performed affects the cost or effectiveness of other activities. Linkages often create trade-offs in performing different activities that should be optimized. This optimization may require trade-offs. For example, a more costly product design and more expensive raw materials can reduce after-sale service costs. A company must resolve such trade-offs, in accordance with its strategy, to achieve competitive advantage.
Linkages also require activities to be coordinated. On-time delivery requires that operations, outbound logistics, and service activities (installation, for ex-ample) should function smoothly together. Good coordination allows on-time delivery without the need for costly inventory. Careful management of linkages is often a powerful source of competitive advantage because of the difficulty rivals have in perceiving them and in resolving trade-offs across organizational lines.
The value chain for a company in a particular industry is embedded in a larger stream of activities that we term the "value system" (see Exhibit II). The value system includes the value chains of suppliers, who provide inputs (such as raw materials, components, and purchased services) to the company's value chain. The company's product often passes through its channels' value chains on its way to the ultimate buyer. Finally, the product becomes a purchased in¬put to the value chains of its buyers, who use it to perform one or more buyer activities.
Linkages not only connect value activities inside a company but also create interdependencies between its value chain and those of its suppliers and channels. A company can create competitive advantage by optimizing or coordinating these links to the outside. For example, a candy manufacturer may save processing steps by persuading its suppliers to deliver chocolate in liquid form rather than in molded bars. Justin-time deliveries by the supplier may have the same effect. But the opportunities for savings through coordinating with suppliers and channels go far beyond logistics and order processing. The company, suppliers, and channels can all benefit through better recognition and exploitation of such linkages.
Competitive advantage in either cost or differentiation is a function of a company's value chain. A company's cost position reflects the collective cost of performing all its value activities relative to rivals. Each value activity has cost drivers that determine the potential sources of a cost advantage. Similarly, a company's ability to differentiate itself reflects the contribution of each value activity toward fulfillment of buyer needs. Many of a company's activities not just its physical product or service contribute to differentiation. Buyer needs, in turn, depend not only on the impact of the company's product on the buyer but also