5 steps to understanding the global value chain

In today’s world, trading systems are global and with their global reach, they are complex.  Each of us has to find our niche, and the big question is how do we “insert” ourselves into a vibrant and rich value chain.

  • How do we access the chain?
  • How do we compete successfully?
  • How do we capture gains in a way that we can grow and become more competitive?
  • How do we take part and take part gainfully?

We aren’t interested in every value chain in the world, but for those that fascinate and attract our attention, we want tools to understand who does what and how to find our place.

  • We want to describe what we make in this value chain and how we make it.
  • We want to think geographically about where everything is.
  • We want to know how the chain cooperates within itself and how it makes sure everyone does their part well and reliably.
  • We want to know how we relate to other value chains and in particular how we honour our obligations to be good citizens in every country where we work.
  • And how is our value chain changing?

These are notes I made from Global Value Chain Analysis: A Primer.  They should be helpful when you are thinking ahead about thorny issues of developing a supply chain.  Once you have the basics, they it would be best to go back to the original source at Duke University.

 #1 What do we make in our value chain?

Our value chain includes everyone who is in it – from people who think up ideas, to people who supply raw materials, to the people who make things, move things and sell things to the people, yes, who pick up the waste and recycle what we throw out.

We map out everyone in the system, initially simply, and then in more detail showing what each person needs and use and what they get back in terms of wages, profits and new possibilities.

#2 Where does everything happen?

Value chains are global but the different parts of the value will happen in different places?  Where?  Can we show the value chain on a map?

And is there a good reason why things happen in any place?  Are the natural resources there?  Do they have a long history in making what is made?  Is the market there?  Are transport lines particularly good?  Does the government give the players special privileges?

What are the opportunities for capturing parts of the value chain and moving them elsewhere?  And who else is looking at the value chain seeing the same opportunities for themselves?

#3 Who has the power  in the network?

Sometimes it is easy to spot a big player like Walmart who dominates the entire chain?  Knowing the ‘type’ of chain that we are in also helps us learn from chains in other industries that we might think are different but are organized in the same way.

  • Price-driven Markets.  Is what we are producing so basic that our buyers do not have a say in what we produce? They buy what is there based on availability and price?  The consumer petrol (gas) market is an example.  There is no difference in buying from BP, Mobil or Shel
  • Order-modulated Businesses.  Do we deliver to customers exactly what they ordered but along the lines of simple combinations of orders as we do with a menu in a restaurant?  Do we offer our customers choice but within a fairly simple range so that cost of taking orders and conveying them to production is fairly low when spread over all our customers?  And equally, is it fairly cheap for our customers to switch to another business that offers a similar service?
  • Relationship Businesses.  Do we need to understand quite a lot about our customer’s needs?  Does it take time to listen to them and do our costs fall dramatically as we get to know them?  Equally, do customers prefer to work with someone who knows them well and work problems out rather than switch to someone else?  Do we have the same relationship with our suppliers?  Do we know what they are particularly good at making and do we prefer to work with them for their special expertise?
  • Captive Networks.  Is our value chain dominated by one buyer on whom we all depend?  Does the dominant buyer pretty much dictate terms?  Does the dominant buyer have the capacity to compensate for our dependence on them with secure contracts and other assistance such as ‘extension’ workers who will help us improve our operations?
  • Hierarchical Governance.  Is work in our value chain so complicated that it has to be completed within a single company structure run by managers experience in co-ordinating the intricate work in that sector?

Governance structures do three things: they express power differentials – who depends upon whom, they provide mechanisms to coordinate ourselves for our mutual prosperity, and they define relative profit margins within our value chain.   Our natural inclination is to manoeuvre ourselves in to a better position and we will do so whenever we can.  So as with political government, good governance is not static and rigid.  It is dynamic, it is aware of shifting sands and it is fair.  Nothing ruins a business relationship faster than the sense that the spoils are divide unfairly.

Sometimes we dismiss governance as ‘politicking’ and sometimes, it is.  But it is as important as doing the work. It is every changing and we are doing business at a time when the rise of the BRICS and the growth of IT and web technology is changing business models.  We need to pay attention and see where our value chain is going.

 #4 PEST Analysis

The relationship between our value chain and the wider world can be thought through using a standard PEST analysis.  In each place where any part of value chain operates, what are the political, economic, social and technological issues and how are these changing?

#5 Making our value chain

Everyone taking part in our value chain is there to make a living and the best living they can.  Hopefully, it is well governed and we can be competitive and innovative without destroying each other and destroying our value chain at the same time.

But the prosperity of the entire value chain does change in time and so does our position in it.

At first, obviously we know little about the value chain. But we can learn about the chain as a whole. We can park out the parts that we do know. And we can mark out who else knows what.

And we can be particularly alert to the best order of learning more and learning about the governance of the chain.

The best example of taking over a value chain was the move by Indian IT firms into software.

At first, we might be able to bid easily for repetitive work.  Then we can gradually increase our skills to handle more difficult work that commands a higher price.

Some sectors are well documented and we can even get government statistics to understand how the value chain works.  In others, we have to resort to special reports and even proxy metrics.  The important thing is to keep paying attention and to keep learning.

  • What are the entry points into this value chain?
  • What are the paths from entry points to more commanding positions?
  • When and how do people broaden their command of the value chain?
  • When and how do people specialize because it is profitable in both the short and long term (20-50 years) to do so?

There are three neat tricks to anticipating where a value chain will go.

  • Layout the present chain so that you can see what is going on
  • Do a 4×4 with the pest analysis showing the interactions of economic and social drivers and social and economic drivers, and so on.
  • And then consider the local education policies.  The labour market has very low elasticity – which means it is slow to respond. Simply, it takes a long time to train people. If the local industry is not well organized about bringing people into the work force and training them 10, 20 and even 30 years ahead, then people will not be available. Correspondingly, when they have the skills, they are motivated to drive change.

Thinking about global business and managing future prospects

So that is it in nutshell.

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