What Changes in the World Economy Have Led to the Growth of Global Value Chains - Essay Example

What changes in the world economy have led to the growth of global value chains? The notion behind value chains is that a commodity goes through a number of chains in series. That’s from a raw material to a final product ready for sale to consumers. Therefore, the overall value of the product at the point of sale can be termed as the value through various points in the series chains. A firm can have a competitive edge through the processes in the chain activities. To achieve this, a company produces a high quality commodity at a similar cost as its competitors or at a lower cost altogether. In the value chain activities can be viewed into two; primary activities and support activities. Primary activities are those activities which involve the organisation of supplies inputs or inbound logistics, operations of manufacturing, delivery as well as the distribution of commodities (Distribution is also referred to as outbound logistics), marketing of products and lastly, sales as well as after –sales services. Each of these mentioned primary activities has the aid of support activities and this is the point at which support activities come in. Support activities may involve; a company’s planning capacity, development of technology, human resource management (HRM), and procurement activities. (Weiss, 2002 p 144) The analysis of global commodity chain involves a process of study on value creation in the process of production and distribution. Business strategies are also very close to the function of value chain, this is since it says that in the world economy goods’ production is in a chain process commencing from one country up to the final country. Each process in the commodity chain has value being added to the product and the magnitude of value relies on the competitiveness in the market. More and more the largest value is enhanced in the product branding and differentiation processes as evidenced in large business organisations like Nike. Analsysing commodity chain aids in the understanding of power relations displayed in the global system. It’s made possible by the world financial order as administered by the IFIs – International Financial Institutions. Commodity chain study unravels understanding of the function of branded transnational capitalism. It also promises to guide in the exploration of the fluctuating distribution of realisations of value between the social groups at the steps of production and the differing fractions of elites of the transnational business. (Murphy 2008 pp 9-10) Member states of OECD’s government as well as the political approach are the ones responsible for the liberalisation of their national economies. These also saw to the creation of instrumental frameworks and polices that ensured the global trade growth and production as well. The developing countries’ governments utilised the global trade expansion as a vehicle to their growth. One of the regions benefiting a lot from the expansion of global trade is East Asia. Firms from economies characterised by high wage levels started to dismantle their value chains and each component in the chain was to be manufactured based on the competitive advantage realised. The modern reforms of liberalisation spread to China, Latin America, India and Eastern Europe over the period from the 1980s and the scope of manufacturing in the world expanded. Over the same time, opening up to countries was made possible by political changes for the purposes of investment and trade. The geographical extensiveness of a business was also made easy through technology and new kinds of business organisations came up. In the USA, over the fifty –year period from 1850s technology is perceived to have made a transformation to organisations of business. Machinery, Iron and Coal increased the levels of large –scale productivity of the US. There was also the invention of telegraphs besides the railway expansion easing the process of communication as well as transportation respectively. Modern hierarchical corporations’ emergence is also believed to have been as a result of these changes. Railway and telegraph permitted the national business orientation away from the previous regional orientation. Firms adopted a world view from then onwards and it eventually led to the value chain fragmentation. Changes were further noted in the 1950s regarding the initiation of commercial jet services and more so impacting on global commerce was the invention of shipping containers that were standardised. These containers ensured a smoother flow of goods while being transported across the globe. (Ravenhill, 2007 p351) Global networks of production have resulted to companies’ strategising on networks forms of organisation development. This had led to the restructuring of industries in various fronts inclusive of specialisation and size, spatial activities distribution as well as inter-firm relations. The global value chain view gives the fundamental framework in the analysis of the organisational functions resulting from this restructuring. This is especially in the manufacturing industries that are highly internalised. The aspect of global value chains is commonly also known as global commodity chains. The structure of input and output in the production networks of the globe has a variety of activities which call for a range of capabilities and competencies and also the formation of value chains as per the terms of Porter. Taking up of value chains view is of importance to understand due to the upcoming forms and the competition logic under the world industries arena. Environments that are too complex and dynamic as well competitive edge rely upon not much material asset base but on the company’s ability to vividly understand its organisational process. This organisational processes concern those that clients demand for quality, specificity and also timeliness and thus, the organisations have to meet these needs. Also, other scholars view that due to the new role by services in organisations as origins of value creation the global value chains are developing as a high pace. Some of the activities in the value chain that see the essence of services are; commodity design and development, achieving of strategic importance, brand-building and marketing. Global value chains (GVC) is by itself an enhancer of a firm’s competitive edge. Those companies adopting a direct control over the services in the organisations can thus, make a provision to value chain in the global networks. (Rhodes, et al 2006 p 409) Countries, especially, developing ones can use value chains analysis to maximise on their exports. The strategy at the sector level calls for the successful identification of market opportunities and the subsequent organisations of the relevant support programmes. Detailed analysis should be done on a wider view than would be the case for exporters. Mapping of the activities involved in the value chain can aid strategy markers in making apt decisions on the points at which the biggest value is achieved in the country as a player in the global value chain. What strategies can countries, and companies adopt in order ‘move up’ the value chain? A successful strategy which is sector based on the bid to increase the revenues from exportation should reflect the conditions prevailing in the market, purchaser’s requirements and the processes involved in delivery a commodity to the market. The private sector shouldn’t be sidelined since it has the deepest knowledge about the market needed to construct the sector’s model of global value chain. An example of this is the small-scale exporters of vegetables from the country of Kenya. The traders would initially purchase beans in their local small holders, pack these beans in boxes and finally send them to the UK’s importers. The UK importers would dispose these to UK’s markets of wholesale. However, the business has nowadays changed. These vegetables are sold via big supermarkets. In UK five chains of supermarkets take about 70% of fresh retail sale goods. The freshness of the commodities has also been enhanced in the process of supply chain. Quality and its consistency have been improved. Safety standards and requirements with regard to food have been made more firm. A few big exporters have now taken over the market aside from small-scale exporters. Those people involved in exporting can maintain or even improve on their earnings via value chains. This can be through evaluating of gaps of performance, pointing out the process in the chain where value can be added, improving activities and making notice of the needs for the support of business. Companies can emphasise their activities upon some or all of these products’ product chain or process. Establish new commodities or upgrade old ones faster than competitors on the part of product. This may call for development process of a new commodity’s course change (that’s in both the single links in global value chain as well as in the various chain links relationships). On the part of chain it’s called for that companies should initiate new value chain approaches. Regarding process; raised levels of effectiveness and efficiency should be encouraged to internal activities such that they are better than competitor’s. This should be both in the single value chains links like lower amounts of scrap and between chain links such as faster documentation processing. (International Trade Centre, 2003) Recently, the companies following the value chain strategy have increased. The trade has been mainly due to companies which utilised high standard information technologies bid to improve on their model of supply chain. For a business to be competitive in terms of products offered, it should produce innovative commodities of highest quality and at marketable prices quicker than rivals. The strategy involves improvement on services as per the requirements by customers, making of apt decisions and also better performance of the business to enhance a competitive edge. Many organisations have focused their strategies on demand fulfillment processes. These strategies by firms should aid in achieving optimum cycle times of orders, cash flows, share of the market, Return On Equity and finally profitability. The model of supply chain inter-connects companies and nations with one another, balances the movement of commodities and escalated the value addition in the world market. Each commodity has a supply chain and it’s in these supply chains that competition and rivalry comes in. Large companies develop the strategies and these companies are the likes of large supermarkets like Wal-Mart. They give the businesses a vantage point when it comes to business efficiency. Further, while strategizing countries should note that the optimum points to them are not similar to the overall world optimum points. Therefore, it’s of essence to view supply chains in a holistic manner. This commences with requisition by customers, raw materials supply, through the entities involved in the manufacturing as well as the delivery of a finished good to the final consumers. The firms and companies should concentrate on the commodities in context, flows that are value –generating, processes of the business that are value chain-oriented. This ensures that the bushiness is run more effectively than in a traditional setting of conventional supply chains. The focus is also on the integration’s importance while carrying out business activities. (Poluha, 2007 pp 26, 27) What kinds of companies stand to gain the most from entering Strategic Alliances with potential competitors? Why? Strategic Alliances are a potential way to reduce rivalry between firms and is dependent upon the amount of competition in a given market, failure to which the consequences of changes in technology as well as dynamic efficiency may be grave to a firm. Actual or potential competitors are a serious threat if a horizontal alliance isn’t applied to counter this. Strategic alliances guide towards cohesions and other policies to curb high competitions. A close analysis should be done to determine merits and demerits of particular alliances to show their impact on competitions. Implications of a strategic alliance may involve successes in obtaining market power and on the other hand it might prevent gains and benefits arising from the alliance. (Waverman, et al 1997 p 145) Merits associated with strategic alliances in the international market depend upon the structure of the alliance and the particular industry in limelight. For instance; Canningham and varadarajan (Journal of small business p 2) argue that companies in an industry that’s mature have high chances of benefiting from the alliances. On the other hand Vyas, et al say that alliances that are technology- based are likely to have industries of high-tech benefiting a lot unlike traditional industries. However, firms ought to conduct a SWOT analysis, value added analysis and goal compatibility before taking part in strategic alliances. Yet still, companies may test or evaluate the market power, competencies and economies of scale prior to making a final decision. Lack of proper pre-assessment of the market or firms is possible to end up in firms losing control, members’ conflict, gains that re not equal as well as costly settlements to legal disputes. A successful establishment of a strategic alliance is achieved through right partner selection, appropriate frameworks to contracts and trust development. (Journal of small business, 2006 p2 vol. 14) The question of whether and how much firms gain out of entering strategic alliances is very distinct, though. According to Reuer, the fact that there are other processes besides the strategic alliances that can impact on the performance of firms alliances cannot be the final basis for a firm’s success. Several studies have been conducted by scholars to estimate the individual alliances’ effect on a company performance. These studies have particularly been centered on effects on stock markets following announcements by alliances. To narrow down and make the studies more relevant evaluation have been carried out on differential gains companies get from various alliances types and further, how it has been impacted by the formations conditions Stock markets can be used to forecast the prospected outcomes of strategic alliances. They have presented mixed evidences of the consequential merits of alliances by firms. Researchers have also examined the results of a firm due to social networks emanating from cumulative alliances. One of the researchers’ approaches is to try and evaluate firms’ performance based on the extensiveness of their tasks of alliance and to other factors being held constants. Further, recently a study has been conducted with regards to technology-oriented alliances and concerning their performance as well as patenting activities. A third research has also been conducted and this one was to assess the total impact of alliances on the performance of firms and more specifically it examined the extent of the firms’ concentration in alliances and the event that they would survive. Firms examined on their survival possibility were those dependent upon vertical suppliers and major environmental institutions. The end was that the ties under these types of alliances are bound to reap gains in general and also ensure survival. This might not always be the case, though. (Reuer, 2004 p 403) Despite the arguments portrayed by the views of the previous cited scholars’ works. Small retail businesses in the manufacturing industry are set out to gain highly when they indulge in strategic alliances with their actual and potential competitors. This is as per the journal by Verhallen and Theo. Their journal is also not short of reasons why benefits are higher to small retail firms when they involve in strategic alliances. The most common of strategic alliances are horizontal and vertical alliances. Horizontal alliances refer to business relationships between firms at the same level of production and sharing a common industry. Examples may include retailers (Medium and Small –sized). Vertical strategic alliances are those characterized by a manufacture- supplier business relationship. Based on this horizontal alliances are, this, more likely to reap more gains from strategic alliances since it may involve retailers. Significant levels have been reported in various countries on retail business strategic alliances and this has triggered the researchers thirst for finding out facts leading to this phenomenon. Two strategic alliances are evident in retailing and these are voluntary association and franchising. Of these, franchising has had a lot attention. The interest of this answer though is on the recent voluntary association. The benefits arising from voluntary associations by retail firms may include; fast and easy access to knowledge, Bigger scope for purchasing and selling and economies of scale, chances of influencing the competition structure in markets of interest and the decline in capital requirements as well as risks associated with coming up with new service programmes. The study carried out by Verhallen and Theo was particularly on strategic alliances by franchising firms selling men’s wear in the Netherlands. Participation in strategic alliances by these firms has influenced very much their strategic behaviour. For example; the reasons for strategic alliances in Japan is based on a variety of reasons; security of the firms in future, future expansion and development as well, escalating levels of trust in firms, obtaining information is made easier, cooperation that plummets efficiency and mutual aid among the firms involved. While compared with firms that are not allied the market of allied firms was more efficient. From the knowledge obtained, therefore, strategic alliances are perceived to lead to efficiency in carrying out of organisational tasks and the tasks of marketing. Outsourcing is one of the changes that strategic alliance firms witness. Those retailers that are allied outsource more compared to their colleagues that are not allied. This organisational approach helps the firm realise higher sales revenues and also larger profits. Franchising is argued to give the participating firms a competitive edge against their rivals through outsourcing. They are able to cope with the regulations by the government, control the levels of outlays, low inventory loss and high sales due to assistance in marketing. Another merit is seen on performance. Studies found out that networking, as a form of alliance, in which a company takes part has a positive correlation to profitability and sales. Those firms in any kind of network with other organisations had a mean of sales that was higher than others over a three –year periods studied. The inter-organisational networks’ relationships aided in raising the levels of profits for the involved small firms over time. Thus the performance of a retailing firm in a strategic alliance is generally improved. The third positive impact is on the market behaviour. Here the researchers used a sample questionnaire to determine the result. Retailers that are allied are lower in terms of price levels and at a significant rate unlike the non-allied, the products by two measures. These were self-rated range of prices and the average prices. The non-allied retail firms had a narrower assortment in this study. Their prices were rated the most high. Further, in activities of promotion the firms in strategic alliances were more active compared to their non-allied counterparts. Professionalism is also another factor leading to the view the retail firms are likely to make most gains from entering strategic alliances. The facts for the justification of this are mentioned as under. Franchisers and retailers understanding the effects of training on their organisations, have a good number of qualified persons due to their elaborate training programmes. These catalyses the professionalism levels in the firms. Professionalism in firms can be measured by looking at availability of the market’s information in the firm, automation levels, internal functions of the firm and its competitiveness. It can also be evaluated by quality of services to the customers. Allied firms score higher under all these fronts. Finally, the entrepreneur behavior of firms can help indicate the positives of formation of strategic alliances by retail firms. A franchise business arrangement aids the franchisee to gain a vantage point against rivals. The studies carried out showed that there’s a positive correlation when it comes to the retailer’s attitude towards the franchise and four tasks of entrepreneurship. Namely; control of costs assistance while ensuring compliance wit the state regulations, merchandising as well as marketing aid in pursuit of sales revenue increase, and the ability to minimise loss of stocks. However, of controversy is the strategic alliance impact on the function of marketing. Nevertheless, many retailing firms were found in a study to prefer strategic alliances to a sole business since franchises are associated with several positions. These are; goodwill, a well laid out business format and support during start-up and onwards. The conclusion is, therefore, that retail firms have a minimal number of workers to carry out multiple tasks in the organisations. There’s also the predicament exposed by poor time management. One should not forget that the size of the strategic alliance also influences on the firms performance. Therefore, answering to the question on the firms that are more likely to benefit most from strategic alliances, the retail firms under voluntary association are bound to make gigantic steps if only they remained so and thus outdo actual competitors while taking in potential competitors. Reference list: International trade center, (2003). Value Chain Analysis: A Strategy to Increase Export Earnings. Retrieved March 18, 2009 http://www.tradeforum.org/news/fullstory.php/aid/529/Value_Chain_Analysis:_A _Strategy_to_Increase_Export_Earnings_.html Journal of Small Business. (2006). Strategic Alliances. Canadian Council for Small Business & Entrepreneurship. p 2 vol. 24. Murphy, J. (2008). The World Bank and Global Managerialism. Routledge. Edition: illustrated. pp 9-10. Poluha, R.G. (2007). Application of the SCOR Model in Supply Chain Management. Cambria Press. Edition: illustrated. pp 26, 27. Ravenhill, J. (2007). Global Political Economy. Oxford University Press. Edition: 2, illustrated, revised. p 351. Reuer, J.J. (2004). Strategic Alliances: Theory and Evidence. Oxford University Press. Edition: illustrated. p 403. Rhodes, E. et al. (2006). Supply Chains and Total Product Systems: A Reader. Blackwell Publishing. Edition: illustrated. p 409. Verhallen and Theo M.M. (1996). Strategic alliances among small retailing firms: empirical evidence for the Netherlands. Retrieved March 19, 2009 http://www.allbusiness.com/business-planning/565259-1.html Waverman, L. et al. (1997). Competition Policy in the Global Economy: Modalities for Cooperation. Routledge. Edition: illustrated. p 145. Weiss, J. (2002). Industrialisation and Globalisation: Theory and Evidence from Developing Countries. Routledge. p 144. Read More