Feed the Future
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2.6.5. Power

Power is the ability of a firm or organization to exert influence and control over other firms in the chain. Power can come from any part of the value chain structure, in many different forms. Within the chain, power comes from firms and the workers within the firms. Outside the chain, power comes from institutions created by the enabling environment and consumers. Those in possession of industry power actively shape the distribution of profits and risk through their activities. [1] Those in possession of industry power actively shape the distribution of profits and risk through their activities.

At the firm level, power is accumulated, held and wielded in different ways and in different amounts. Power within the chain can be divided into power exerted by lead firms or from suppliers. Lead firms, because they have the agency (within limits) to choose and replace suppliers, wield purchasing power. Although not always exercised, purchasing power allows a lead firm to explicitly coordinate the activities of the supply chain and to pressure suppliers to lower costs, increase quality, adopt specific equipment, employ specific business processes, purchase inputs from specific vendors and invest in specific locations. [1]

The lead firms can be buyers or final-goods producers in the chain. In producer-driven chains, the power is frequently held by final-product manufacturers and is characteristic of capital- and skill-intensive industries, whereas in buyer-driven chains, the power is held by retailers, marketers or branded manufacturers. These buyers shape mass consumption via strong brand names and their reliance on global sourcing strategies based on large, decentralized production networks in labor-intensive industries. Knowing if the lead firm in a chain is a buyer or a producer can help to determine likely upgrading opportunities for the network. [2] For example, buyer-driven chains tend to provide more opportunities to their suppliers in product and process upgrading because the core competence of the buyers is in marketing and branding. By contrast, in producer-driven chains where the lead firm’s competencies are ingrained in technology and the production process, lead firms are less likely to invest in supplier upgrading that will encroach on their competitive advantages.

The most notable form of supplier power comes in the form of “platform leadership.” Platform leaders exhibit marketing and technological dominance, which affords them the power to set standards and warrant higher returns for their products. In such instances, suppliers exhibit more power and leverage in commercial relationships; however supplier power is not associated with explicit coordination of buyers or other “downstream” value chain actors. [1] When supplier power is present, governance structures are more likely to be relational.

In most cases, retailers or manufacturers own the brand. However, in some situations the brand is defined by origin (e.g., Blue Mountain coffee) or ethnicity; through the “story” of the producers (e.g., Lulu Life beauty products made by Sudanese refugee women); or through organic, conservation or fair trade labeling. When this is the case, the suppliers are exerting platform leadership by sharing marketing and branding power with the final product manufacturer or retailer.

A softer form of supplier power is competence power. Unlike platform leadership, competence power is not recognized industry-wide, Instead, suppliers’ technical and service capabilities are viewed as indispensable, but only to the lead firms they serve.

 

Footnotes

  1. 1.0 1.1 1.2 Sturgeon, T. (2009). Chapter 6: From commodity chains to value chains: Interdisciplinary theory building in an age of globalization. In J. Bair (Ed.), Frontiers of commodity chain research. Stanford University Press.
  2. Gereffi, G. (1999). International trade and industrial upgrading in the apparel commodity chain. Journal of International Economics, 48(1), 37-70.