Feed the Future
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2.6.4. Shifts in Value Chain Governance

The five common ways for value chain governance patterns to shift are:

  • Captive to Relational If suppliers acquire competences that enable them to cooperate with buyers, particularly with regard to innovation, then relationships might evolve in the direction of innovation networks in which buyers and suppliers work together to create new products and technologies. In this case, the supplier’s development is less likely to be from lead firms via learning by exporting, and more likely to be the result of active, strategic learning activities, initiated by the firm, supporting markets or business environment. [1]
  • Captive to Modular If suppliers are competent in process terms, but some coordination is required with respect to product or process design, then relationships might evolve towards modular production networks.[1] If the information can be codified, and a codification scheme is widely known and widely used, then modular value chains emerge. If the information cannot be codified, lead firms can: keep the function in-house, leading to vertical integration (hierarchy); outsource it to a competent supplier with complex instructions (relational); or outsource to a supplier that they tightly control and monitor (captive).
  • Captive to Market If firm governance originally exists because suppliers cannot provide goods in the required quality and environmental standards, but suppliers acquire competence over time, the buyer can shift to arm’s-length market relationships, provided the suppliers’ potential and performance can be verified easily. Certification offers one route for this. [1]

 

Vertical Linkages & Governance

The success of apparel firms in Hong Kong, South Korea, Taiwan and China occurred when they moved from captive relationships with lead firms in the United States and Europe to modular and/or relational forms of governance involving complex coordination, knowledge exchange and supplier autonomy. Asian manufacturers began by assembling pre-cut inputs supplied by the lead firms. Over time, the Asian suppliers acquired more capabilities and transitioned to making complex products (product upgrading) for more sophisticated buyers that resulted in higher returns. As the Asian suppliers’ capabilities rose, U.S. buyers farmed out additional functions such as upstream logistics and input procurement to allow Asian producers to functionally upgrade into full package production. In some cases, these firms continued along the functional upgrading trajectory to provide design functions for the lead firms, and even to use these skills and the vertical linkages they developed upstream with local suppliers to become lead firms of their own branded merchandise in domestic and regional markets (channel upgrading). These Asian firms developed the skills needed to interpret designs, make samples, source inputs and monitor quality as a complement to their initial ability to meet buyers’ price and time demands, which initially put these dynamic Asian firms on their upgrading trajectory.[2]

 

  • Hierarchy to Relational During the 1890s, the U.S. and European bicycle industries were comprised of vertically integrated firms that manufactured and assembled all the parts and marketed the final products. Later, the manufacturers began outsourcing parts manufacture to firms in Japan, South Korea and Taiwan that specialized in making specific components for many different buyers. Due to the key technologies these firms held and their breadth of important buyers, they soon became more powerful than the lead firms in the U.S. and Europe, and as a result, the industry moved from a hierarchical to a more relational form of governance with well known parts suppliers.
  • Hierarchy to Modular Traditionally dominated by vertically integrated firms, the U.S. electronics industry moved towards modular industry structures, as the components required to produce electronics became more standardized. A good example is the development of the personal computer (PC). Each of the early pioneers developed computers with different sets of features, components and operating systems. However, when IBM began to develop PCs for multiple computer manufacturers, the main technology used in computers became more generic, decreasing the uniqueness of the technology related to each individual computer brand. As the need for the lead firm to tightly control and coordinate their supply chains decreased, the relationships between processor and computer manufacturers changed from hierarchy to modular governance.

 

Footnotes

  1. 1.0 1.1 1.2 Humphrey, J., & Schmitz, H. (2004). Chain governance and upgrading: Taking stock. In H. Schmitz (Ed.), Local enterprises in the global economy: Issues of governance and upgrading (pp. 349-381). UK: Edward Elgar Publishing Limited.
  2. Gereffi, G. (1999). International trade and industrial upgrading in the apparel commodity chain. Journal of International Economics, 48(1), 37-70.