• 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.

• What? (from what into what)
• Where? (from where to where)
• Who? (who does the work and who has the dominant voice?)
• Why? ( why are people in this business and not another – PEST)
• What’s next? (what is changing and what will change in the next 10-20-30-40-50 years?)

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In the last five or is it six or seven years, our lives have been transformed.  In a year or two, we might count banking crises and revolutions and seismic activity in the change.  Right now, I am talking about Google, Facebook and Twitter who have crept into contemporary live as assuredly as TV, running water and phones.

The ubiquity of new internet services and their ready availability to everyone – rich or poor, powerful or disposed – gives them the status of institutions. Google is now a verb.  “Google it!” Facebook is a noun.  “I am a bad Facebooker.”  Twitter has its own vocabulary. “RT” = “retweet”.

The very ubiquity of internet services worry us. They seem to have taken over our lives.

The characteristics of new institutions

But of course, they have taken over our lives.  New utilities scare us because they reflect deep changes in society and our status relative to each other.  That is the point.

New institutions have three characteristics.

• They bring us together in a forum – in a talking shop – on a massive scale.
• They provide a “complete world” where everyone and every interest is invited.
• They allow us to take part in history – indeed they allow us to make history.

Are we about to see even more new institutions emerge?

I have a deep sense that we are going to see changes in these central apps – not necessarily in technology but in whom they serve.

If we want to foresee change, indeed if we want the heady experience of being part of history, we have to  look at the world historically and socially with a keen eye.  Who is included in the “complete world” as of today?  And who is on the sidelines waiting to join in?

When we add a wider range of pressing interests to the mix, where will we see new institutions germinating and sprouting because people are looking for a forum where they can connect ever more widely to make history.

It is not the disaffected that matter so much in the emergence of institutions.  It is who wants to connect more widely.  Who wants to connect where they couldn’t connect before?  Who is genuinely interested in listening to other people who aren’t part of their current existence?

Further reading on the birth of institutions

Barbara Czarniawska.  (2009). Emerging Institutions: Pyramids or Anthills.  Organization Studies 30(4). pp 423-441. (History of the London School of Economics) [Download the full paper following link highlighted in yellow in the middle column]

I am not sure that the content of Wikileaks is really much to write home about and I still see the reaction as being a classic case of Emperor’s Clothes.  It seems the Guardian has the same view.

Scientific Journalism

But I do take Assange’s point that Wikileaks has ushered in an era of scientific journalism.  Yes, it is good to have evidence for what we write about and what we believe in.

Who has put the frighteners on Amazon and Paypal?

I can’t see why Amazon, Paypal etc are running scared.  Who is putting pressure on them?  And why?

As for delayed warrants of arrest  . . .

As for the extradition, I am afraid I believe Assange’s lawyer.  The Swedish authorities have had more than three months to issue that warrant.  It is sub judice now but I am curious to know what questions are asked by British judges.

If you have never lived through a turning point in history . . .

This is one of these moments when history turns.  We are in a room that turns cold as everyone realizes that we are a fork in the road from which there is no return.  We go this way or that.  Let’s hope it is not that.

Remember the feeling . . .

As we get older, we accumulate experience and we recognize the signs.  And the deep dread of prolonged trouble ahead.

Remember the feeling. It is one of those visceral reactions to life that you should never forget.

Good luck to everyone.  We are going to need it.

Wikileaks – so I found out about the lame political analysis coming out of Embassies.  Surprised – not really – they hear the same lame analysis I hear at cocktail parties. Surprised – sort of – surely, well I mean these guys are the crème de la crème – surely they think more deeply than that.  It seems not.

Wikileaks was a nothing.  We all know this stuff. We just didn’t know that THIS IS ALL!

Wikileaks and the Emperor’s Clothes

The powers-that-be are writhing precisely because Wikileaks turned out to be a nothing event.  So a boy in the crowd has yelled out that the Emperor is wearing no clothes.   The tailors who sold him make-believe clothes, if they have their smarts about them, cashed in and headed for the hills along time ago.

Those who didn’t have the guts to point out the scam before are looking foolish. That’s all.

But maybe we are the ones with no clothes?

It is a logical possibility.  Let’s look at the squeals of outrage.

Critics say that our officials can’t govern unless their inane analysis is secret. Hardly. There was little secret or analytical about it.

Anyway, the basic requirement of their position is that they do nothing without our consent or that would be consistent with our consent on inspection (maybe that is why the analysis has been so lame?)

Privacy and confidentiality refers to the people they describe.  Yes.  Other people’s details are private but not the politicians they ‘play’ with. Those people consort with foreign embassies to be heard.  There interaction is not a secret; nor cannot it be.  The lamentable state of Joe Soap’s bank account or the personal foibles of a  politician’s mother – those are confidential to those people.  Actions taken on behalf of voters is never secret.  Ever.

The only secret that has been blown is that it doesn’t take a lot of expertise to do what Wikileaks has exposed.

But still, maybe they do other stuff we don’t know about.  Hands up if you believe that.  But still, maybe we suffer from outstanding ignorance and they are wearing clothes after all.  It is possible.  But that is how the scam works.

Simple solution: wear clothes

If they are wearing clothes, I think we would have seen another reaction and different body language.  Wearied looks. A condescending pat on the head.  We would even have heard what was reputed to have been said to Hilary Clinton:  you should read what we say about you.  The world is simply roaring with laughter at a case of emperor’s clothes.

There is a simple solution.   Put on some clothes.  I am sure we will like what we see when you do.

I don’t like anger. I don’t trust it.  We just become one track-minded and lose perspective.

Eduardo Galeano expresses the anger many of us feel

But sometimes we do need to sink into an emotion.  I re-read Galeano’s words on the hegemony of unfairness and I re-read them aloud.  These are hard words to be read aloud to hear their flint-sharp steel-hard tones.

Reading negative poetry aloud at home is safe . . . and cathartic

I felt better.  I did.

It doesn’t harm that below those words I had also recorded a positive way forward.  But it helped to hear words that confirmed that I am not the only person in the world so heartily tired of having to pretend that the unfairness we see every day is not there.

Maybe one day I will read those words aloud in public

I don’t know how I got to be a good intuitive economist. My formal economics sucks.

So it is good when the economist bloggers catch up with me (:)) and I learn a bit of formal economics too.

Seeking Alpha writes today about the failure of capitalists to do their job as capitalists. OK, we agree. We are angry with ‘capitalists’ in an unfocused, diffuse way of non-experts. This is what the financial economists mean.

1. A big company makes lots of money out of you and me. (We knew that already.)
2. Internal looters (otherwise know as managers) pay themselves large salaries and bonuses and sit on the cash.  (We knew about the salaries; we were less conscious about the cash.  Note, even Warren Buffet’s company is sitting on cash.)
3. The rationale of capitalism is that money acts as a “signal” about what is worth doing.
   1. A firm makes good profits.
   2. Profits tells to invest more money.
   3. The money we invest goes into the infrastructure of the firm (machinery, expansion, training people, research & development).
   4. More money is spent on building the productive base of the economy than on consumption and we all have a better lifestyle.  (We benefit from what the company does and by doing business with the company and using taxes on its larger profits to pay for roads, schools, armies, etc.)
   5. When the business of the company is approaching its “end-by-date”, profits start to fall and we follow our natural instincts to move our money to up-and-coming lines of work that are becoming more profitable (and we help them reach their potential).  There is a bit of a time lag here but we will swap over quite ‘naturally’.
4. When a company sits on cash, or pays lavish salaries to its employees/managers, we know that putting more money into that business is not worth it. The people in the business know that new machinery won’t help.  New markets won’t help. New R&D won’t help.  The business is saturated.  It has reached its potential.  In strategy terms, it is a ‘cash cow’ that is turning  into a ‘dog’.  (Indeed, HR people will tell you that when salaries are very high, the business is already a dog.  We are bribing managers to stay and effectively end their own careers in a business that is coming to the end of its days and might collapse ignominiously.)
5. We don’t have one or two companies sitting on cash. That would be normal.  We have lots and far too many companies are sitting on cash which is doing nothing. (See Seeking Alpha.)  The cash is not moving into healthy, growing up-and-coming industries (seemingly because there aren’t any or the powers that be don’t understand them. I suspect the latter.)
6. Economists will tell you capitalism is failing because the famous hidden hand of the marketing should be waving, beckoning and saying over here, quick, over here, get in on this business while it is young and uncertain and you will make a fortune (and your money will help the prediction come true).  The hidden hand is nowhere to be seen.  (It is staying firmly in the old guard’s pocket . . . .)
7. We are heading for a crisis of all time because big companies are taking cash out of the economy faster than George Osborne.  Money that should be going into inventing new enterprises suitable for the 21st century is going into personal pensions of a select few.  (This is the same formula as used by third world kleptocrats and does none of them any good because the economy crashes anyway taking their lavish lifestyles with it.)

Where are the industries that should be attracting the money?

Anyway, here is Seeking Alpha setting up the rallying cry – where are the industries that should be attracting the money? I claim to be a good intuitive economist (and a dunce formally) because I have been pestering economists asking them where are these industries?  What should young people be training themselves for?  Green is a bit vague.   Science and languages is a bit broad. Show me the door of these companies.

What will happen if the capitalists don’t start allocating capital soon?

I am not being a pessimist here.  I am just saying that the pundits don’t seem to have a map.  And if the people who say they are good at “allocating capital” (Warren Buffet’s phrase), the stick will come out.  This is what the stick will look like:

• Taxes on corporate savings . . . if you keep money in the business and don’t invest in plant, machinery, training and R&D, we will take it away and put it into roads, schools, broadband, armies etc.  (Maybe a good idea).
• Heavy taxes on any business that essentially just plays with money as figures on a spreadsheet (that might include second houses). (The public wants this but they haven’t thought about second houses and other ways they are playing the same game of sit-on-cash.)
• Putting money into public infrastructure (like broadband, science education . . . oh I do like this part).

Could economists do better?

It’s a funny thing.  When I rewrite sociology, I end up thinking, “is this all?”. When I re-write economics, I think this is a frightfully elaborate system for something so simple.  Our capitalist system developed, as far as I understand it, to finance the big shipping companies that set up UK as a global trading country.  Companies and stock markets were a way of getting people to pool money and back enterprises that would grow the empire (casino trading in its time).

Maybe it is time to consider our place in the world and reconsider commercial law as a tool to our national goals.  I also read William Hague’s first speech yesterday.  I am yet to read critiques from experts. Hague’s strikes me as a good Oxford essay:  a comprehensive overview of what we must do.  I commend it to novices in international relations as a starting point.  At least it is positive.  At least it hints at this crisis in capitalism.  (Marx must dancing a jig in his grave.)

What is our vision of the future economy in the world (the empire-makers started with this question)?  What is the part we want to play?  What commercial structures do we need to play our part?

Don’t watch this space – I am not an economist.  But don’t hold your breath either.  Get involved.  Decisions are being made and you should be where the decisions get made.

With the way things are in Greece, and the UK debt scaring the politicians silly, a lot of Brits are happy that we didn’t join the Euro.  After all, we can always print money and inflate our way out of our profligacy, right?

Understanding how the Euro-zone works

We get the bit a about using the Euro in just about every European country but ours.  Otherwise most of us have the slimmest ideas about why the Germans are quite so mad with Greece and how all the lego-bits for running the Euro fit together.

“we get it, we’re drunk drivers, we’re selling our cars and resolving to get around on a German-piloted bus.”

Phrased-like this, it’s a bit easy to understand.  Mathew Yglesias has written a brilliant primer on the European Central Bank.

If you know as little as I did at the start, it is about a ten minute read

attend to the facts

I think we live in oddly optimistic times, but only if we attend to the facts.  Financial facts can be hard to come by and its very difficult to find the whole picture laid out in one place.

The Huff has a summary of the financial crisis in April 2010

• our total national debt as you and I understand it – what we owe not just what the government owes
• how much is underpinned by China
• what China wants done and what IMF is doing RIGHT NOW

The Huff’s general message is tighten your seat belts.  The critical ideas seem to be

• Debt repayments due in April 2010
• Chinese/IMF proposal to introduce SDR’s – in short an international reserve currency which allows countries with surpluses to hedge their bets across countries looking for bailouts (us)
• Where (and to whom) our money has gone (we really should get back what is left)
• A crisis due in the next month or so (hang on to your seats)

I have some right wing friends. Really I do.  But I generally don’t like their friends.  Right wing people tend to have potty mouths.  Even when they have developed smooths and smarts, their general dislike of people shines through.

It’s funny. They claim to be worldly.  The truth is that they have a overweening need to feel superior.  They like races because someone loses.

Is competition so bad?

The trouble is that the right are such sore losers themselves.

I accept their equally scathing view of the left.  They think we are too idle to be competitive.  It’s true that we sometimes won’t have races in case someone loses.  It is not a slander.  We do believe that we can’t have losers when we our people can’t stand losing.

If we are to have races, then we must love losers.  We have to be grateful to them.  If we have a basic need to dislike people, then we have trouble with this basic requirement of sportsmanship.

We can’t have competitive systems for people who are bad losers

Uh-uh.  Giving races to people who don’t like people is like putting a free bar in front of someone with a track record of drink driving. It’s daft.  Remove the temptation.  Serve a good soft drink first.  Serve food.  At least charge cash for the second drink.

Am I being nanny-ish?

I don’t think so. I am being worldly.

I was once told by someone living in France that you cannot serve alcohol there without a meal within a defined distance of a motorway.  Of course, the customer might not eat the food. But they have to pay for it.  And so they might as well eat it.  It’s French food after all.

I like the Australian habit of tracking down the person who sold alcohol to the drunk driver.  Yes.  Take responsibility for your actions.

We can’t give races to people who are addicted to racing yet don’t know how to lose.  We can’t vote for the right because far too many people on that side just don’t like people. 

We can’t vote for the right because they don’t take responsibility for the effect of their races on the losers.

When might I vote for the right?

We’ll vote for you when your policies tell us what you will do rather than what you will do to us.  I want to hear how your policies limit you not me.

Of course, you say that about the left too.  It is true that the authoritarian left likes being in charge.  We must be careful only to put in charge those people who bring a substantive vision and administrative competence

But will I vote for someone with substantive vision, administrative competence and an need for 95% of the population to lose so they can win.  No.  How can I?

I need a substantive vision, administrative competence and a set of races where losers and winners are different every day and are all part of the after race party.

I need all three attributes in a politician but the first two can never outweigh the third.  Whoever designs the race must take responsibility for the effect on the losers.

Right now in Britain though we are going to go broke if we don’t find fair leaders who have vision and administrative competence.  And so we must ask the question.

How are we holding the conversation to produce such an purposeless election?  How can we be contemplating a government who doesn’t even feel responsible for all the people of Britain and the effect of its decisions on people who had no control on the design of the race?

If you are interested in current affairs, I highly recommend the Indian blog, The Acorn.  Always clearly & succincly written, you will get a daily editorial on international affairs on the sub-continenent that is informed and analytical.

The despair of the right

Dedicated as I am to reading their thoughtful and professional analysis, I’m not sure though that I can subscribe to their world view.

One of their themes is to dismiss the righteous and the cynical as being unable to engage in ‘real politik’.

Some time last week, they published a good parable about two fishermen.  One fisherman was virtuous, never broke any rules and did not catch enough food to feed his family.  The other was cynicial.  He knew that other people were more successful fishermen but never learned their skills.

Accept the challenge by the right

I think it is always useful for the pragmatic ,and even resolutely right-wing, to challenge liberals and lefties. We should take right-wing taunts as a reminder that sometimes we are lazy and use the notion of being right to avoid hard work and the anxiety of challenging  moral choices.  It is also true that cynics are lazy, if not feckless, and cover their lack of application with curmudgeonly commentry.

But don’t buy into their existential despair and ‘emperor’s clothes’

I don’t buy the argument, though, that we have to cheat to meet our worldly needs and our reasonable worldly need for status.

Why can’t we simply decide to make money honestly?  Yup, I know they are calling the virtuous and the cynical as sour grapes. That is a reasonable call.  But I think ‘emperor’s clothes’ are worse.  Pretending that sour, rotting grapes are sweet and delicious is just as bad, as dismissing the victor’s grapes as sour.

How I know this is your emperor’s clothes and not my sour grapes

There has to be a middle way of defining a fresh ripe harvest and working honestly, with others, to achieve it.  I want a prize worth having.  Sweet delicious grapes, please.  You may be sitting on a bigger pile.  May be all your grapes are delicious.  But do you know, I don’t believe you.  You are so concerned with losing that you would lie rather than be seen to lose.

That is the real difference between the right and the left.  You want to win even when there is no prize.  It is so important to win that you will invent the race and describe a prize that doesn’t exist.  You say to us. Prove it.  Prove the prize doesn’t exist.

Hmm.  I don’t have to.  If the prize existed, you would be busy enjoying it.  You wouldn’t be trying to get my attention!

Show me the prize or race just for fun!

As for the left, we want the prize and we won’t compete unless there is one.  Yes, I know.  When we compete and lose, we justify our lack of ability by claiming there is no prize. Yes.  That happens a lot.   Right wing politics has its share of curmudgeons though.  Hegemony is rampant on the right.  But we wouldn’t be whining if we thought there was no prize.  It is up to us to go out and get it.

I want to see the prize first.  The lads and lasses that just want to race up and down for prizes that don’t exist can be my guest.   I might even join them sometimes for fun.  But I am not going to kid myself that they are doing anything more than that.  This is leisure activity. Not politics or economy.

Living with the compulsively competitive right wing

So indeed there will be fisherman who are unsuccessful and cover up their lack of success under the cover of virtue or cynicism.  But if the others are so successful, they wouldn’t give a jot about the unsuccessful fisherman.  They would not necessarily be callous either.  They would make the unsuccessful offers.  They would discretely ensure their children were OK.  They would even rein in any unfair practices.   But they wouldn’t be threatened by the unsuccessful.  Why would they?  They have the prize.  Or do they?

All they are doing is negotiating for a prize that they believe they would win.  I think this is what Warren Buffet calls being attracted by the terms of a sale.  “We want a race so we can win a prize.’

Sorry.  We aren’t going there.  First, the prize is too important and your racing takes up too much time.  Second, you won’t necessarily win and then you will whine.

We’ll aim for the prize.  We’ll even set up races and prizes so you can have fun.  But aren’t turning everything into a race to satisfy your compulsion to win (which you won’t necessarily do anyway).  We just aren’t going there!