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Establishing A Global Value Chain

A value chain is a business model that describes the full range of activities across the entire input-output process that companies engage in to bring a product – either goods or services – from its conception to the consumer’s hands and beyond. This includes research, design, qualification, production, marketing, distribution, customer support, and in some cases the recycling and disposal or storage of products after use.

The activities that comprise a value chain can be contained within a single organisation or divided among different companies and within a single geographical location or spread over wider areas. In some instances, activities of the value chain may be embedded in established clusters – such as research hubs, manufacturing centres or industrial parks – that specialise in that particular activity.

At its core, the global value chain (GVC) has the flow of materials, goods, technology, information, knowledge, finance, and people. GVCs have huge economic impact on countries, markets, industries and companies, on multiple areas such as competitiveness, investment climate, economic growth, labour markets, and trade costs.

They make it possible to bring together all the components – like the raw materials, know-how and talent – that combine to make a product or service, to deliver it into use through distribution systems, to support users on a 24/7 basis, as well as to recover and integrate residue that may subsequently be incorporated into earlier stages of the value chain.

For many companies the ability to effectively insert themselves into GVCs is a vital condition for their development. This supposes an ability to access GVCs to compete successfully, and to capture the gains in terms of economic growth, capability building and jobs creation.

GVCs are organisational systems that operate across multiple nations and are interconnected. A global value chain may involve US designers, Indian software writers, African raw-material suppliers, Asian manufacturers, and European system integrators and support provision.

The integration of technologies into such value chains to create symbiotic business systems that yield maximum performance is the key to competitive advantage in today’s globalised economy. The value chain global integration is multifaceted and it is technologically facilitated by transportation, telecommunications and the information technology.

Developing and maintaining the competitiveness of the GVC is paramount. Therefore, global value chains must build and defend longer-term competitive advantage through intricate and hard-to-imitate company-level assets or capabilities.

Critical to this strategy is the understanding of how global value chains work and how they affect economic performance. Thus, the global value chains take an end-to-end perspective in terms of activities, resources, assets, capabilities, relationships, and financial and operating data.

They take account cost factors such as productivity and inflation, the strength and quality of business environment including the extent of political and economic risk, regulatory and tax considerations, technology, logistics considerations including value-to-weight ratio and just-in-time practices, degree of digitisation, economies of scale, and customer needs, which influence the requirement for and location of buyer-related support activities.

In the case of high-end manufacturing and vertically integrating direct ownership of activities, other considerations include infrastructure, talent availability, IP protection, energy costs, and domestic supply networks.

A thorough examination of the GVC framework allows us to understand how global economy is organised by examining the structure and dynamics of different actors involved in a given industry. There are four dimensions of global value chain analysis:

(1) Highlight the complex input-output structure of the industry with an emphasis on core technologies and key subassemblies;

(2) Map the relevant geography of the industry;

(3) Indicate the major companies that are involved in different stages of the value chain, and those organisations that occupy high-technology and other strategic nodes of the chain; and

(4) Analyse the institutional context of the industry in terms of the opportunities for policy interventions, which would improve upgrading outcomes and the trade-offs that expansion of this sector would entail for economic and social actors.

Global value chains are complex and ultra-competitive. Successfully mastering all the above criteria, factors, elements and actors requires deep knowledge and on-the-ground operational experience.

Ainira Industries has developed in-house GVC expertise since early days, embedded it well into our skillset, and deployed it numerous times in support of our international business. Reach out if you need help, we are happy to lend you a hand.

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