Global Value Chains

Agenda

§  What is a value chain? §  Meaning and use of value chain analysis §  Value chain global strategy

iPod economics

Inside an iPod

•  Model: Ipod 5th generation, 30 GB (Video Ipod)

•  Final price: 299$

Decomposing the product

Key components

Fonte: Linden et al., 2007

Value distribution

299$ -

144.40$ =

154.60$

Distributor

Apple

Retailer

Readings

Kaplinsky, R. and Morris, M. (2001). A Handbook for Value Chain Research. Institute of Development Studies, Brighton. Selected pages: 4-10; 22-23.

What is a value chain?

Flow  of  inputs  and  information  

Design Components Assembly Distribution Retail

§  “Competitive  advantage  can’t  be  understood  by  looking  at  a  ;irm  as  a  whole.                                                                                                    It  stems  from  the  many  discrete  activities  a  ;irm  perform  in  designing  ,  marketing,  delivering  and  supporting  its  production.”  

           (Michael  Porter,  1985)    

Why is value chain analysis important?

3. Entry into global markets requires an

understanding of dynamic factors within the whole value chain

There are three main reasons

1. With the growing division of labor and the global dispersion of production, systemic competitiveness has become increasingly important

2. Efficiency in production is only a necessary condition for successfully penetrating global markets

What can we gain from a VC analysis?

ü  The analysis and identification of core competences will lead the firm to outsource those functions where it has no distinctive competences (core business)

ü  Mapping the flow of inputs in the production chain allows each firm to determine who else’s behavior plays an important role in its success

ü  Value chain analysis plays a key role in understanding systemic competitiveness

VC analysis

Value chain global strategy

§  In the global reconfiguration of the firm, managers should retain in-house those activities in which the company has its distinctive capabilities ..

§  and should outsource to external partners the peripheral, non-core activities

§  The disaggregation and dispersion of the firm also entails more complexity and more costs in terms of added management and communication efforts

Trade-off

Value chain global strategy

§  In a dynamic sense, the building of a global network of disaggregated and dispersed value chain activities is ìa learning process

§  The main task of a global strategy is to determine the optimal level of disaggregation of the firm’s operations over its entire value chain and decide the optimal global allocation of each piece

Factors of complexity

3.  The greater the number of discrete slices into which the firm’s value chain is divided, the greater the complexity and overall coordination overheads

1.  The interface or coordination costs increase with geographical and organizational distance

2.  Each relocation involves additional search costs – i.e. searching for external vendors, searching in unfamiliar foreign locations

The GVCs model

§  Governance models of global inter-firm relationships have been theorized by the Global Value Chains (GVCs) model, as proposed by Gereffi et al. in the 2005

§  Gereffi, G., Humphrey, J. and Sturgeon, T. (2005). The governance of global value chains. Review of International Political Economy 12(1): 78-104

The GVCs model

§  The interaction of 3 transaction variables–i.e. complexity of transactions, ability to codify transactions, suppliers’ capabilities –determines 5 types of governance

§  “The global value chain framework focuses on the nature and content of inter-firm linkages, and the power that regulates value chain coordination.”(Gereffi, et al 2005: 98)

Market

Transactions are managed with little explicit coordination

§  Transactions are codified

§  Suppliers have the capability to replicate the products

§  Low complexity of information exchanged

Hierarchy

§  Suppliers capabilities are not found

Hierarchy; activities are internalized

§  High complexity of products

§  Product specification can not be codified

Captive

§  Low suppliers capabilities

Captive relationships; suppliers are dependent on the lead firm for complementary activities (e.g.

design, logistic)

§  High complexity of products

§  High ability to codify transactions

§  Exchange of information is not limited to prices

The degree of explicit coordination tends to increase

§  Complexity of products increases

§  Codified knowledge (process specification)

Modular

Relational

§  High suppliers capabilities

High level of explicit coordination;

Mutual dependence can be regulated through reputation, social and spacial proximity

§  Transactions are complex

§  Product specifications can not be codified

The GVCs model

Determinants  of  global  value  chains  governance  

The GVCs model

A dynamic approach

Low

Low

High

High

Hierarchy

Capabilities

Codification

A dynamic approach

Low

Low

High

High Captive

Hierarchy

A dynamic approach

Low

Low

High

High Captive

Hierarchy

Modular

A dynamic approach

Low

Low

High

High Captive

Hierarchy

Modular

Relational

A dynamic approach

Low

Low

High

High Captive

Hierarchy

Modular

Relational

The GVCs model: Upgrading

§  Upgrading at the firm level has been related to capability development. It refers to deepening the firm’s capabilities in the same functions or in additional functions along the value chain

§  The upgrading construct can be correlated to the concept of dynamic capabilities (Teece & Pisano, 1994), thus describing how a firm evolves over time in the attempt to improve its competitiveness

Product Upgrading

Product upgrading: introducing new products or improving old products faster than rivals. This involves changing new product development processes both within individual links in the value chain and in the relationship between different chain links

Process Upgrading

Process upgrading: increasing the efficiency of internal processes such that these are significantly better than those of rivals, both within individual links in the chain (for example, increased inventory turns, lower scrap), and between the links in the chain (for example, more frequent, smaller and on-time deliveries)

Functional Upgrading

Functional upgrading: increasing value added by changing the mix of activities conducted within the firm (for example, taking responsibility for, or outsourcing accounting, logistics and quality functions) or moving the locus of activities to different links in the value chain (for example from manufacturing to design)

Chain Upgrading

Chain upgrading: moving to a new value chain (for example, Taiwanese firms moved from the manufacture of transistor radios to calculators, to TVs, to computer monitors, to laptops and now to WAP phones)