Value Chain Essay Sample

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I. Systems view of world order and relations

Three concrete systems stand out: 1. Mini system 2. World empire( make the world similar) 3. World economies ( feel the influence of some economy around) Ex: There is a German university in Vietnam The system consists of a single division of labor within one world market but contains many states and cultures. Core states concentrate on high skill, capital- intensive production (not use much labor but machine). They are militarily strong and appropriate much of the surplus of the whole world economy. Peripheral areas focus on low skill, labor intensive production and extraction of raw material: they have weak states. Semiperipheral areas have stronger states. II. Globalization: State of belonging to networks and getting into interdependencies in multi-continental level where linkage and interdependencies occur through flows and influences of capital and goods, information and ideas, people and forces.

A. Cobweb of globalization: Consumer and industrial market: domestic, international, regional, global Around the consumer and industrial market are substitute products and services The substitute products and services are influences by: 1. Producers 2. Suppliers 3. Intermediaries 4. Providers. All of these things above are affected by : 1. Political systems 2. legal systems 3. cultural systems 4. natural resources and ecology 5. technology and know-how 6. government and other change agents, Note: the differences between industrial market and consumer market In a consumer market, the consumer uses the product for personal use but in an industrial market, the products are used as supply or to do the operations

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B. Drivers of the economic globalization: 1. Market: a. Common customer need b. Global customer c. Global market channel d. Transferable marketing Ex of Transferable marketing: An advertisement for a shampoo is made in Iran. This advertisement or marketing campaign can be used in many countries like India, Banglades,… as they have somehow similar culture and thinking. This ad keeps the same content and change the languages. 2. Cost: a. Sourcing efficiencies b. Global scale economies c. Factor productivity differentials d. High product development cost e. Rapidly changing technology 3. Government: a. Less restrictive investment and trade policies b. Compatible( to be exist or be used together without causing problems) and harmonious standardization c. Harmonious regulatory regime(particular system) 4. Competition: a. Two way trade and cross border FDI b. Global competitor c. Interdependency and integration through policy, trade, investment and management link Market Government Cost Competition

Low Domestic

high Global

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C. Looking for a clever choice: Offshoring and outsourcing Outsourcing refers to an organization contracting work out to a 3rd party, while offshoring refers to getting work done in a different country, usually to leverage cost advantages. It is possible to outsource work but not offshore it. For instance, hiring an outside law firm to review contracts instead of maintaining an in-house staff of lawyers. It is also possible to offshore work but not outsource it. For instance, a Dell customer service center in India to serve American clients. Offshoring outsourcing is the practice of hiring a vendor to do the work offshore, usually to lower costs and take advantage of the vendor’s expertise, economies of scale, and large and scalable labor pool Comparison chart:

Risks and criticism Is often criticized for transferring jobs to other countries. Other risks include geopolitical risk, language differences and poor communication Offshoring means getting work done in a different country Benefits of offshoring are usually lower costs, better availability of skilled people, and getting work done faster through a global talent pool

Risk of outsourcing include misaligned interests of clients and vendors, increased reliance on 3rd parties, lack of in house knowledge of critical business operationas Outsourcing refers to contracting work out to an external organization Usually companies outsource to take advantage of specialized skills, cost efficiencies and labor flexibility



D. Theoretical foundations and evolution of the concept of global value chain: Management & Industrial organization Global production network(GPN) Linkages (Hirschmann)

Value system ( Porter)

Value chain analysis

Chain characteristics(Ge reffi, IDS)

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1. Porter’s value chain: If companies are to deliver the value chain to the customers, it is important for companies to understand where value is created and where value is potentially lost. The Value Chain put forward by Michael E. Porter is helpful to determine where value is created or lost in terms of activities performed by the company. The value chain describes the activities within and around the company that create the final product or service. The cost and value of these activities will determine whether or not best value products or services are being made that will satisfy the customer. The value chain is grouped into two main groups of activities: primary activities and support activities. Primary activities are directly concerned with the production or delivery of certain products or services. Support activities help to support the efficiency and effectiveness of primary activities. Primary activities: + Inbound logistics + Operations + Outbound logistics + Marketing & Sales + Service Supporting activities: + Procurement + Technology development + Human resource development + Firm infrastructure

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Supply chain Management covers with inbound logistic, operation. It sets up IT tools to manage the suppliers on material, schedules people to turn from raw material to finished goods and also help to manage them. Customer Relation Management (CRM) often deal with outbound logistics to help sell products in the market. CRM systems help to understand what customers really want. On the top of the primary activities are the supportive activities. Supply chain management , CRM, Enterprise Resource Planning System all focus on outbound logistics key component to understand the value chain

Note: Inbound and outbound logistics Inbound logistics is the management of transport and storage for raw materials received by a business. Outbound logistics is the management of transport and storage for finished goods dispatched by a business. 2. Hirschman’s linkages and development: How can ‘external economies and ‘cumulative effects’ be used (reaped) in order to gain maximum results? → Forward and Backward linkage → Sectoral imbalances as basic for development Backward linkage: means the inter-industry effect of every activity due to its requirements of production inputs that must be supplied by other industries. Forward linkage: takes place in industries whose production is used as inputs of other industries

Global commodity chain: 1. Definitions: Commodity chain is the network of economic links which integrate transnational labor processed and corporations involved in global sourcing and global marketing of products. Commodity chain analysis sometimes also known as the “ global commodity chains”( GCC) approach- is a development of the world system perspective. It challenges the assumption that capitalism is an incremental process contained within nation-states by tracking the organizational, geographical and cultural dimensions of worldwide chains for the manufacture and distribution of goods such as clothing, automobiles, food, and drugs. A distinction is sometimes made between producer-driven( transnational corporation) and buyer-driven( retailer/ trading company) commodity chains.

Consist of sets of interorganizational network, clustered one around one commodity or product, linking households, enterprises, and states to one another within the worldeconomy. These networks are: a. Situationally specific b. Socially constructed, and c. Locally integrated a. Producer-driven chain : Are those in which large, usually transnational manufacturers play the central roles in coordinating production networks (including their backward and forward linkages). This is characteristic of capital- and technology-intensive industries such as automobiles, aircraft, computers, semiconductors, and heavy machinery. The automobile industry offers a classic illustration of a producer-driven chain, with multilayered production systems that involve thousands of firms (including parents, subsidiaries, and subcontractors). b. Buyer- driven chain I:

Refer to those industries in which large retailers, marketers, and branded manufacturers play the pivotal (more important than anything else in a situation, system) roles in setting up decentralized production networks in a variety of exporting countries. 6 Nguyen Anh Phuong

- e.g. labor-intensive, consumer goods industries such as garments, footwear, toys, house wares, consumer electronics, and a variety of handicraft. – Production is carried out by tiered networks of third world contractors that make finished goods for foreign buyers. The specifications are supplied by the large retailers or marketers that order the goods. c. Buyer- driven chain II: – Powerful retailers: Wal-Mart, J.C. Penney, Karstadt, Metro, Lidl – Marketers of brand names:

Nike, adidas, Reebook, Zara – Branded manufacturers: Sara Lee Corporation, Van Heusen, Levi Strauss & Co. – Consumer priority – No own production sites, just subcontracting, design by big companies – Triangle Manufacturing: – Good buyer driven chains need: Networks, Trust, Quality and Flexibility OEM (Original Equipment Manufacturing) OBM (Original Brand Name Manufacturing) Characteristics of Producer- driven and Buyer driven global commodity chains: Producer driven Commodity chain Industrial Capital Reseach & Development; Production Economies of Scale Consumer Durables; Intermediate Goods, Capital Goods Automobile; Computers, Aircraft Investment-based Vertical Buyer driven Commodity chain Commercial Capital Design, Marketing Economies of scope Consumer Nondurables

Drivers of Global Commodity chains Core Competencies Barriers to Entry Economic Sectors

Typical industries

Apparel; Footwear; Toys

Main network Links Trade-based Predominant Network Horizontal Structure Note: Economies of Scope: An economic theory stating that the average total cost of production decreases as a result of increasing the number of different goods produced. For example: McDonalds can produce both hamburgers and French fries at a lower average cost than what it would cost two separate firms to produce the same goods. This is because Mc Donalds hamburgers and French fries share the use of food storage, preparation facilities, and so forth during production. Another example is a company such as Proctor& Gamble, which produces hundreds of products from razors to toothpaste. They can afford to hire expensive graphic designers and marketing experts who will use their skills across the product lines. Because the cost are spread out, this lowers the average total cost of production for each product.

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Economies of Scale: The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. There are two types of economies of scale: – External economies: the cost per unit depends on the size of industry, not the firm. – Internal economies: the cost per unit depends on size of the individual firm. 2. Changing world scenario: 1950s and 1960s: – Trade: raw materials exports from developing countries vs. capital goods from industrialized countries Recent times – Global system of production for goods – Technology and information asymmetric relations among the economies Globalization: a) Global finance systems b) TNC very important (1/3 or ½ of world trade)

TNC are organizers of global value chains c) Intensified competition in world market new regional centers in Newly Industrialized Countries (NIC) through low wages and rise of productivity d) Modern technology Information and communication and transport allow for fast reaction and adjustment of consumer demand e) State und protection for national industries (China, India, Taiwan, Brazil) support systems for enterprises through human capital development and R&D Note: TNC: Transnational Company (Corporation) TNC is a company that sells its products internationally and globally. It normally makes its products in LEDCs whereas its branches are in MEDCs. Examples of TNCs are: Nestle, Topshop, Sony, Cocacola, Nike (they are basically huge brands!) LEDCs: LEDC stands for less economically developed country and in general, LEDCs are non-industrial nations.

They tend not to manufacture goods and the residents are usually poor. Another term for LEDCs is Third World nations and there are MEDC’s too, that stands for more economically developed countries and those countries are rich. A few of them are England, Australia and The United States of America. A few of the LEDC countries are Panama, Sierra Leone and Ghana and there several more. Residents of LEDC’s countries earn the equivalent of less than $1200 US a year (which is less than $4 US a day). A MEDCs stands for More Economically Developed Country. This is a country like the UK that has a reasonably stabel economy and is high on the development spectrum. 3. Trends in the world economy: a. Worldwide industrialization – Growing share of industrial production 8 Nguyen Anh Phuong

b. Diversification and export-oriented industrialization – Growing share of Industrial processed final commodities export – Rising share of exports of investment goods c. Geographical specialization and export niches Note: What is niche market? Small market within a large market or industry Maybe off the wall or very specific in the details, such as : water roof hiking boots for man Below is another example of niche market

Global Production Network: 1. Definition: Global Commodity Chain (GCC) analysis is principally concerned with understanding how global industries are organized. It consists of identifying the full set of actors (i.e. firms) that are involved in the production and distribution of a particular good or service and mapping the kinds of relationships that exist among them’ (Bair, 2005, p. 157) In order to understand the dynamics of development in a given place, then, we must comprehend how places are being transformed by flows of capital, labor, nowledge, power etc. and how, at the same time, places (or more specially their institutional and social fabrics) are transforming those flows as they locate in place-specific domains (Henderson, 2002) GPN focuses the analysis mainly on ‘production rather than commodity’ and ‘network rather than chain’ and extent of understanding is ‘global’

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2. Analytical framework of GPN Categories: Value Creation Enhancement(improvement) Power Corporate Collective( shared or made by every member of a group or society) Institutional( existed for a long time in an organization and have become accepted as normal) Embeddedness Territorial Network



Institutions – Governmental – Quasi-governmental – Non-governmental


Sectors – Technologies – Products/Markets


Firms -Ownership -Architecture’

Networks (Business/Political) – ‘Architecture’ – Power configuration

Global value chain: 1. Overview: Value chain describes the full range of activities which are required to bring a product or service from conception, through the intermediary of production, delivery to final consumers, and final disposal after use (Kaplinsky, 2000) Global value chain approach (Institute of Development Studies, University of Sussex researchers) emphasizes on the analysis of cross-border linkages between firms in global production and distribution systems 2. Focal points in global value chain analysis: Global value chain (Gereffi and Korzeniewicz, 1994; Gereffi, 1995) analysis focus on the exploration of: – the input-output structure of the chain – the territory it covers – its governance structure  - the institutional framework that identifies how local, national, and international conditions and policies shape the globalization process at each stage in the chain Notes: The difference between inputs and outputs in business: Every production company adds value to the material it purchases in order to sell those at a profit.

Thus inputs are everything necessary to add value to a product and outputs are the products that can be sold after the value has been added. 3. Filiere approach: Filière-approach (French Economists, 1970s) – Knowledge about economic activities inside a production and distribution system – Identification of flows of goods and involvement of actors – Identification of ‘input-transformation-output’ at all levels, i.e. identification of decentralized production and actors ……it is the task to identify ‘strategic knots’ as a means for domination of the whole production and distribution chain (Hugon, 1993) – Government intervention and strategic national activities 4. Whom and what to look for in mapping value chain: – Actors in global industries, and how their roles are changing (lead firms plus supply chains) – Power in the chain (brands, global buyers) – Linkages between value chain activities (firms, intra-firm, networks) – Geography: locate domestic and national industries in their global context – Institutions: Government, unions, trade associations, NGOs, multi-lateral agencies and regulations.

Concerns in the global market: Product definition The more the buyers pursue a strategy of product differentiation, for example, through design and branding, the greater the need to provide suppliers with precise product specification and to monitor that these specifications are met Risk of supplier failure The increasing importance of non-price competition based on such factors such as quality, response time and reliability of delivery, together with increasing concerns about safety and other standards, means that buyers have become more vulnerable to shortcomings in the performance of suppliers VI. Concept of the governance in global value chain: 1. Overview: Governance: is the act of governing. It relates to decisions that define expectations, grant power, or verify performance. It consists of either a separate process or part of management or leadership processes. These processes and systems are typically administered by a government. 11 Nguyen Anh Phuong

In the case of a business or of a non-profit organization, governance relates to consistent management, cohesive policies, guidance, processes and decision-rights for a given area of responsibility. For example, managing at a corporate level might involve evolving policies on privacy, on internal investment, and on the use of data. The concept of ‘governance’ is central to the global value chain approach. This article explains what it means and why it matters for development research and policy. The concept is used to refer to the inter-firm relationships and institutional mechanisms through which non-market coordination of activities in the chain takes place. This coordination is achieved through the setting and enforcement of product and process parameters to be met by actors in the chain. In global value chains
in which developing country producers typically operate, buyers play an important role in setting and enforcing these parameters. They set these parameters because of the (perceived) risk of producer failure.

Product and process parameters are also set by government agencies and international organisations concerned with quality standards or labour and environmental standards. To the extent that external parameter setting and enforcement develop and gain credibility, the need for governance by buyers within the chain will decline. 2. What exactly is done in governance? Control is exercised by setting up key sets of parameters -What is to be produced? Definition and configuration of the product to be produced – How it is to be produced? Production process, technology to be used, environmental and labor standards etc. – When it is to be produced? – How much to be produced? 3. Types of relations among the actors in global value chain: a. Markets.

Markets are the simplest form of GVC governance. GVCs governed by markets contain firms and individuals that buy and sell products to one another with little interaction beyond exchanging goods and services for money. The central governance mechanism is price. The linkages between value chain activities are not very “thick” because the information that needs to be exchanged and knowledge that needs to be shared is relatively straightforward.

b. Modular value chains. This is the most market-like of three network-style GVC governance patterns. Typically, suppliers in modular value chains make products or provide services to a customer’s specifications. Suppliers in modular value chains tend to take full responsibility for process technology and often use generic machinery that spreads investments across a wide customer base. This keeps switching costs low and limits transaction-specific investments, even though buyer-supplier interactions can be very complex. Linkages are necessarily thicker than in simple markets because of the high volume of information flowing across the inter-firm link, but at the same time codification schemes and the internalization of coherent realms of knowledge in value 12 Nguyen Anh Phuong  chain “modules,” such as design or production, can keep interactions between value chain partners from becoming highly dense and idiosyncratic.

c. Relational value chains. In this network-style GVC governance pattern we see mutual dependence regulated through reputation, social and spatial proximity, family and ethnic ties, and the like. The most obvious examples of such networks are in specific communities, or “industrial districts,” but trust and reputational effects can operate in spatially dispersed networks as well. Since trust and mutual dependence in relational GVCs take a long time to build up, and since the effects of spatial and social proximity are, by definition, limited to a relatively small set of co-located firms, the costs of switching to new partners tends to be high. Dense interactions and knowledge sharing are supported by the deep understanding value chain partners have of one another, but unlike the codification schemes that enable modular networks, these “short-cuts” tend to be idiosyncratic and thus difficult and time-consuming to re-establish with new value chain partners.

d. Captive value chains. In this network-style GVC governance pattern, small suppliers tend to be dependent on larger, dominant buyers. Depending on a dominant lead firm raises switching costs for suppliers, which are “captive.” Such networks are frequently characterized by a high degree of monitoring and control by the lead firm. The asymmetric power relationships in captive networks force suppliers to link to their customer in ways that are specified by, and often specific to a particular customer, leading to thick, idiosyncratic linkages and high switching costs all round. e. Hierarchy. This governance pattern is characterized by vertical integration (i.e.”transactions” take place inside a single firm). The dominant form of governance is managerial control.

Much of the literature that seeks to categorize cross-border economic activity emphasizes only two options: market or hierarchy. Firms either invest offshore directly or buy goods and services from foreign firms. A smaller body of literature has noted the prevalence of network forms of organization where there is some form of “explicit coordination” beyond simple market transactions but which fall short of vertical integration. While this is a useful insight, there is convincing evidence that not all networks are the same. The GVC framework specifies three types of network governance (modular, relational, and captive) along with the two traditional modes of economic governance (markets and hierarchies). 4. What makes GVCs different?

When would we expect to see GVC organized according to the five patterns outlined above? This is a complex question, and there are many factors that influence how GVCs grow and develop over time. One important point is that the patterns and effects of GVCs tend to vary in specific industries and places. Because of this, GVC research often has a sectoral or geographic focus. In ”The governance of global value chains” (cited above), the co-organizers of the GVC Initiative identify three important variables to look for when studying GVCs in a particular firm, industry, or place: 13 Nguyen Anh Phuong

a. The complexity of transactions. More complex transactions require greater interaction among actors in GVCs and thus stronger forms of governance than simple price-based markets. Thus, complex transactions will likely to be associated with one of the three network governance patterns (modular, relational, or captive) or integrated within a single firm (hierarchy). b. The codifiability of transactions. In some industries schemes have been worked out to codify complex information in a manner in which data can be handed off between GVC partners with relative ease, often using advanced information technologies. If suppliers have the competence to receive and act upon such codified information, and if the codification schemes are widely known and widely used, then we would expect to see modular value chains emerge. If not, then lead firms might either keep the function in-house, leading to more vertical integration (hierarchy) or outsource it to a supplier that they tightly control and monitor (the captive network type) or have a dense, idiosyncratic relationship with suppliers (the relational governance type). c. The competence of suppliers.

The ability to receive and act upon complex information or instructions from lead firms requires a high degree of competence on the part of suppliers. Only then can the transfer of complex but codified information be achieved (as in modular networks) or intense interaction be worthwhile (as in relational networks). Where competent suppliers do not exist, lead firms either must internalize the function (hierarchy) or outsource it to suppliers that they tightly monitor and control (captive suppliers). Furthermore, if one of these three variables changes, then value chain governance patterns tend to change in predictable ways. For example, if a new technology renders an established codification scheme obsolete, we might expect modular value chains to become more relational, and if competent suppliers cannot be found, then perhaps captive networks and even vertical integration would become more prevalent. Conversely, rising supplier competence might mean that captive networks move toward the relational type and better codification schemes might prepare the ground for modular networks.

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Key determinants of global value chain governance

Types of coordination ni global value chain:

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Example of parameter setting and parameter enforcement

Driver of standards over process and product

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Categories of private public governance in global

5. Why does governance matters? – Market access – Fast track acquisition of production capability – Funnel for technical assistance – Distributions of gains – Leverage point of policy initiatives

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