In addressing this question, it would be pertinent to make some preliminary observations about nature of the current phase of globalization which characterise the contemporary global economy. Although internationalization of economic activities like trade, investment and production started in a major way since the 16th century when European colonization spread out throughout Asia, Africa and Latin America, what we call globalization is completely new. The 'new' globalization involves the emergence of international trade and production networks characterised by the rise of intra-industry and intra-product trade, the ability of producers to break the production process into geographically separated steps, the fact that the geographic dissembling process has affected both goods (e.g. auto parts) and services (e.g. banking) and that global trade integration appears to be correlated with disintegration of production. (Gireffi, 2005)
The rising integration of markets through trade has also facilitated what is known increasing fragmentation or disintegration of production at the industry or firm level. In particular, there has been a dramatic reorganization of international production and trade in which the multinational companies (MNCs) or Trans-national Companies (TNCs) have been playing the role of movers and shakers. Companies are finding it profitable to outsource (domestically or abroad) an increasing share of their noncore manufacturing and service activities. For instance Juan Alcácer states simply that, "dividing activities across locations is common in manufacturing industries and multinational firms. I argue that competition costs and agglomeration benefits vary in magnitude according to the value-chain activity performed. Competition is less threatening to activities that are distant from the product market (Alcácer, 2004). She further backs up her theory in a later article where she says that firms are able to make a distinction between themselves and competitors when they do such activities in order to soften price competition.
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This represents a breakdown of the vertically integrated mode of production- the so-called Fordist model, originally exemplified by the automobile industry-on which U.S. industrial prowess had been built for much of the 20th century. The success of the Japanese model of "lean production" in the global economy since the 1980s, pioneered by Toyota in automobiles, reinforces the central importance of coordinating exceptionally complex inter-firm trading networks of parts and components as a new source of competitive advantage in the global economy (Jacque, 1995). The task of ensuring smooth and efficient movement of inputs, intermediate products, materials and information from one step to another, often over geographically sparse locations is done through a systems approach, known in International Business language, as global supply chain management (GSCM). The goals of GSCM are to reduce inventory, reduce cost and add value at each of the stages. The latter goal is known as value chain analysis (VCA).
According to Gary Gireffi, in value chain approach, value is added at different parts of the production and marketing process. Often, different firms in different geographic locales will take on different parts of the production and marketing process (many large western retail fashion stores, for example, produce none of their own goods (Alcácer, 2006).
In one sense, GSCM and VCA may be considered as two sides of the same coin. Yet this is not always the case when certain links in the GSC do not add much value. The links play a mechanical role of relay race without playing a substantive role of creating value or adding to the revenue stream. Therefore, the relation is not automatic. Rather, it should be a conscious strategy of the firm to make sure that each stage adds value. This happens mostly when management discounts the role of supply chain as a lower priority cost centre or back-office job. Thus, disjuncture, if any, between core strategy of the company and GSCM should be minimised, and so, designing, sourcing, manufacturing/assembly or service generation, warehousing, marketing, delivery and after sales service should be viewed in an integrated whole, rather than segmented operations. This may entail additional involvement in the value chain, particularly at stages where the firm is not currently involved. Managers should then determine what assets are required in order to perform these activities effectively (Craig & Douglas, 1996).
The question is, what strategies should be adopted by companies in order to maintain their positions at the top of the value chain, meaning, they slice up the production or service generation and marketing process in such a manner that they attain and retain competitive edge over the competitors and earn greater revenues and profits. The industry creation perspective holds the view that firms could alter the competitive dynamics of the industry with creative strategies (Tsang, 2003).
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To compete successfully in world markets, firms from emerging market and newly industrialized economies need to develop strategies to participate more broadly in the transnational value chain (Craig & Douglas, 1996). Moving up the value chain implies a continuous process of change, innovation and productivity growth. For example, an Indonesian contract manufacturer who produces athletic footwear for Nike is part of a transnational value chain that extends well beyond Indonesia. Its role focuses on sourcing and production, while Nike controls the transnational value chain and captures most of the "value" generated through its advertising, marketing, and distribution system. If the cost of goods supplied from Indonesia becomes too high, Nike can easily shift to a lower cost labor market without disrupting delivery of "value" to its customers (Craig & Douglas, 1996). Products and services that are currently regarded as among the most innovative and experimental ultimately end up as commodities that can be produced anywhere and by many producers. Developed economies can only grow by inventing new technology, by innovating products and processes and by designing new management methods. To foster and support the innovation process, several policy areas could be considered:
Policies might also aim at creating new areas of economic activity, in stimulating new firm creation and entrepreneurship, or in stimulating innovation and technology in new areas, e.g. through public procurement. Also making a country an attractive location for economic activities can help attract foreign direct investment and foster new areas of economic activities. Understanding what determines national attractiveness, building on national strengths and addressing weaknesses to the extent possible can help in drawing greater benefits from the globalization process.
In recent years a discussion has emerged about the need and desirability of more government action, based on the success of some countries in strengthening comparative advantages in certain areas. Policies improving the functioning of labor, products and financial markets are necessary but may be no longer sufficient for successfully moving up the value chain, since market failures and externalities exist especially in new activities that are risky and require large-scale investments. However, experience in several countries with old-style industrial (support) policies has not been positive. Until the 1970s no product or investment project from overseas could be sold or set up in Japan unless it suited the government's industrial policy, however hard foreigners tried. Now the administrative barriers are down but not the socio-cultural ones, which mean that FDIs into Japan have continued to follow the joint venture route (Jacque, 1995). The current policy debate in several countries is seeking to move beyond these types of policies, underscoring the need for well-functioning and competitive markets, but looking for actions that the government can undertake to strengthen the capacity of firms to compete in the global market.
Countries aim to achieve industrial upgrading, meaning that they move from low value to high value parts of global production networks. Success in upgrading may be the result of a combination of government policies, institutions, corporate strategies, technologies, and human capital. In production, companies may move from simple assembly, through original equipment manufacturing (OEM), to original brand name manufacturing (OBM), to original design manufacturing (ODM). In order to attain this, upward trajectory countries must attain upgraded capabilities. However, the other companies within the production chain may resist this up gradation, for example by withholding access to a full production process to avoid it being copied. (Gireffi, 2002).
To maximise strategic and financial results, every part in the supply chain must be aligned closely with the unique value proposition that the organization is proposing to offer to its customers (Craig & Douglas, 1996). The supply chain must support the top level strategy of the business so that key customer promises are delivered. For example, if the top strategy is shortest lead time, the entire supply chain is to be based on speed and accelerated supply or if the top strategy is to deliver innovative product, the GSCM should be based on R & D, product development and rapid market launch whilst if the strategy is to minimise customer inventory, a flexible delivery may be planned.
Often companies follow a policy of outsourcing to too many suppliers or vendors, creating a long supply chain. To ride on the top of value chain, the number of links and networks in the supply chain should be reduced to bare minimum of outstanding and excellent ones who deliver quality on time. The debate between vertical integration vs horizontal networking is a pertinent one at this point. The current business practice is biased less on vertical integration and more on horizontal networking but without compromising quality and efficiency.
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Business firms often focus on material and product inventory but do not look at human management and human inventory. The principle should be making an inventory of human skills in the company and match role with skills. In the process, often, unnecessary and unconnected skills may be culled to ensure excellence and efficiency.
A more innovative and productive economy sector may require more highly skilled workers or a different mix of skills. Standard production tasks can increasingly be carried out in the developing areas where labor costs are often considerably lower. Upgrading the workforce can support a shift of economic activity towards more high value-added areas that might remain in the developed countries. Addressing this through education and training policy requires a growing focus on life-long learning.
Gireffi, G., "The Global Economy: Organization, Governance, and Development" in The Handbook of Economic Sociology, 2nd ed., edited by Neil J. Smelser and Richard Swedberg 2005, pp. 160-182.
Gireffii, G., "MNCs and Gloval Value Chain: Shifting Paradigm of Development", North Carolina: Center on Globalization, Governance and Competitiveness.
Craig, C. Samuel and Douglas, Susan P., "Managing the Transnational Value Chain-Strategies for Firms from Emerging Markets" in Journal of International Marketing, Vol. 5. No. 3, 1996, pp. 71-84.
Alcacer, Juan., "LOCATION CHOICES ACROSS THE VALUE CHAIN: HOW ACTIVITY AND CAPABILITY INFLUENCE AGGLOMERATION AND COMPETITION EFFECTS", Academy of Management Best Conference Paper, 2004.
Alcacer, Juan., "Location Choices Across the Value Chain: How Activity and Capability Influence Collocation", in Management Science, Vol. 52, No. 10, October 2006, pp. 1457-1471.
Tsang, Denise., "The Interaction Between Supply Chain Strategy and Industry Environment: Industry Creation or Industry Evolution in European Microcomputers", in The Marketing Review, 2003, Vol. 3, pp. 311-327.
Jacque, Laurent L., "THE CHANGING PERSONALITY OF U.S.-JAPANESE JOINT VENTURES: A VALUE CHAIN MAPPING PARADIGM", in The International Trade Journal, Vol. 9, 1995, pp. 67-84.