Definition of value chain
A value chain is used to define the combination of all the activities and resources needed for generating products and services. The value chain often consists of several operators (manufacturing industry, wholesale trade, retail trade, customer, etc.) The value chain ends with the customer.
There are various types of value chain:
i) Simple value chain: The value chain describes the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use.
ii) Extended value chain: In the real world, of course, value chains are much more complex than this. For one thing, there tend to be many more links in the chain. Take, for example, the case of the furniture industry. This involves the provision of seed inputs, chemicals, equipment and water for the forestry sector. Cut logs pass to the sawmill sector which gets its primary inputs from the machinery sector. From there, sawn timber moves to the furniture manufacturers who, in turn, obtain inputs from the machinery, adhesives and paint industries and also draw on design and branding skills from the service sector. Depending on which market is served, the furniture then passes through various intermediary stages until it reaches the final customer, who after use, consigns the furniture for recycling.
iii) One or many value chains: In addition to the manifold links in a value chain, typically intermediary producers in a particular value chain may feed into a number of different value chains. In some cases, these alternative value chains may absorb only a small share of their output; in other cases, there may be an equal spread of customers. But the share of sales at a particular point in time may not capture the full story – the dynamics of a particular market or technology may mean that a relatively small (or large) customer/supplier may become a relatively large (small) customer/supplier in the future. Furthermore the share of sales may obscure the crucial role that a particular supplier controlling a key core technology or input (which may be a relatively small part of its output) has on the rest of the value chain.
iv) One or many labels: There is a considerable overlap between the concept of a value chain and similar concepts used in other contexts. One important source of confusion – particularly in earlier years before the value chain as outlined above became increasingly widespread in the research and policy domain – was one of nomenclature and arose from the work of Michael Porter in the mid 1980s. Porter distinguished two important elements of modern value chain analysis
• The various activities which were performed in particular links in the chain. Here he drew the distinction between different stages of the process of supply (inbound logistics, operations, outbound logistics, marketing and sales, and after sales service), the transformation of these inputs into outputs (production, logistics, quality and continuous improvement processes), and the support services the firm marshals to accomplish this task.
• He complements this discussion of intra-link functions with the concept of the multi- linked value chain itself, which he refers to as the value system. The value system basically extends his idea of the value chain to inter-link linkages,
There are six main business functions of a value chain:
• Research and Development
• Design of Products, Services, or Processes
• Marketing and Sales
• Customer Service
Importance of value chain analysis
There are three main sets of reasons why value chain analysis is important in this era of rapid
globalization. They are:
• With the growing division of labour and the global dispersion of the production of components, systemic competitiveness has become increasingly important
• Efficiency in production is only a necessary condition for successfully penetrating global markets. Value chain analysis helps in understanding the advantages and disadvantages of firms and countries specializing in production rather than services.
• Entry into global markets which allows for sustained income growth – that is, making the best of globalization – requires an understanding of dynamic factors within the whole value chain; value chain analysis helps to explain the distribution of benefits, particularly income, to those participating in the global economy. This makes it easier to identify the policies which can be implemented to enable individual producers and countries to increase their share of these gains. This is an especially topical issue at the turn of the millennium and has captured the attention of a wide variety of parties.
Value chain as a heuristic and analytical tool
There are three important components of value chains, which need to be recognized
and which transform an heuristic device into an analytical tool:
• Value chains are repositories for rent, and these rents are dynamic
The value chain is an important construct for understanding the distribution of returns arising from design, production, marketing, coordination and recycling. Essentially, the primary returns accrue to those parties who are able to protect themselves from competition. This ability to insulate activities can be encapsulated by the concept of rent, which arises from the possession of scarce attributes and involves barriers to entry. There are a variety of forms of rent. The focus of much of the literature, entrepreneurial energies and government policies is on what is called economic rents. The classical economists (such as Ricardo) argued that economic rent accrues on the basis of unequal ownership/access or control over an existing scarce resource (e.g. land). However, as Schumpeter showed, scarcity can be constructed through purposive action, and hence an entrepreneurial surplus can accrue to those who create this scarcity.
• Effectively functioning value chains involve some degree of ‘governance’
A second consideration which helps to transform the value chain from an heuristic to an analytical concept is that the various activities in the chain – within firms and in the division of labour between firms – are subject to what Gereffi has usefully termed ‘governance’ (Gereffi, 1994). Value chains imply repetitiveness of linkage interactions. Governance ensures that interactions between firms along a value chain exhibit some reflection of organisation rather than being simply random. Value chains are governed
when parameters requiring product, process, and logistic qualification are set which have consequences up or down the value chain encompassing bundles of activities, actors, roles and functions.
In trying to understand the role of governance in global value chains, we can be informed by the discussion of governance in civil society. Here four elements are relevant:
o There is an important distinction between the three functions of government (the “separation of powers”) – the legislature (making the laws), the executive (implementing the laws) and the judiciary (monitoring the conformance to laws).
o To be effective, the power to govern requires the capacity to sanction behavior; these sanctions are generally negative and are directed against transgressions (the “stick”), but they may also be positive and may reward conformance (the “carrot”).
o In the long run, sustained governance reflects the legitimacy of those in power.
o The remit of power may vary in intensity and in physical and economic space.
• There are different types of value chains
Building on this concept of governance, Gereffi has made the very useful distinction between two types of value chains The first describes those chains where the critical governing role is played by a buyer at the apex of the chain. Buyer-driven chains are characteristic of labour intensive industries (and therefore highly relevant to developing countries) such as footwear, clothing, furniture and toys. The second describes a world where key producers in the chain, generally commanding vital technologies, play the role of coordinating the various links – producer-driven chains