single customer case, not bydedicated investmentdirectedat a targetedcustomer popula-tion. Case B relied on a mix in its activities. The organizationwas engaged in projects directly initiated by specific customerproblems forwhich the resultingdeliverywasnot alwaysbasedon a pre-specified solution. But it also directed continuous ef-forts towards maintenance as well as development of somegeneric solutions thatmultiple customer projects could utilizetowards various customers. Case C, and to a large extent alsocase D, relied more on its investments in generic solutions,although final deliveries still needed to be customized to spe-cific needs. Especially the organization of case C had clearlyestablished structures for the gathering of customer require-ments across larger populations in order to develop, improveand also maintain generic solutions.

The organizations of cases C and D, being significantly lar-ger than the others, indicate that as organizations acting onindustrial markets grow, the gathering of customer needsand solving of problems towards a set of customers often be-comes institutionalized in formal product planning, R&D andsupport functions in order to capture scale benefits. Thus,activities related to customization and solving of specific cus-tomer problems are separated from solving problems acrosscustomer populations resulting in underlying solutions.

An activity set aimed at establishing underlying solutionsis what would often be found in an R&D department. But itcannot always be regarded merely as a support activity. Itcan play such a vital role that it becomes the core of a valueconfiguration. The prime technology of the activity set,using the meaning of Thompson, is similar to that of thevalue shop, the intensive technology (1967:18): ‘‘The inten-sive technology is a custom technology. Its successfulemployment rests in part on the availability of all the capac-ities potentially needed, but equally on the appropriate cus-tom combination of selected capacities as required by theindividual case or project.’’ Stabell and Fjeldstad (1998)do not emphasize on intensive technology that can be ap-plied differently vis-a-vis the market – either towards singleprojects and customers or towards larger groups. Thus, onecould say that the shop logic corresponds to applying inten-sive technology to the individual case whereas an activity setaimed at developing underlying solutions incorporates manypotential customer cases. Stabell and Fjeldstad (1998, p.434) actually indicate this when they state that: ‘‘A manu-facturing company employs a long-linked technology to pro-duce its products whereas product development relies on anintensive technology.’’ However, they fall short in recogniz-ing the strategic importance of segment generic develop-ment and the fact that it should not only be regarded as asupportive activity. As discussed above, it is the fact that adevelopment effort spans over multiple cases that makes itstrategically different.

Knowledge flows and value creation

In this section we take a closer look at value creation logicsin relation to knowledge development and knowledge flows.


The first part focuses on the shop logic and repetitive deliv-ery, i.e. exploitation, between customization projects. Thesecond part of this discussion focuses on how enabling sys-tematic repetitive delivery through underlying solutions isreflected in the knowledge flows of the organization. Final-ly, we discuss how these relate to the chain logic.

Shop logicThe prime source of knowledge development for an organi-zation working according to a shop logic is the interactionwith customers. The nature of the interaction is iterative(Løwendahl, 1997; Stabell & Fjeldstad, 1998) and thus re-quires forward and reverse knowledge flows. The participat-ing team from the supplying firm goes through an iterativesequence of problem identification and problem solvingwith the customer. At the end of this sequence the organi-zation transfers solutions in the form of explicit and tacitknowledge. Due to the close interaction, the supplier andthe customer goes through a learning process. If the sup-plier project team also works with tangible items, i.e. thebusiness model includes supplying artifacts, such as prod-ucts, the supplying team completes the learning cycle inter-nally for the problem at hand and embeds the solution inartifacts which are supplied to the customer alongside theknowledge transfer.

For the supplying organization, the knowledge and expe-rience base has now evolved within the project team asso-ciated with the customer project. The gained knowledgeis both customer and project specific and is both of explicitand implicit character. However, some aspects of the newlygained knowledge or competence may be applicable to newprojects within the same customer or towards new custom-ers with similar problems. But the gained knowledge is notgeneric since when facing a new situation the appropriateknowledge has to be extracted from the previous situation.Thus, when the firm is confronted with a new project it cantry to replicate the knowledge gained from the previousprojects in order to speed up the problem solving processand thus make it more co st efficient. This can be done bydirectly reusing the same human resources, i.e. the sameproject team which solved the prior problem is allocatedto a new project. Another approach involves transferringknowledge internally to new parts of the staff. Thus, knowl-edge as well as artifacts, if they can be reused, must betransferred. For instance, in cases A and B prior customerspecific solutions were reused as a basis for new projects.Previous deliveries, blueprints or other artifacts were trans-ferred into the new project environment and used as a basisfor developing a new customer specific solution. This can berelated to the discussion on exploiting proven solutions ofexplicit character. Most often this transfer was accompa-nied by the direct reuse of some of the human resources,i.e. individuals with experiences from prior projects. Sucha reuse of knowledge is similar to the idea of lateral knowl-edge flows (Ambos et al., 2006). However, a new projectstill faces the problem of extracting the relevant solutionsfrom the specific context of the previous project.

For all of cases, activities related to customization activ-ities required the utilization of prior customer project expe-riences. Most often projects relied on intermediaries thathad vast experience of similar problems as well as of theparticular customer. This type of staff was typically senior

personnel and had to master the interaction with the cus-tomer regarding the problem at hand as well as technical is-sues. In particular they were essential for the iterativesequence of successively redefining the customer problemto be solved. However, more technically oriented staff of-ten also needed experience of prior customer problems sim-ilar to the specific one to be solved. Thus, reusing humanresources with similar experiences appeared necessary inthe cases. This can be linked to the discussion about tacitknowledge and knowing (cf. Cook & Brown, 1999).

A collective knowledge development processA more consistent method of generating scale advantages isof course to create formalized underlying solutions. Whatthe firm then essentially does is to temporarily or perma-nently establish a collective learning process that enablesthe organization to identify solutions to problems that thefirm believes to be generic among the customers that it in-tends to target. As we have seen in the previous sectionsthis involves a decision regarding the market target and itrequires an investment decision with subsequent financingsince the efforts following the decision cannot be financeddirectly by a specific customer project.

A central function of the firm will then go through the ini-tial part of the learning cycle. Initially the focus is onsearching for solutions to problems that are within the focusarea within the firm. It then extracts relevant parts of sev-eral project specific solutions and produces a generic‘‘underlying solution’’. Such a solution is then diffused tothe parts of the organization involved in customer projects,which then absorb it and embed it. As the organizationestablishes this way of working it can also, in the scanningprocess, look directly at generic customer problems andsolve these in a more abstracted problem solving process.The solution provided can also be accompanied by artifactsof various kinds or a central function ready to produce arti-facts within the limits of the underlying solution. This pro-cess can thus involve direct interaction with the marketby a central function and a flow of knowledge to and fromentities mostly working with customer adaptations.

This way of working was most clearly present in the orga-nizations of cases C and D, and to some extent in case B.These organizations had developed clearer product planningand product management structures, which were needed inorder to handle the demands of a larger population of cus-tomers and the demands from several future customer pro-jects. This required more extensive processes for gatheringand prioritizing among customer requirements as well as theability to transfer the underlying solutions to teams involvedin customization projects. In cases C and D the knowledgetransfer would involve formal training efforts and extensivedocumentation of the underlying solutions. The organiza-tions in cases B, C and D also had to take into considerationlong-term effects as their underlying solutions had to bemaintained and sometimes improved in order to be appliedto multiple customer projects over longer periods of time.

These organizations also indicated a stronger presence oftechnical specialists who were able to rely more strongly ontheir knowledge within a specific technological field and noton their experience of customer specific problems and theability to interact iteratively with customers. Generic prob-lems to be solved across a number of targeted customers


were identified in advance before problem solving com-menced. In many instances the process then followed inter-nally iterative solving and testing sequences but technicalspecialists could focus on their technical area and developtheir knowledge within it, as generic market requirementswere gathered and prioritized among in advance of theproblem solving sequence.

Consequences and links to the chain logicThe establishment of formalized underlying solutions hastwo main consequences. Firstly, it will limit the scope of fu-ture customer projects that the organization takes on (notethough that several underlying solutions may exist simulta-neously within the organization, providing a number of op-tions) since the organization needs to get payback on theinvestments made in the underlying solutions. Secondly, itwill provide a more efficient problem solving process, withinthe scope of the solution, for the project teams that facecustomer problems. Since the scope is delimited, the pro-ject teams will choose customer projects that fit the under-lying solution (although the underlying solution may notcover the whole set of problems). They will then executethe problem solving sequence for the customer project intwo ways. The solving of problems that fall directly withinthe range of the underlying solution will bear chain logiccharacteristics, much in line with what is depicted in serviceor professional service situations (Christensen et al., 2009;Løwendahl, 1997). The second part of the problem solvingprocess will deal with deviations from the underlying solu-tion i.e. customer and project specific aspects. These partshave to go through the normal process of learning and prob-lem solving. Thus, aspects of the chain and shop logic willappear simultaneously in customer projects due to theestablishment of an underlying solution.

The establishment of formalized underlying solutions in-volves the utilization of a collective knowledge develop-ment process, such as the one described above. This is anindication of a major shift in the ways of working of an orga-nization and of how value is created and cost efficiency ispursued. This way of working is not explicitly covered byStabell and Fjeldstad (1998) and we therefore propose anew value creation logic; the package logic.

The package logic

The new logic proposed in this paper is labeled the packagelogic due to its way of identifying generic problems, andproviding packaged solutions that can be utilized across cus-tomers and projects. In order to be able to do that it is nec-essary to understand how knowledge flows between variousprojects. The package logic can be distinguished from thechain and shop configurations by comparing the characteris-tics of value creation. The shop logic solves customer andproject specific problems, the package logic solves genericproblems, and the chain logic transforms inputs to outputaccording to a pre-specified solution. The package logicthereby rely on forward and reverse knowledge flows in or-der to create scale advantages relative resources dedicatedto solving customer problems. This involves limiting thesolution scope at a generic level. However, the organizationmay still customize ‘‘on top of’’ the underlying solution.

By identifying the package logic the link between Løwen-dahl�s (1997) description of an R&D-like function in profes-sional service firms and the R&D function of amanufacturing firm is revealed. The logic is similar. It con-sists of choosing a number of generic problems that rangeacross potential customers and solving them in advance. Apackage configuration, based on the package logic, includessome features of the chain configuration and the shop con-figuration, as originally defined by Stabell and Fjeldstad(1998). But these features should be related exclusively toa package configuration rather than chain and shop. For in-stance, the outcome of a package logic, i.e. an underlyingsolution, can be marketed, either internally or externally.A dedicated marketing function communicates with largergroups of customers and is thus intrinsically linked withthe process of identifying and choosing common demandsto implement, and not specifically with the input–outputtransformation process.

The package configuration is a configuration in its ownright but its logic also provides a link between the shopand chain value creation logics and promotes activity basedanalyses seeking to outline the balance between value cre-ation logics in an organization. In Table 2 we present a re-vised set of configurations with the addition of thepackage configuration, based on the package logic (the net-work configuration is not included here). The package con-figuration complements the chain and shop configurations.

In our empirical examples (for a summary see Table 3),the clearest example of the package logic can be found inCase C and D. Both of these cases indicate that dedicatedresources are continuously applied to activities aimed at en-abling systemized reuse through underlying solutions. CaseB also utilizes package logic value creation whereas CaseA primarily relies on shop logic value creation on a continu-ous basis.

Cost drivers

The package logic produces underlying solutions or productsthat are generic in the sense that the solution can be repli-cated and thus enable processes of transformation. Further-more, the package logic creates scale advantages in relationto the resources deployed to develop underlying solutions.Thus, the scale benefits of the package logic are relatedto utilization of development resources of the organization.Porter (1985) briefly mentions the scale effects related tocost drivers in association with R&D and the dependenceon scope. However, for firms where value is primarily trans-ferred through output of a less tangible nature, i.e. tacitknowledge, coupled with the creation of value through hu-man resources, in interaction with the customer, thesescale effects on development become one of the primarymeans by which to create cost efficiency.

For instance, in telecom and electronics the so calledfabless firms strive to utilize their human capital associatedwith development activities in a fashion that make theirsolutions attractive to many OEMs. Fabless firms, havingno manufacturing capacity in-house, try to gain scale bene-fits based on their development efforts. On markets wherethe innovative pressure is high and the continuous supplyof new solutions is required it becomes essential to utilize


these scale benefits in order to be cost efficient. Directingall of the R&D activities at one customer at a time, i.e. inaccordance with the shop logic, is likely to be too expensiveunless requirements differ substantially between customersas to enable customer specific niche strategies. The pack-age logic provides scale benefits when the value createdby development resources, through underlying solutions, isavailable to multiple customers. The way that the chain lo-gic utilizes scale is quite different as it is most closely asso-ciated with the transformation process.

Thus, cost drivers vary significantly between the logicsand distinguishing between various types of costs associatedwith each logic is essential. In Case D the organizationencompassed several different approaches to the market,some with generic solutions and some directly aimed atone customer, i.e. reliance on package plus shop logic ver-sus shop logic only. Distinguishing between such varying ap-proaches and being able to compare them from a costperspective requires identifying costs related to genericmarket approaches and customer specific approaches,respectively. The logics, as defined above, provide a basisfor analyzing cost structures for firms acting on industrialmarkets.

As indicated above, the shop and package logics are theones that are most closely associated with the solving ofnew problems and the development of knowledge and solu-tions. Therefore, in the next section we focus on balancingthese two logics.

Balancing the package and shop logics

Balancing the package and shop logics is a strategic choicebetween approaching several customers, and thus strivingfor cost efficiency through reduced offering scope, andfocusing on one or a few customers and by that reducingscope. However, it is not just a matter of choosing betweena market, a smaller group or a single customer in the selec-tion of activities. It is also a matter of choosing your cus-tomers depending on their importance and thus thechances of repeated business and reuse over time towardsthe same customer. Hence, the potential repetitive deliveryand size of future customization projects that a customer islikely to demand can grant the customer a position thatstrongly influences how longer-term development projectsare designed by the supplier. Consequently, the choice ofbalance between shop and package that an organizationfaces can be a very complex matter. In order to understandthis balancing act the ideas about knowledge flows can be ofassistance. It is not only vital to consider how knowledgeflows between the organization and the supplier(s) but alsowhat type of knowledge that is necessary to transfer. Thus,a supplying organization has to take into consideration awide set of variables. The supplying organization faceschoices between doing customization projects in an adhoc fashion for each new assignment and customer, or ofperforming longer-term projects for one or several groupsof customers at a certain level of implementation, plus cus-tomization for each case on top of that. And when choosingto carry out longer term development as well, in accordancewith a package logic, the organization must select a numberof requirements from the combination of each customer�s

set of requirements and implement them in one or a numberof different underlying solutions. Each underlying solutionmust correspond to some common needs of a group of cus-tomers, but not all the needs of each customer.

On industrial markets, getting a detailed view of therequirements of customers most often calls for an estab-lished relationship with the supplier. And also, collectingrequirements is most often done through the process ofthe customization projects, most of it through project spe-cific pre-studies. Even for experienced buyers it is virtuallyimpossible to try to determine their own exact require-ments up front as they often need help from the supplieror from a third party in setting them. Furthermore, require-ments gathered through customization projects are an esti-mate, when used as inputs for longer-term development.For future projects, although the customer may be thesame, the requirements are likely to change depending onthe setting. Therefore, a detailed picture of the require-ments of the members of a group, especially as the size ofthe group increases, becomes very difficult to achieve exante. Some requirements in an underlying solution will, ofcourse, be set as time goes on. Every new project doesnot start completely from nothing. The prime way of gath-ering requirements and implementing them across groupsof customers is through the experience drawn from previousinteraction with customers. Consequently, requirementsthat live longer through different deliveries become estab-lished in the reusable share of output through the chosencustomization projects. This, from the perspective ofapproaching a market over longer periods of time, meansan incremental approach to uncertainties. It is thus a wayof being flexible and open to a certain amount of changeson a continuous basis.

The cases of this study display a variety of combinationof logics. Although all of the studied firms depend on theshop logic in order to customize to customer unique de-mands, some of the studied case organizations have com-plemented the shop logic with the package logic in orderto gain scale advantages. Pursuing such scale advantages in-volves, as we have illustrated, a new approach to risk han-dling as the investment decision related to the packagelogic activities is different. Changing the focus towardsthe package logic is also an organizational challenge asthe package logic requires different organizational struc-tures, processes and roles.

By clearly distinguishing between the shop and packagelogics for value creation as well as cost analysis, a firm onan industrial market will be able to increase its understand-ing of its own as well as its competitors� activities towardsthe market. Although there seems to be a connectionbetween size and dependence on the package logic this doesnot mean that a strategy based primarily on the shop logic isunsuitable. Several of the studied firms relied primarily onthe shop logic and could, due to strong customer relation-ships, maintain a profitable business. Also, in some indus-tries, there may be technological obstacles to switchingtowards stronger dependence on a package logic. However,as Christensen et al. (2009) show, overcoming such obsta-cles and being able to utilize a different value creation mod-el can be a radically innovative step leading to asignificantly stronger market position. A first move towards

Table 1 Overview of cases and data collection methods.

Organization description Data gathering

Case A Small business unit in a highly diversified corporationsupplying primarily mechanical products to automotivemanufacturers

Five main in-depth interviews, two groupnterviews, document studies plus on-site observations

Case B Medium sized business unit in a highly diversifiedcorporation supplyingmechanical products, primarily for the off-shoreindustry

Four main in-depth interviews, three groupinterviews, document studies plus on-site observations

Case C Major business unit in a large corporation supplyingsystemsfor automation and control

Three in-depth interviews

Case D Large firm supplying products for the telecom industry Participant observation over more than two years

Table 2 Overview of package and revised chain and shop value configurations. (Revised excerpt from Stabell & Fjeldstad, 1998,p. 415 plus the new package configuration.)

Chain Shop Package

Value creation logic Transformation ofinputs to products

(Re)solving customer problems Solving common problems

Primary technology Long-linked Intensive IntensivePrimary activitytechnologies

Inbound logisticsOperationsOutbound logistics

Problem finding and acquisitionProblem solvingChoiceExecutionControl/evaluation

Problem gatheringProblem prioritizationProblem decompositionProblem solvingControl of parallel developmentMarketing and support

Main interactivityrelationship logic

Sequential Cyclical, spiraling Single to multiple point packaging funnel

Primary activity interdependence

PooledSequential

PooledSequentialReciprocal

PooledSequentialReciprocal

Key cost drivers ScaleCapacity utilization

Efficiency in referralReuse of human resources

Scale/Development capacity utilization

Key value drivers Reputation QualityBusiness value systemstructure

Interlinked chains Referred shops Packaging funnels in tree structure


such innovative steps for a firm is to recognize the currentvalue creation and cost character of its business and itscompetitors. The refined logics proposed in this articlefacilitate such analysis.

Concluding discussion

The activity based view has a prescriptive character as itdeals with the efficiency and effectiveness of the activitiesof the firm, which can be affected by managers (Sheehan &Foss, 2007). Within the activity based view, value configura-tions and value creation logics play an important part in pro-viding guidance to how firms can create value. Stabell andFjeldstad (1998) called for further research into combina-tions of value creation logics into hybrid configurations.The focal point of this article is between the chain and shopconfigurations as the aim is to identify a distinct value cre-ation logic and define its associated value configuration

positioned between the chain and shop configurations. Bybringing in research on knowledge flows we identify a dis-tinct new value creation logic, the package logic, in orderto provide a better understanding and a better basis for ana-lyzing cost and value aspects of firms acting on industrialmarkets. We also refine the configurations as outlined byStabell and Fjeldstad (1998) and introduce the package con-figuration, which is based on the package logic.

The package configuration fills a gap between the chainand shop configurations and enables the establishment ofa set of configurations that is more appropriate for analyz-ing organizations acting on industrial markets. The distinc-tion between the shop and package logics, and theassociated configurations, indicates how the process ofchanging the firm�s offering differs depending on whethera single customer or a group of customers are consideredin the design. Since the final deliveries are highly custom-ized, the package logic provides a baseline from which

Table

3Ove

rview

oftheke

ych

aracteristicsofthestudiedca

ses.

Delive

rych

aracter

Reuse

andrepeatab

ility

Organ

izational

set-up

Logicdependence

CaseA

Highly

customizeddam

pingsolutions

adap

tedin

close

interactionwith

customeran

dapplica

tionsetting

Wideproduct

conce

ptan

dflexible

productionfacilitiesas

base.Ad-hoc

reuse

betw

eencu

stomerprojects

primary

Few

keyindividualsco

mbinetech

nical

and

commercialexp

erience

incu

stomer

interaction.Noco

ntinuousdeve

lopmentof

genericsolutions

Primary:

shopseco

ndary:

chain.

Pac

kage

logiconly

temporarily

inestab

lishingbasic

conce

pts

CaseB

Off-shore

productsbasedonmulti-

laye

rmaterials

customizedto

applica

tion

environmentan

dappliedto

mech

anicaldetails

Ad-hocreuse

betw

een

projects+systematic

reuse

of

materialswhichserveas

underlying

solutions

Commercialan

dtech

nical

rolesintertwined

butexp

licitresourcesutilize

dfor

maintenan

cean

ddeve

lopmentofge

nericsolutions.

Primarilyin

theform

ofmaterials

Primary:

shopseco

ndary:

pac

kage

.So

mech

ainch

arac

terin

parts

of

production

CaseC

Extensive

automationsystemswhich

arecu

stomizedto

customerspecific

needsan

dproject

settings

Automationsystemsarehighly

generican

ddocu

mentedin

orderto

ensure

genericqualityac

ross

various

customers

andindustries

Highly

form

alR&Dstructuresseparatedfrom

theresourcesad

aptingsolutionsto

specific

customersettings.Product

man

ageran

dsupport

rolesclearly

estab

lishedto

maintain

genericch

arac

terofsystems

Primary:

pac

kage

seco

ndary:

shop.

Somech

ain-likech

arac

terrelatedto

hardwarean

dserviceexe

cution

CaseD

Teleco

msystemsco

mbining

hardwareandsoftwarewithge

neric

aswellas

customerspecificdesign

.Customerad

aptationofva

ryingleve

l

Productsco

mbinege

nericaspects

withcu

stomerspecificdesign

.Reuse

charactertherefore

variesbutis

oftenlargely

applica

ble

toce

ntral

partsofhardware

Form

alR&Dstructure

butoftenap

pliedto

asubstan

tial

degreeto

customerspecific

requirements.Genericdeve

lopmentform

ally

separatedfrom

customizationbutin

practice

oftenove

rlap

Primary:

pac

kage

andshop.

Seco

ndary:

chainonly

insomeservice

exe

cution


deliveries can be designed in interaction with the custom-ers. The package logic also clarifies the similarities betweenprofessional service firms and business to business firms ontraditional industrial markets in their pursuit of scale ef-fects across customers and projects. It therefore further ex-plains the similarities, as outlined by Løwendahl (1997),between the activities of creating ready solutions in theprofessional service firm and R&D activities.

Through this new set of logics it is possible to explorethe choice between customization to unique customerand project demands, and generalization of solutions tomeet demands that are common across populations. Theshop and package logics are different from each other,independent of whether an organization is working withproduction of details for the automotive industry, if it issupplying software systems or supplying services. Further-more, the article explains what makes the package logicstrategically different from the chain and shop logics.The redefined logics, and the package logic in particular,are therefore key findings of this work. The paper confirmsbut also refines and develops the ideas of Stabell andFjeldstad (1998). This article also illustrates how the logicsdepend on forward/reverse and lateral knowledge flows(Ambos et al., 2006) and repetitive use of product solutionsby an organization across customers. Adding knowledgeflows and the comparison with replication to the analysisprovides us with a new understanding of how the logics cre-ate value within the organization. Furthermore, utilizing aknowledge based perspective provides insights into theorganizational consequences of balancing or altering thereliance of the different value creation logics. These in-sights and the revised set of value configurations shouldalso be considered for future research within the field ofinnovation and value configurations, an area explored byChristensen et al. (2009).

Moreover, in its focus on organizations that are associ-ated with industrial characteristics, but with value shopqualities, the paper contributes to the critique against thevalue chain perspective such as reviewed in Payne and Holt(2001). But the critique is more balanced than in for in-stance Normann and Ramirez (1993), Normann and Ramirez(1994) as this paper recognizes the significance of severalaspects of Porter�s (1985) value chain. The findings aretherefore important contributions to the formal theory ofvalue creation logics and to the field of value configurationsin particular. Thus, the paper also contributes to theorieswithin the activity based perspective (Porter, 1985;Sheehan & Foss, 2007).

This study encompasses several different industries but isnonetheless restricted to four cases. Also, the case studyapproach applied, with its restricted set of in-depth inter-views limits the generalizability. Further research is calledfor within the same empirical setting in order to confirm,alter or refine the frameworks and models of explanationprovided in this study. In particular, there is a need forstudying in greater detail how firms manage a combinationof the shop and package logics and when organizationschoose to abandon or include one or the other of them overlonger time-periods. But there is also a possibility of enlarg-ing the empirical field in order to study whether the differ-ence in logics is valuable for other types of firms and morediverse populations.


In terms of managerial implications, this article suggeststhat in order to be innovative and competitive it is impor-tant to understand how value is created in accordance withvalue creation logics and knowledge flows. The refined log-ics proposed in this article can be used by managers for va-lue creation and cost analysis, of the firm as well as ofcompetitors. Thus, the redefined logics can supportstrategic analysis of firms acting on industrial markets,especially on markets where customization of deliveries isa prerequisite.

Appendix A

Tables 1–3.

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MAGNUS JOHANSSON holds a Ph.D. at theSchool of Economics and Management, LundUniversity. His research is focused on valuecreation strategies as well as competenceand knowledge management in business tobusiness firms.

ANNA JONSSON holds a Ph.D. at the Schoolof Economics and Management, Lund Uni-versity. Her research interests include e.g.internationalization strategies and knowl-edge sharing in retail firms and professionalservice firms.

The package logic: A study on value creation and knowledge flows

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