Value chains and globalisation

1
Value chains and globalisation

• Prof. André Jooste

2
Impact of international trends
Shift from production driven to market driven
agriculture
Napier, 1999
3
Two significant enablers

• First is trade liberalization
• World trade growth is double world production
  growth
• The second major enabler is global communications
• E-commerce is transforming communications and
  business processes across the world.
• Distance is now not an impediment to world trade

4
CHANGES IN MANUFACTURING AND DISTRIBUTION

• CHANGING POWER POINTS
• Processors/manufacturers have to scramble for
  least cost supply points
• Industries are concentrating into fewer hands
• Product or service line reporting relationships
  is replacing geographic organizations
• Manufacturers are rationalizing brands and
  factories across previously protected national
  boundaries
• The global players are buying the local
  organizations

5
CHANGES IN RETAILING
In recent survey of 300 of the leading European
grocery retailer executives a number of questions
were asked about the future of retailing

• What percentage of todays retailers will be in
  existence in 2005? 63 said less than 50.
• Who will own most of the stores in 2005? 65
  said large global retailers.
• If you were not in the food business, would you
  invest 50 of your personal wealth in food
  retailing, today? 52 said definitely not.
• By what date will consumer-direct sales represent
  20 per cent of retail volume? 20 said by
  2005 and 48 said by 2010.

6
Clear shift in power to the retailer

• Power is moving to larger retailers
• There is a move from national to global
• Global promotions
• Leading retailers are lowering their prices but
  at the same time increasing profits
• Strong growth in private labels
• Retailers recognize that they are selling a
  package and focusing on image, quality and
  consistency
• Leading retailers are developing global scope and
  transnational private labels
• Retailers are driving innovation and attempting
  to capture more of the available consumer
  dollar/margin pool from the manufacturer.

7
Trends in retailing
8
HOW TO MANAGE THE VALUE CHAIN

• The best way to manage the Value Chain is by
  forming efficient and long-term alliances
• Four points to achieve this
• Power balancing
• Co-specialization
• Target costing, and
• Personal alliances with managers
• Strategic positioning

9
Forming partnerships/Alliances

• Partnership most prevalent in
• Growing markets
• Where consumers wants are fragmenting
• Where there is scope for increasing sales of
  value added products
• Where there is a wider choice of products,
  particularly at the higher added value end of the
  market
• Retailer-distributor alliances come in the form
  of lower costs, more efficiency in retailing
  responding to consumers faster

10
What must producers do

• An integrated system linking production with
  point of sale allowing information flow up and
  down the supply chain
• Product that is of the highest quality and meets
  all the regulatory and consumer requirements
• Consistency of supply
• Suppliers with the initiative and capacity to
  develop new products
• Suppliers that can work with buyers to provide
  price stability
• A marketing perspective of the supply chain
  rather than a production view
• A preference for long term commercial
  relationships

11
Strategy

• One of the most common strategic choices are
  vertical integration.
• Three rationales are often given by producers for
  vertically integrating.
• First is to take control of their own crop
• (Does this strategy really mean more returns
  for producers?)
• A second rationale, is that integration allows
  producers to capture the higher returns and lower
  price volatility downstream
• (Simply because greater returns reside down
  stream is not a sufficient
  condition justifying direct investment)
• Third, a very practical rationale for integrating
  downstream is to replace lost markets due to
  industry consolidation
• (Must to do something??)

12

• Two very important aspects
• core competency and
• tacit knowledge

13
Continue

• Successful adaptors understand their capabilities
  as bundles of competencies, not products or
  functions
• Competencies are the human capital in the firms,
  the shared knowledge, the corporate history,
  communication networks and traditions,
  organizational structure, and collective learning
  
• In other words, it is all that remains if you
  were to remove the products
• A key component of core competencies is
  information and knowledge

14
Continue

• Tacit knowledge is acquired largely through
  personal experience and is often embedded in the
  routines of organizations or individuals
• Much of the knowledge needed for successful
  decision making is made up of unique experiences
  generated over time and through interactions that
  can not be replicated by formal rules

15
Continue

• A firm has two basic strategic positions, a focus
  on productivity or a focus on opportunity.
• A productivity gap focuses on present routines,
  processes, products, and markets.
• Decisions involves improving productivity of
  known systems and routines.
• This strategy is important for success when
  markets are static, mature, of fully competitive.
• In other words, firms are able to invest in
  assets corresponding to long production runs and
  lowering marginal costs

16
Continue

• However, what happens when markets are dynamic,
  firms enter a period of structural change, or
  when markets become less competitive.
• Product or production-based strategies are lost
  because the markets are lost
• Globalization and structural change have
  seriously challenged the traditional business
  model of being the worlds low cost producer of
  commodities
• Technology is packaged in ever more useable
  formats adaptable by almost any producer in the
  world
• Decreasing commodity prices outpace producers
  abilities to increase productivity
• Hence, a shift away from the productivity gap and
  focus on the other half of the value creation
  equation, defined as the opportunity gap

17
Continue

• To accomplish such a strategic repositioning, a
  firm need to assess itself on its core
  competencies and use tacit knowledge
• Firms need to refocus on investment in knowledge
  assets that provide them a competitive advantage
  in markets where direct competition firms
  (rivalry) is the norm
• Producers looking to create more value from their
  competencies shift their managerial focus from
  the production side of the business to the
  marketing side
• The marketing knowledge gained then feeds back
  into changes and adaptations to the production
  plan and asset mix

18
Strategic repositioning to compete globally
Present routines, markets, etc.
Core competencies and tacit knowledge crucial
19
Continue

• Result of taking the opportunity gap
• Improved information flows
• Minimal investments in hard physical assets
  through partnerships
• Financing can be used for market development and
  supply chain relationship development
• Better understanding of dynamics of the market,
  retailer policies and management
• Relationship development and management becomes a
  strategic initiative

20
Case Study Royal Ahold Asia Pacific

• Problem
• Meat had a disproportionate market share compared
  to fruit and vegetables
• Distinct lack of skills and no recognised skills
  development courses
• Market dominated by importers
• Poor handling and cold chain controls
• Inconsistent quality
• Not adhering to customer demand (Asian style
  cut)
• No forward planning for marketing

21
Case Study Royal Ahold Asia Pacific

• Initial steps
• Form alliance with a meat supporter in Australia
• Royal Ahold selected South Burnett Meats as
  partner
• They signed a supply agreement as Preferred
  Supplier
• Analysed the changes needed to make their goals
  achievable

22
Case Study Royal Ahold Asia Pacific

• Managing the change
• Assess the change
• Develop change leadership
• Build commitment
• Sustain new behaviours
• Configure the change program
• Manage the transition

23
Case Study Royal Ahold Asia Pacific

• Actions Undertaken
• Joint research of the Singaporean beef market
• Developed specifications for every cut
• Reviewed and rationalised the cut range
• Jointly participated in government programmes
• South Burnett Meats supplied skilled butchers to
  conduct training in Royal Ahold Singaporean
  stores
• Joint injection of funds
• Development of Trader Database
• Joint analyses of the supply chain
• Joint development of more efficient and
  controlled supply chain

24
OLD SUPPLY CHAIN
Meat Packer
Broker
Air Freight
Air Freight
Port - Singapore
Local Importer
Storage
Local Distributors
Retailer/Wet Market
25
NEW SUPPLY CHAIN
Information flow
Information flow
26
Result of endeavor

• Greater consistency
• New Asian style implemented
• Supply chain savings exceeding 20
• Improved skills of personnel
• Sales percentage share of store doubled to 3