In contrast, the external value chain has not been studied as extensively. The external value chain consists of the important upstream/supply and downstream/distribution processes. However, even though these processes occur outside the corporation, the strategic opportunities they reveal and areas of risk they highlight warrant careful study. Consider:.
B Outsourcing " involves transferring certain primary or support functions in the internal value chain to the external value chain.
B Vertical integration " involves taking control of one or more additional stages of the external value chain and making them internal.
B Horizontal expansion " involves new product lines or expanded channels of distribution, including geographic expansion.
B Strategic alliances with suppliers " involves more closely managing external suppliers as if they were part of the company's internal value chain, but without actually owning them (for example, Toyota's Kaizen system, wherein key suppliers are located very near a.
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factory and receive all kinds of help and training from Toyota to ensure smooth and efficient production).
One of the most complex value chains today can be found in the oil industry (see Exhibit 1). This chain has nearly 30 significant elements, starting with the search for oil (at the upstream end) and including field production, transportation (pipelines and supertankers), refining and processing and, lastly, consumer gas stations (at the ˜ ˜downstream'' end). Internally, the oil-industry value chain processes a broad range of products, including such major categories as oil/lubricants, gasoline, petrochemicals (plastics), fertilizers/pesticides, natural gas, power generation/electricity, and convenience stores. The firms that are considered major integrated oil companies participate in a significant number " sometimes all " of these external (upstream and downstream) and internal value-chain elements.
