Value added partnership

Small-company focus and large-company efficiency!

Beyond Vertical Integration
the Rise of the
Value-Adding Partnership
by RUSSELL JOHNSTON and
PAUL R. LAWRENCE

For decades large, vertically integrated companies
have reaped the benefits of their size, growing
stronger with every competitor they eliminated or
engulfed. But the elephants aren't grazing so freely
anymore, Another beasthas been nibbling at the
herbage, and its presence is beginning to be felt.
Tbat beast is the "value-adding partnership"—a set
of independent companies that work closely together to manage the flow of goods and services along
tbe entire value-added chain. It is an organizational
form much like the putting-out system of tbe early
industrial revolution, whereby manufacturing was
done incottages and coordinated by a merchantmanufacturer wbo supplied tbe raw materials and
sold tbe final product. But the value-adding partnership, or VAIJ is not an anachronism. It is a product of
its time, and its time may well have eome.
ost bistorians agree that the development
of cheap, centralized power and efficient
but costly production machinery tipped
tbe competitive advantage toward largecompanies that could achieve economies of scale. Today, low-cost computing and communication seem
to be tipping tbe competitive advantage back toward
partnerships of smaller companies, each of which
performs one part of the value-added chain and coordinates its activities with tbe rest of tbe chain.
VAPs are not, however, necessarily technology
driven. Tbey may emerge as the result ofcomputerized links between companies or they may exist be94

fore tbe technical links bave been made. In all cases,
they depend largely on the attitudes and practices of
tbe participating managers. Computers simply make
it easier to communicate, share information, and respond quickly to sbifts in demand. Tbey facilitate
VAPs but alone don't create tbem.
To better understand wbat a value-addingpartnersbip is and how it works, let's look at some that are
doing especially well'
McKesson Corporation, the $6.67 billion distributor of drugs, health care products, and other consumer goods, is among the most successful. Tbe
business press has often cited McKesson for its innovative use of information technology to improve
customer service and cut order-entry costs. But
McKesson's story ismucb richer tban most people know. Once a conventional wholesale distributor squeezed by vertically integrated chain stores,
McKesson has transformed itself into tbe bub of a
large value-adding partnership that can more than
bold its own against the cbains.
McKesson's evolution to a VAP was triggered by
fierce competition from large drugstore cbains,
Russell Johnston is an associate professorof management at Boston University, where he studies the effect of
increasing access to information on management processes and structures. Paul R. Lawrence is the Wallace
Brett Donhaw Professor of Organizational Behavior at
the Harvard Business School and is the author of numerous books and articles.
HARVARD BUSINESS REVIEW

luly-AuKust 1988

which were eating into tbe business of theindependent stores McKesson serviced. McKesson realized
that if the independents died, it would soon follow
suit. To protect tbeir business, McKesson's managers
began to look for ways to help customers.
Their search focused on a rudimentary order-entry
system at one of McKesson's warehouses. In tbe early
stages, the system included data-collection devices,
powered by car batteries, tbat werewheeled around
customers' stores in shopping carts. Tbe system
dramatically cut tbe costs of processing orders by
expediting the steps of checking inventory, calling
in an order, manually recording the order, and eventually packing and shipping it. McKesson soon discovered that the system could also specify how to
pack orders so tbat tbey coincided with tbe arrangement of customers'...