Two key aspects in the value chain analysis are the governance of the chain and the possibility of upgrading of its participants. While governance seeks to explain how the chain is controlled and the value, profitability and power are distributed asymmetrically among the participants, the upgrading seeks to explain the dynamic character of the role of each supplier; in other words, how participants incorporate more profitable tasks or even change activities within the chain. In this article I will comment on some aspects of governance and in the next article the conditions for upgrading will be addressed.
Buyers and Producers-driven Chains
GVC focuses in the commercial dynamics between companies in different segments of the production chain. Gereffi (link) found out that there are be two types of GVC: buyer-driven and producer-driven chains.
In general, the producer-driven chains are led by international manufacturers seeking vertical integration to ensure ownership and control. Representative industries are natural resources (oil, mining, and agribusiness), capital goods and durable consumer goods. On the other hand, the buyer-driven chains are led by retailers who seek integration of the network and have better logistics. Examples include Sears, Nike, Gap, and Wal-Mart.
Governance in GVC
The concept of governance is key to the GVC analysis because at any point in the chain some degree of coordination is necessary, in order to answer not only “What” and “How” but also “When”, and “At what price”. According to Gary Gereffi, Humphrey and John Timothy Sturgeon (2005) the governance of a chain means “the authority and power relations that determine how financial, material and human resources are allocated and flow within the chain”. Additionally, GVC presents itself as a non-market coordination of economic activity. The highlight here is that the governance of a chain is conducted by a leading company that uses both its market power (via market share) and its position in the chain to create and / or appropriate high returns.
The governance structure, as opposed to direct relationships between companies and their suppliers, arises from two distinct needs: i) the increasing complexity of products (and services), which requires coordination of many companies, from design, development, creation and delivery of a solution for a client, and ii) the high exposure of a company to the failures of its suppliers.
The study of the governance of a chain leads to the analysis of the role of business leader who, even without owning property relations (eg, control or matrix-subsidiary links) to participants influences the partition of value between members. Gibbom, Bair and Bridge, in an introductory article to the 2008 special edition of Economy and Society, analyzed three different interpretations of chains governance, namely driver, coordinator and normalizer.
- Governance as a driver of the chain: In this approach, the authors present the concepts of producer-driven and buyer-driven chains. In the former case the chain is run by leading manufacturing companies that tend to be vertically integrated; while in the second case the chain it is governed by companies that have become specialists in design, brand management and marketing. The power of this type of company emanates from the relationships between companies and not by entry barriers such as capital requirements.
- Governance as a coordinator of the chain:It is clear that this interpretation does not only refer to the strategies and actions of any particular firm, but the coordination between the leader and their first-tier suppliers. Thus, the change in simplistic producer chain type / buyer to more sophisticated models of five types of GVC shows that chain governance relates to coordination over all links of chain and not only impose standards of quality, price and goals.
- Governance as a normalizer of the chain: this approach is related to the regulation of the relationship between buyer and supplier. Governance, with a focus on normalization (standardization), provides common vocabulary for the development of the actions that buyers should take and specifies the quality standards that suppliers must meet.
Final question: What would be the main weaknesses of the GVC analysis?