Concept and Tools : Global Value Chains

WHAT IS THE CONCEPT OF A VALUE CHAIN?

A value chain is a business model that outlines the entire process of creating a product or service. The steps involved in taking a product from creation to delivery, as well as all in between—such as procuring raw materials, production functions, and marketing activities—make up a supply chain for companies that manufacture products.

A value-chain analysis is carried out by examining the detailed processes involved in each phase of a company’s operations. A value-chain analysis is used to improve manufacturing performance so that a business can produce the most value for the least amount of money.

CAN YOU EXPLAIN THE DIFFERENCE BETWEEN A SUPPLY AND A VALUE CHAIN?

Yes, indeed. The term “supply chain” refers to the integration of all the operations involved in the manufacturing, procurement, conversion, and logistics processes. Value chain, on the other hand, refers to a set of business operations in which utility is applied to the firm’s products and services in order to increase consumer value.

Supply Chain is the interconnection of all the functions that begins from the manufacturing of raw material into the finished product and ends when the product hits the final consumer. A value chain, on the other hand, is a series of actions aimed at increasing the value of a commodity.

Supply Chain vs. Value Chain: What’s the Difference?

The main distinctions between supply chain and value chain are as follows:

1. Supply chain refers to the coordination of all operations, people, and businesses involved in moving a product from one location to another. The term “value chain” refers to a series of actions that add value to a commodity at each stage before it reaches the final customer.
2. The Supply Chain concept comes from organisational management, while the Value Chain concept comes from market management.
3. Materials are transferred from one location to another as part of supply chain operations. Value Chain, on the other hand, is largely concerned with delivering value for money in the form of a product or service.
4. The supply chain order starts with the product request and ends when the product meets the customer. Unlike the value chain, which starts with the customer’s request and ends with the product, the value chain starts with the customer’s request and ends with the product.
5. The supply chain’s main goal is to achieve full customer satisfaction, which is not the case for the Value Chain.

ISN’T THERE A VALUE CHAIN AND A GLOBAL VALUE CHAIN (GVC) DIFFERENCE?

A value chain may exist within a single geographic area or even within a single company (think about a fruit that is grown, packaged, sold and consumed within one country). Multiple companies and regional spaces are involved in a global supply chain. A machine, for example, uses labour and materials from many countries, is manufactured in another, and was built and will eventually be sold in other countries. The GVC Initiative is especially interested in value chains that are distributed through numerous firms and locations, hence the expression “global value chain.”

WHAT ARE THE SOCIAL IMPLICATIONS OF GLOBAL VALUE CHAINS?

Firms and staff in far-flung areas have a greater impact on one another than in the past. Some of these effects are simple, such as when a company from one country opens a new factory or engineering centre in another country, while others are more complicated, such as when a company from one country contracts with a company from another country to coordinate production in plants operated by a third company, and so on.

It’s critical to track global output trends and understand how GVCs operate or are “governed,” as well as the positions they play in both rich and poor countries. It provides information on particular industries and locations’ employment, technology, standards, laws, products, procedures, and markets. Economic players, companies, staff, and policymakers must have a clear understanding of how GVCs operate in particular cases and resources to forecast how they will evolve over time.

ARE THERE ANY GLOBAL VALUE CHAINS THAT ARE THE SAME?

No, it’s not true. Product characteristics (i.e., number of components or weight of the product), firm capacities, and the ability to standardise the manufacturing process all influence the relationships between firms in GVCs. For more information on value chain governance, see the section below.

WHEN DID GLOBAL VALUE CHAIN ANALYSIS REACH ITS FINAL STAGE?

In the early 2000s, the GVC system was created to incorporate elements of common industrial organisation structures such as commodity chains, networks, industrial districts, and clusters, among others. In the year 2000, a group of researchers from different scholarly backgrounds came together to create a common framework for describing the complex network relationships between firms that often span large geographic areas using a standard collection of words. This was the start of the Global Value Chains Initiative, which led to the introduction of a new research method known as global value chain analysis. More information can be found on the About Us tab.

WHAT IS THE GVC ANALYSIS AND RESEARCH APPROACH?

Academics and practitioners alike use the global value chain research method to perform in-depth research on the structure and dynamics of global markets in order to better understand where, how, and by whom economic, social, and environmental value is generated and transmitted. In practise, research questions are focused on topics of growth and sustainability, with study aimed at identifying possible leverage points and bottlenecks in the supply chain. The findings of a value chain study are often used by economists to formulate industrial policies and strategic strategies for businesses and countries.

The GVC system is commonly used in studies that adopt a research methodology that includes two key steps: value chain mapping and analysis. The process of defining the geography and activities of stakeholders involved in moving a product or service from raw material to production and then to the customer is known as value chain mapping (input-output). The goal of value chain analysis is to figure out what role dynamic factors (governance, organisations, and inter-firm relationships) play in influencing a product’s or service’s location, growth, and competitiveness. Identifying possible interventions and leverage points to initiate progress is also part of this process.

WHO SHOULD BE CONCERNED ABOUT THE GVCS?

GVCs are large, organizationally fragmented, and diverse, making it difficult to determine one’s role and prospects. As a result, understanding how GVCs operate in particular cases and having resources to forecast how they might evolve over time is critical for economic actors, companies, staff, and policymakers. A small company in a developing world, its manager, and local politicians focused on sustainable economic upgrading, for example, would all benefit from considering their competencies in relation to other local and global players in the chains they engage in, or plan to participate in.

WHAT DOES IT MEAN TO MANAGE A VALUE CHAIN (OR FIRM)?

Five separate GVC governance trends were established in a paper that emerged from the GVC Initiative’s discussions (Gary Gereffi, John Humphrey, and Timothy Sturgeon, “The governance of global value chains,” Review of International Political Economy, vol. 12, no. 1, 2005).

1. Markets. The most basic type of GVC governance is markets. Firms and individuals in GVCs governed by markets buy and sell products to one another with little contact other than exchanging goods and services for money. Price is the primary governing mechanism. Since the information that needs to be exchanged and the knowledge that needs to be shared is relatively clear, the linkages between value chain activities are not very “thick.”
2. Modular value chains. This is the most market-like of the three GVC governance patterns based on networks. In most modular supply chains, manufacturers produce products or offer services according to a customer’s requirements. In modular supply chains, suppliers are more likely to take full responsibility for process technology and to use common equipment to spread investments over a large customer base. Even though buyer-supplier interactions can be extremely complex, this keeps switching costs low and transaction-specific investments to a minimum. Because of the high volume of information flowing through the inter-firm link, linkages must be thicker than in simple markets, but codification schemes and the internalisation of coherent domains of expertise in value chain “modules,” such as design or development, will prevent interactions between value chain partners from being dense and idiosyncratic.
3. Relational value chains. Mutual dependency is governed in this network-style GVC governance pattern by reputation, social and spatial proximity, family and ethnic relations, and other factors. Trust and reputational effects can occur in spatially dispersed networks as well. The most obvious examples of such networks are in particular neighbourhoods, or “industrial districts,” but trust and reputational effects can also operate in spatially dispersed networks. Since confidence and reciprocal dependency take time to develop in relational GVCs, and because the effects of spatial and social proximity are, by definition, restricted to a small number of co-located companies, transitioning to new partners has a high cost. The deep understanding value chain partners have of one another supports dense interactions and information sharing, but unlike the codification schemes that allow modular networks, these “short-cuts” are idiosyncratic and therefore difficult and time-consuming to re-establish with new value chain partners.
4. Captive value chains.  Small suppliers are reliant on larger, dominant buyers in this network-style GVC governance pattern. Suppliers that are “captive” face higher switching costs when they rely on a dominant lead company. A high level of monitoring and control by the lead firm is common in such networks. Because of the asymmetric power relationships in captive networks, suppliers are forced to connect to their customers in ways that are dictated by, and often unique to, each customer, resulting in dense, idiosyncratic linkages and high switching costs all over.
5. Hierarchy. Vertical integration is a function of this governance pattern (i.e.”transactions” take place inside a single firm). Managerial control is the most common type of governance.

Most of the literature on cross-border economic activity categorises it into one of two categories: market or hierarchy. Firms either invest directly overseas or purchase products and services from international companies. A smaller body of literature has noted the prevalence of network types of organisation, which have some kind of “explicit communication” beyond simple market transactions but are not vertically integrated. Although this is an insightful observation, there is compelling proof that not all networks are created equal. Along with the two conventional modes of economic governance, the GVC system defines three forms of network governance (modular, relational, and captive) (markets and hierarchies).

WHAT DIFFERS GVCS BY INDUSTRY?

When can we expect GVCs to be structured in the five patterns described above? This is a complicated topic, and several factors affect how GVCs evolve and grow over time. One important thing to remember is that the trends and effects of GVCs differ depending on the industry and place. As a result, GVC research often focuses on a specific industry or region. The co-organizers of the GVC Initiative describe three essential variables to look for when researching GVCs in a specific firm, sector, or location in “The Governance of Global Value Chains” (cited above).

1. The transactional complexity. In GVCs, more complex transactions necessitate more interaction among actors and, as a result, more robust forms of governance than simple price-based markets. As a result, complex transactions would almost certainly be aligned with one of the three network governance trends (modular, relational, or captive) or incorporated within a single firm (hierarchy).
2. The transaction’s codifiability. In some industries, schemes have been devised to codify complex information in such a way that data can be easily passed between GVC partners, often using advanced information technology. We may expect modular value chains to emerge if suppliers have the ability to obtain and act on such codified information, and if the codification systems are well-known and commonly used. If not, lead firms can choose to keep the feature in-house, resulting in more vertical integration (hierarchy), outsource it to a supplier they tightly manage and track (captive network type), or have a dense, idiosyncratic relationship with suppliers (the relational governance type).
3. The competence of suppliers. Suppliers must have a high level of competence in order to obtain and function on complex knowledge or orders from lead firms. Only then would it be possible to transmit dynamic yet codified information (as in modular networks) or to engage in intense interaction (as in relational networks). When qualified suppliers aren’t available, leading companies must either internalise the job (hierarchy) or outsource it to suppliers they can closely track and manage (captive suppliers).

Furthermore, as one of these three variables shifts, value chain governance trends shift in predictable ways. If a new technology makes an existing codification scheme redundant, we may expect modular supply chains to become more relational, and if competent suppliers are hard to come by, captive networks and even vertical integration which become more common. Rising supplier competence, on the other hand, may indicate that captive networks are shifting toward relational networks, and better codification schemes may be laying the groundwork for modular networks.

HOW DIFFERENT ARE GVCS FROM GLOBAL COMMODITY CHAINS?

The GVC system is only one of many approaches to comprehensive, firm-level research on global industry structure and dynamics. A crucial distinction was established between global chains that are “led” by two types of lead firms: buyers and producers, in an earlier but still active body of research on Global Commodity Chains (GCCs). Gary Gereffi’s chapter “The organisation of buyer-driven global commodity chains: How U.S. retailers form overseas production networks” in the 1994 book Commodity Chains and Global Capitalism (Westport, CT: Praeger), which he edited with Miguel Korzeniewicz, was a major contribution to this stream of research.

The GCC system drew attention to the significant position that large retailers like Wal-Mart and brand marketers like Nike have come to play in global manufacturing and distribution governance. Despite the fact that “global consumers” own few, if any, factories of their own, the scale of their purchases gives them enormous clout over manufacturers, which they have used to determine what, how, where, where, and by whom the products they sell are manufactured. Global consumers have also been able to secure price cuts from their biggest suppliers thanks to their disproportionate market strength. Suppliers have responded by concentrating more of their factories in low-cost locations and exerting greater pressure on their own upstream suppliers to reduce prices.

The GCC system distinguished “buyer-driven” chains from “producer-driven” chains, which are dominated by large manufacturing companies like GM and IBM. Simply put, producer-driven chains have more ties to corporate affiliates, while buyer-driven chains have more ties to legally independent businesses. The idea that buyer-driven chains are more popular in relatively simple items like clothing, home goods, and toys underpins this distinction. In these sectors, product design and marketing are more important than manufacturing know-how, making it easier for leading companies to outsource production. Technology and manufacturing skills are key competencies that need to be built and deployed in-house or in captive suppliers that can be blocked from sharing with rivals in the more technology- and capital-intensive products made in producer-driven chains, such as cars and complex electronics.

Transnational giants, on the other hand, have changed radically in the last 30 years, outsourcing more operations and forming strategic alliances with rivals. They’ve been more network-oriented and less vertically integrated. Better global standards in the realms of business processes and product characteristics, as well as extensive use of information technology in areas such as design, manufacturing, service provision, supply chain coordination, and materials management, have enabled increased outsourcing in producer-driven chains and made it possible, and more compelling, for firms to forge modular linkages between a variety of products.

As a result, there have been significant and rapid changes in chain governance, with producers becoming more buyer-like by outsourcing and the skills needed to service global buyers increasingly increasing. Today, global-scale networks of legally independent companies produce not only simple products, but also goods and services that require a lot of technology and resources. The GVC system defines a more comprehensive collection of governance forms, as well as a tool for explaining changes in governance trends over time. To begin, we may claim that buyer-driven chains are more likely to be organised through market, modular, or relational governance, while producer-driven chains are more likely to be coordinated through captive or hierarchical governance.