A value chain is usually defined as a sequence of activities which lead to the transformation of inputs and raw materials into something that can be purchased by the final consumer.
The term “value” refers to the fact that each activity in the chain adds value to the final product.
These value additions can be calculated in order to see how much accrues to each other along the chain (McCormick 2007: 28). The use of the term “chain” suggests a focus on vertical relationships between buyers and suppliers and the movement of a good or service from producer to consumer (Gibbon/Ponte 2005: 77), but also implies the analysis of a linear process (Stamm 2004: 9).
However, both these aspects should be understood in a broad and comprehensive way, and it will be shown in the following that it is actually being done so in the literature, with value chains including vertical and horizontal linkages, as well as supporting markets and services.
The concept of global value chains refers to the configuration of coordinated activities that are divided among firms and that have a global geographical scale (Gibbon/Ponte 2005: 77).
To give an impression of different aspects highlighted in the literature, a number of definitions of value chains will be listed in the following:
o One of the most commonly cited definitions is probably that of Kaplinksy/Morris, who define a value chain as “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
78 Schmitz 2006: 546-7.
75 physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use.”79
o Value chains do not solely focus on processes taking place within a single firm, but involve networks of cooperating firms, different firms located in various places and linked together in a chain. Each link in the chain adds a certain amount of value to the final product. Since value chains do not merely focus on the physical transformation of inputs within one firm, they offer the possibility of capturing economic returns that can be found in different links in the value chain. While the realisation of primary economic returns used to lie in activities related to production, these returns have increasingly shifted to areas outside production such as design, product development, branding and marketing (UNCTAD 2005: 10-11, based on Kaplinksy 2000a, UNIDO 2001b, Humphrey 2004).
o A value chain, which is narrower than a sector, traces the flow of competing products from the input stage to the final consumer (Nichter/Goldmark 2009: 1457).
o “The value chain describes the full range of activities that firms and workers do to bring a product from its conception to its end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer. The activities that comprise a value chain can be contained within a single firm or divided among different firms.
Value chain activities can produce goods or services, and can be contained within a single geographical location or spread over wider areas.”80
These definitions make clear that value chains encompass a full range of activities and services to bring a product or service from its conception to sale in its final markets, whether local, national, regional or global, including suppliers, producers, processors and buyers, supported by a range of technical, business and financial service providers, as well as the enabling environment for the chain. Seen in this way, it also becomes clear that the competitiveness of products, services and firms does not only depend on the specific performance of single actors at a certain stage of a value chain, but is determined by the performance of all actors along and within a value chain and the interaction among them.
Value chains are usually diagrammed to show the flow of goods and services, as well as the connections between the various actors. More complex and elaborated diagrams include not only the key actors in the chain (directly involved in the transformation process), but also support markets and services, as well as the national and global environment. The figure below represents simple generic value chain.
79 Kaplinksy/Morris 2000: 4.
80 This definition is taken from the Global Value Chain Initiative’s website:
http://www.globalvaluechains.org/concepts.html [26th of February 2010].
76 Figure 6: Generic value chain
Source: Own compilation.
Gereffi identifies four basic dimensions for the description of value chains:81
o an input-output structure, understood as the tangible (raw materials, intermediary goods) and intangible (knowledge) flows linked together in the process of value creation;
o geographical coverage, understood as the geographic concentration or dispersion of value chains across regions or countries and their effects on the distribution of return flows and regional development;
o a governance structure, understood as authority and power relationships that determine the cooperation of firms, as well as how financial, material and human resources are distributed within a chain, introducing the key notions of entry barriers and chain coordination;
o an institutional framework surrounding the chain, understood as the regulations for the interaction of chain segments in a national and international context.
Concepts linked to that of “value chains”:82
“Supply chains” and the analysis of them tend to cover more the logistical aspects of bringing a product from its conception to the final consumer and disposal, based on a supply push (rather than a demand pull in the case of value chains) and focusing primarily on costs and prices (see Barnes 2004: 2 for a comparison between supply and value chains).
81 Gereffi/Korceniewicz 1994: 96-97. To be precise, these dimensions were introduced by Gereffi to describe the so-called “global commodity chains” (a term introduced previously to that of “global value chains”, as will be elaborated later). These characteristics are taken up by others, such as Stamm 2004 and Gibbon/Ponte 2005.
82 Concepts or approaches closely linked to those of business linkages and value chains, which are mentioned here, are described in more detail in the section 4.2.3.
Input providers
77 The term “commodity” is usually used to describe a standardised good with clearly defined product characteristics that is traded on anonymous markets, with price being the primary criterion for competition (Stamm 2004: 9). Therefore, the term “commodity chain” can be considered to cover less complex goods and services as the term “value chain”.
In “global production networks”83, large corporations of industrialised countries dominate the exchange of goods. These firms have often withdrawn from performing their own manufacturing, being engaged in vertically disintegrated agglomerations of economic activities in different countries, rather than organising their production in a series of individual investments, globally sourcing work and specific resources. According to the global production network concept, the most important motive for firms to establish such networks was access to flexible, specialised suppliers in countries with low costs (Stamm 2004: 13). The literature on global production networks deals with issues such as upgrading, appropriation of rents in the chain, barriers to entry and governance structure, similarly to that of global value chains (Brach/Kappel 2009: 9). The term is, however, somewhat confusing and not capturing the whole complexity, with production only referring to the transformation of inputs or raw materials, and the use of the term network also not being very clear with most of the interest related to the vertical dimension of relationships (Stamm 2004: 10).