The Global Value Chain

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The Global Value Chain

• Formation Location
• Organisation Relations
• Management

IVØ, February 2006
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Four Basic Questions
Formation How many links ? Why are new ones
established/ existing ones abandoned ?
Management How is the chain/the links
managed? What tools exist for co-ordination?
?
Location Where are the links located?
Relations What mechanisms tie the links together?
The global value chain as structure and flows of
information, values, etc.
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The Multiple Aspects of the Value Chain
Imagine the chain as a tunnel with structures and
various flows
1. Efficiency
Min. transaction and production costs economies
of scale, location.
2. Effectiveness
Max. value to customers
3. Innovativeness
Producer-user relations
4. Power/control
Position in value chain
5. Co-ordination
JIT IT-use Logistics
6. Over time
Degree of integration over the I/PLC and business
cycle
7. Information
Transparency asymmetric flows
8. Environment
Life Cycle Management
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Modes of Interaction/Relations
Market
Spot market
Auction, FruitsVegetables
Marketing concept
Create and satisfy
Long-term, mutual relations (alliance, network,
contract)
Create, satisfy and keep
Reciprocity relations
Business groups
Kinship relations
Asian groups
Power relations
Buyer driven garment chains
Joint venture
Governance relations
Hierarchy
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Theories of the Value Chain
Up-stream
Procurement/ Logistics theory Theory of
outsourcing
Global commodity chain theory Global
Production Network Network theory Internet
theory Cluster theory Environmental theory
(PLC)
Porter theory FDI- theory TCT
Marketing theory Relationship
Marketing (CRM)
Marketing channel theory
Down-stream
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Choice of Theory
The choice depends on the purpose of the study
Cheklist, conceptual framework or theory
Down- or Up-stream
Company or chain perspective
?
Immediate link or whole chain
Economic rationale or social embeddedness
Cost or innovation focus
Domestic or global perspective
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Theory of Global Commodity Chain by G. Gereffi
Firm characteristics
Power, control, and profit
Three Issues
Global Location
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Categories of Global Commodity Chains
Producer driven with the TNC-producer in control,
e.g. the car industry
Buyer driven with the TNC-marketer in control,
e.g. the garment industry
Producer-Buyer driven with mixed governance
structures, e.g. the food industry
Gereffi works only with the two former ones
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Main Characteristics
Producer Driven
Buyer Driven
1. Dominant firm
TNC-producer
Large retail chains
2. Example
Car producers
Garment, shoes marketers
Technology Production Co-ordination
Design, marketing, Branding Co-ordination
3. Core competence
Integration Tier system of sub-contractors
Network of contract producers Intermediaries
4. Organisation
5. Control/power
Up- and down- stream
Down- and up- stream
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Main Characteristics 2
Buyer
Producer
Economies of scale
Brands and marketing
6. Barriers to entry
7. Location
Global, depend- ing on input 1) HQ in
developed economies
Low labour cost HQ in developed economies
8. Profit
The TNC lead company
The retail/whole- Sale chains
1) See cost break down
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The Value Chain of the Food Industry
1. Wholesaler driven, before 1930.
Wholesalers were actors between two fragmented
structures of retailers and producers.
2. Producer driven, 1930-60. Food processors
combined economies of scale with marketing
and branding (pull strategy), which together made
them custodians of quality and created
barriers of entry.
3. Retail Chain Driven, 1960-90. Large retail
chains are formed in more European markets.
Rationalisation of distribution/logistics,
private brands, and shelf-space as the scarce
resource. Some backwards integration.
4. Producer-Chain Driven, 1990- Producers
rationalises (MA relocation) Speciality
producers Chains enter strategic alliances
for supplies of chain brands Chain interna-
tionalise de-investments, i.e decoupling of
producers and chains.
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The Value Chain of the Global Garment Industry
1. Large manufacturers in EU/US with brands 2.
Large retail chains in EU/US, some with trade
brands 3. Outsourcing/purchasing in Japan, HK,
Korea and Taiwan using the PMT formula EU/US
procurement and quality control subsidiaries
in Asia. Marketing and branding in EU/US. 4.
Continue step 3 under the whole package
formula 5. Relocating production to low labour
costs Asian countries, coordinated by HK,
Korean, and Taiwanese companies. 6. Increasingly
leaving procurement and production activities to
the Asian intermediaries, who sub-contract
production to other countries. 7. Continue
step 5 to other countries at the same time as
Asian producers and intermediaries develop
own Asian brands 8. What is the next step???
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Governance Modes of Global Value Chains
Price signals from sellers Little
interaction Standard specifications. (Fish)
Market
Lead buyers transfer module designs to producers
with the (tacit) know-how to Produce. (Cars)
Modular Value Chain
Intensive interaction between BS is required.
Explicit coordination and transfer of
tacit knowledge. Mutual dependence (satellites).
Relational Value Chain
Lead buyers control of supplier with little
know-how. (Garment/electronics)
Captive Value Chain
No qualified suppliers tacit knowledge
Hierarchy
The product is broken down to independent
building blocks that are combined
How the chain is organised and managed.
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Global Value Chain
A value added chain is defined as the process by
which technology is combined with material and
labour inputs, and then processed inputs are
assembled, marketed, and distributed.
Complexity of information/knowledge
The organisation/governance of the GVC is based
on three factors
Capability of suppliers
Codifiability Of knowledge
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Factors Determining the Mode of Global Value
Chain Governance
Complexity of information/knowledge to be
transferred be- tween buyers and producers for a
successful transaction
The possibility to codify the information/knowledg
e both on design and production process
(blueprint production manual as in case of
licences)
The capabilities of suppliers to produce and
transact.

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General Findings and Trends
Trend From hierarchy/captive towards relational,
modular and market.
GVCs are Dynamic they change over time
Shift From codified Situation to tacit
knowledge due to new technology. I.e. Tension
between codes and innovation
Trends
The stage in the GVC may be governed differently
When standards, IT and capabilities of suppliers
increase ? Modular Mode
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Example Bicycles
Who drives the chain?
Today
What drives the chain?
1900
Raw Components materials
Sub-suppliers
Specialists (modules)
Components
Vertically integrated firms
Branded assemblers
Which gover- nance mode?
Wholesalers
Integrated
Retail Chains
Retailers
Voluntary chains
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Drivers

• What
• Economies of scale
• Standards
• Innovation
• Brands

• Who
• The specialist producers,
• The assemblers,
• The retail chain

• Governance mode at
• various stages
• Market
• Modules
• Relational
• Captive
• Hierarchy

• Factors (high-low)
• Complexity
• Codifiability
• Capability