GLOBAL VALUE CHAIN ANALYSIS Case Solution
Importance of Global Value Chains
Global Value Chains contribute to the global economies as the global Gross Domestic Product and employment, and the international trade is dependent over the value chains that are presented globally. Different sectors, including: apparel, commodities, electronics, business services and tourism have adopted global value chains, as it significantly contributes to the global level of production, employment and trade. Global value chains bring an integration between the firms, workers and producers throughout the world. It enables the producers, consumers and the workers to interact with each other, by increasing their participation in the global economy. In order to develop the economic situation of the country, especially the low income countries; it is vital to expand the participation in the global economy through global value chains. Due to an increased globalization; the GVCs has become a very significant framework for the export oriented economies, which helps in maintaining their competitive success and economic development.
What are Global Value Chains?
A value chain simply refers to the set of activities, which enables the firms to bring the product to the end customers, from its conception to the end usage. The key activities of a value chain system includes: the R&D, product design, manufacturing, marketing and product distribution as well as after-sale services to the customers. However, in a global value chain; these activities are divided among different firms that are located globally, i.e. these global value chains represent inter- network connection between the firms that perform the value chain activities at a global level.
Global Value Chain Analysis – Dimensions
There are six dimensions of a global value chain analysis. These dimensions (See Appendix 1) are categorized into global elements (top-down) and local elements (bottom-up), which are explained below:
This element refers to the process of converting the raw materials into final goods. It involves determining the key activities in a global value chain and determining the firms according to the relevant dynamics and structure, under each activity of the value chain. The key activities of a value chain system include: R&D, product design, manufacturing, marketing and product distribution and after-sale services to the customers. After determining the key activities; the next step is to determine the companies, which can best serve each activity of the value chain.
The activities of the global value chains are dispersed in different geographic scales, i.e. domestically, regionally or globally. The globalization has brought significant advantages of cost reduction, access to a larger customer and cheap force to the global companies. Due to such benefits; the supply chain activities are carried at different geographical locations, depending on the competitive advantages in assets.
This element refers to the governance of a value chain, i.e. how each element in a value chain is monitored and which value chain actor possesses more power. Moreover, it is explained by Gereffi (1994), that the governance is concerned regarding the authority and power relationships, i.e. how the human, financial and material resources are allocated in a value chain. The GVC has five basic governance structures, which include:
Market – Refers to simple transactions with low power over the partners. The information can be easily transmitted and the governing factor is price, irrespective of the powerful firm.
Modular–It works in case of complex transactions. The suppliers make the products according to the customers’ specification, which keeps the switching costs relatively low. Relationships in modular governance are more important than in market governance.
Relational – It occurs during the transaction, which requires complex information sharing, ultimately requiring the parties to interact frequently. The lead firms specify their requirements and the suppliers respond by offering differentiated products. Relational structures are long term, which makes switching costs higher…………………….
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