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“What strategies might companies adopt in order to maintain their positions at the top of the value chain, as defined by Gary Gereffi?”
Globalization implies functional integration of internationally dispersed activities such as production of goods and services, trade and financial activities (Dicken 1998(in Hofstede 2001). Dicken points out that today's economy involve reorganization of production and trade on global scale. It gives rise to global economy which involves integration of national and international economies. There has been constant change in global economy over the several decades with the change in position of countries in international system. (Gereffi 2004 (in Smelser & swedberg 2004)).
As explained by Gary Gereffi, Professor of Sociology, Duke University, United States, Global Economy can be studied at different level of analysis: Macro, meso and micro.
Whereas main focus is at “meso” level where countries take institutional approach and firms adopt organisational perspective. This analysis helps in focusing countries and firms as drivers of change.
Global economy has been constantly shifting from initial trade and exchange to division of labour in specialization within firm followed by internationalization of labour between countries. Finally new globalization which involves production networks and their geographical location on globe and today we live in an era of deep economic integration which involves doing value adding activities cutting national boundaries. (Gereffi 2004(in Smelser & swedberg 2004)).
In 1994-99 framework of Gary Gereffi, he explained two types of international economic networks. They were “producer driven” and “buyer-driven” commodity chains. A global commodity chain (GCC) focuses on organising structure of global supply chain. In producer driven chain large transnational manufacturers such as General Motors, IBM, Ford Motors are controller of production. This chain involves capital and technological intensive-industries like automobiles, aircrafts and heavy machinery. Technology and smart production were core competencies of these firms.
The latter buyer-driven commodity chains involve “global buyers” such as retailers, marketers and branded companies like Wal-mart, Nike, Reebok and Liz Claiborne. This chain involves industries like garments and other consumer products. They are like ‘manufacturers without factories' who are globally de-centralized and are successful by being highly competitive.
As discussed in Commodity Chains and Global Capitalism a wave of global outsourcing was breaking over producer-driver chains and results in changing behaviour of manufacturers into buyers. This was resulting in deverticalization and becoming more networks oriented. This brings change in chain governance, making a shift from global commodity chain to the new chain concept of “global value chain”. (Sturgeon 2008(Bair 2008))
A value-added chain is ‘the process by which technology is combined with material and labour inputs, and then processed inputs are assembled, marketed, and distributed. A single firm may consist of only one link in this process, or it may be extensively vertically integrated' (Kogut, 1985(Gereffi 2005).
Value chain provide base for providing competitive advantages to firms and comparative advantages to country which help them in upgrading in scale of global world market. (Kogut: 1985 (Gereffi 2004(in Smelser & swedberg 2004))).Today value chains are truly global at each stage of activity. These activities can help in building two competitive advantages: low relative cost and product differentiation.
To become sustainable in global competition, Poter believes in adopting “global strategies which will help in deciding how to spread activities in order to move up in value chain among countries (Gereffi 2004(in Smelser & swedberg 2004))). As per Humphrey and Schmitz ‘value chains primarily focuses on issues of industry re-organization, coordination, governance and power in the chain.'
Today companies adopt various global strategies in order to increase & maintain position in value chain. The global competition has been constantly increasing and companies desire to enter into new emerging markets with acquiring latest technology at lower cost (Hofstede 2001).
The production process has been fragmented across various countries and firms, which involves higher usage of off shoring and as well outsourcing products and services. This give rise to make and buy decision. Outsourcing means when a firm or country uses third party to carry its activities instead of doing in-house production. These parties are specialist providers and can be domestic or based overseas. Example: American Express most of the back-office operations are done in New Delhi and NCR, India. This helps companies to focus on firm's core activities, help saving cost, provide flexibility and access to specialized business services. (Embleton & Wright 1998)
Off-shoring means when a company moves its base to overseas or buy from foreign producers. This also results expanding affiliates abroad. China is preferred destinations for off-shore production, while India has emerged for technological services. It also involves doing “knowledge work' such as data entry, research and data management using technology Outsourcing and off-shoring activities gives competitive edge to companies and countries in delivering better goods and services, making them more buyer-driven and as well help to gain higher position in value chain.
Location strategies which varies with countries, like moving manufacturing to low cost labour countries, or to low cost material brings companies closer to domestic markets. (Wellard 2010)
Government policies could be one of the strategies that company might adopt. As they help in market entry and building strong linkages. Large Taiwanese firms have shifted from relatively simple to more complex production base using government actions and policies. (Gereffi 2004(in Smelser & swedberg 2004)))
A firm (manufactures) should maintain its highly skilled workforce as they will help in delivering high quality goods and services. While a buyer should maintain its high power and flexibility in order to have low switching costs. As well use of effective marketing and distribution facilities is really important for countries to make its customer aware about product. An effective team that provide customer services and take their feedbacks is also very important. All these activities add values to the product.
By increasing foreign direct investment companies can increase their control overseas and add values by gaining more control over the other market as well increase in asset base.
Also by increasing integration in global economy, emerging companies and developing countries associate themselves with higher value chain. China is one of the examples which are moving from low-value chain to high value chain because of its increasing trade and manufacturing activities dominating parts of world.
By developing subsidiaries and affiliates firms become more essential link in global value chain. These affiliates are more successful and technological advance then domestic firms. Joint ventures, mergers, partnering and alliance could be other approach as this help in expanding the knowledge base and network. Example: “Acer” a global IT, uses partnership with the local firms in its target market and then expanded its reach in whole world. It is now successful at both OEM and OBM production. (Barelett and ghoshal 2000(Mathews 2006)).
A firm should look for activities and products which add value to the products and try to reallocate its efforts towards developing those products which help in gaining a niche position in global market. They can also look at the narrow segments of value chain. Also they should also focus on their standard product line and services, as they are their core competencies and need to be sustained. For example “Hauni”, sustain their world position against huge MNE's by focusing on producing on their main product.(Mathew 2006)
Companies can also look for industrial upgrading as way to move up by changing their economic roles from being an assembly to original equipment manufacturer, original brand name manufacturing and original design manufacturing. Global apparel industries are fine example of industrial upgrading. (Gereffi 2004 (in Smelser & swedberg 2004)).
Companies keep struggling to attain topmost position in value chain; a major role in globalization is advancement of Information and Communication Technology (ICT). Technology keeps changing daily. A firm should look for opportunities to develop highly technical, specialized as well innovative products and run parallel to advancements in technology in order to compete effectively and successfully. Companies should focus on how to use ICT effectively to keep them at higher position. As well a large focus on R&D activities and their innovation is also necessary for the firms to gain competitive advantages in their process chain.(OECD 2007)
Lenovo came with new strategy of customized product. They adopted tools of rapid development of specific requirements and quick response to the customers. It bought positive results and helped them to progress in the market share of computers.
A product differentiation strategy provides highly competent edge to the product. It creates an image and attracts customers. “Apple” products are fine example of uniqueness. (Wellard 2010). Going for Intellectual property rights also bring value to the firms.
Big companies take ownership of another organisation, called acquisition. Its increase their shareholder base and market strength. “CEMEX” world's third largest cement producer expanded through strategic acquisition in several parts of world.(Mathews 2006).As knowledge and technology are high value added activities, therefore, company should focus on new technology such as lean manufacturing, green products and technologies. Adopting terminology of going green bring a higher value to product as well to the firms.
In order to maintain a top position at value chain companies' main focus should be on strategic innovation, focusing on emerging markets, putting efforts on core competencies, accelerated internationalization and organization innovation. By adopting global strategy and internationalising activities into high value networks, effectively controlling and coordinating their supply chain efficiently can be the key to the success for the companies to excel.
Hofstede, G. 2001, International Business: An Introduction, 1st edition, Hampshire, Palgrave
Smelser, N., Swedberg, R 2004, Handbook of Economic Sociology, 2nd edition, Princeton University Press and the Russell Sage Foundation
Bair, J. 2008, Frontiers of Commodity Chain Research, Cambridge, Stanford University Press
Gereffi, G. 2005, The Governance of global value chain.Review of International Political Economy
Embleton, R.P., Wright, C.P. 1998.A practical guide to successful outsourcing. Empowerment in Organization 6(3) pp. 94-16
Mathews, A.J. 2006, Dragon Multinational: A new player in 21st century globalization. Asia Pacific Journal of Management 23(1), pp. 5-27.
OECD (2007), Moving Up the Value Chain:Staying Competitive in the Global Economy.[Online] Available at: http://www.oecd.org/dataoecd/24/35/38558080.pdf [Accessed 27 February 2010]
Wellard, N. 2010, Strategic Management: A quest in Ten torments, Essex, Pearson Education.