Chain-link logic and the advantage of dependencies

This post is a collaboration between myself (writing) and David Standen (editorial).

Often the business analogy of chains is associated with limitations, silos and the phrase “you’re only as strong as your weakest link”. However, this isn’t always the case. The following two contrasting excerpts help explain how being part of a chain can be both a bad and a good thing.

Richard Rumelt, in his book Good Strategy Bad Strategy, introduces the chain analogy as a logic:

“A system has a chain-link logic when its performance is limited by its weakest subunit or ‘link’.”Richard Rumelt

He goes on to explain that if your business is limited by one weak link there is no advantage to investing in the other parts of your business. He refers to the Shuttle Challenger, whose O-ring caused the rocket to explode during take-off – there was no advantage to investing in stronger engines or better crew as the O-ring was the limiting factor.

Chain-linked businesses, organisations and economies exist when each link is managed separately. It is common for one link of the chain – or silo – to be managed by an individual who sees their department as their success (and can often de-prioritise the overall business goals). If managers aren’t collaborating, parts of the business will advance beyond the others at costly expense with no advantage.

However, chain-link logic doesn’t have to be a hinderance. Many organisations are built upon collaboration between different business units, entirely dependent on each other, and it’s the linked dependencies that give them their advantage.

In his essay What is Strategy? Michael Porter discusses that how a company strategically positions itself not only dictates what activities it will perform, but how they relate to each other. He stresses that business units performing well is not enough to create a competitive advantage:

“While operational excellence is about achieving excellence in individual activities, or functions, strategy is about combining activities.”Michael Porter

Porter refers to this state as fit – when a strategy involves a whole system of activities working in unison, not just a collection of parts. Fit prevents competitors and imitators from being able to replicate a company’s advantage and creates a chain that is as strong as its strongest link.

IKEA is a classic example of a company that has achieved fit, and maintained it for decades – with a manufacturing process, distribution network and customer service that complement one another. This creates economic value to IKEA and its customers, while also creating a system that is complex and difficult for competitors to replicate. In other businesses, with poorer chain-link systems, similar functions are managed separately, do not reinforce each other, value is lost and systems are easily copied.

These two examples suggest why we tend to only hear of chains with weak links and strong links in extreme situations – when a company is suffering due to poor collaboration, or it’s excelling due to well crafted fit. Perhaps we don’t hear about the businesses in the middle that aren’t remarkable for these reasons. The ones with operational excellence in different departments, but in need of a strategy and purpose to link them together into a competitive advantage.

For a company to take advantage of dependencies it must first identify which areas are limiting the ability of others. Once these “weak links” have been identified, supported and brought to a basic level of operations, this creates what Rumelt describes as the first type of fit – simple consistency. This is when all business units align under one strategy, bringing the business together under one message, and clearly communicating that message to the customer.

The second stage of fit – second order fit – is achieved when activities are reinforcing. An example of a business executing this is MOO, which creates custom business cards and other print products. If you receive a delivery from MOO, you’ll likely receive what you ordered in, or with, a sample of a new product (e.g. business cards arriving in a gift box). By doing this, MOO is combining one of its activities (custom print) with another (delivery), to provide a delightful customer service and raise awareness of its products – and this all falls under their brand promise:

“That’s why we make it simple to create beautiful, expertly crafted business stationery and promotional materials that’ll help you start conversations, open doors and strengthen relationships.”MOO

This kind of combined activity is difficult for existing, and new, competitors to recreate easily, helping MOO differentiate itself.

Rumelt describes the third, and final, stage of fit as ‘optimisation of effort’. At this stage a company is already performing multiple activities* which combine and reinforce in a variety of ways to deliver on its strategy, and is seeking to further improve them. A company like MOO can further its already strong position by using data and information to improve existing activities (e.g. ensuring that your order arrives in a product you are statistically more likely to be interested in as a particular type of customer).

*note: each additional combination of activities, doesn’t add but multiplies the complexity of a business, making it harder to copy

Businesses need to be aware of chain-link logic to identify dependencies, both those creating obstacles and opportunities to create new dependencies that secure unique advantage.