Discuss about the Managing Value Chain for Global Economy.
Globalization is the process of international integration of markets in the global economy. The pace of globalization has increased for a couple of reasons. The development in integrated communications technology and transport has accelerated the pace of globalization. Globalization has been a driver significant growth in the industry economics. It has become the catchword for the international economy and the nations have become greatly interdependent through flow of goods and services across borders (Beck 2014). In the recent times, the globalization processes are viewed from the perspectives of value chains. Value chain analysis can be defined as the tool for creating greatest possible value for the customers. The businesses are paid to take raw inputs and they add value to them that could be worth to people. When these values are coordinated across geographies, it is stated as global value chain (Pananond 2013).
The activity of value chain includes design, production, marketing, distribution and support to the final consumer (Geisler 2016). The idea of value chain was developed by Michael Porter who classified the activities into primary and secondary (Fearne, Martinez and Dent 2012). The primary activities include inbound logistics where the inputs are received. Then, under operations the inputs are transformed into outputs. Next, the outbound activities involve distribution. The buyers are informed about the products and services under marketing and sales. Lastly, the service activities are included after the products are sold and delivered. The secondary activities include procurement, technological development, human resource management and infrastructure (Fearne, Martinez and Dent 2012). The aim of this essay is to evaluate the impact of globalization on the value chain based on the literature and experience.
Every organization makes decisions that affect the profitability and competitive advantage. Going global is one of the strategies to gain competitive advantage for organizations. Value chain analysis can be used to formulate competitive strategies and developing linkages that create value in the global world (Antràs and Chor 2013). Porter suggests an environment for co-ordinating and sharing of activities between nations. The different nations have different market focus and customer demands that require co-ordination across product lines and boundaries. The organizations search for competitive advantage beginning with the strategic choices and position within the industry. An organization must implement competitive strategy for achieving competitive advantage (Antràs and Chor 2013). Value is determined by unique combination of attributes, related to products and services as it is important to the customer. For example, the value of multinational automobiles such as Ferrari or Fiat is determined only by customer perception. Value is added from the specific functions performed by them. The organization may compete in design while working closely with advertising or material procurement (Antràs and Chor 2013).
Value chain activities are not a collection of independent activities. Competitive advantage can result from any of these linkages. Globalization provides access to cheap raw materials, energy sources and better environment regulations (Antràs and Chor 2013). With low cost, the companies can attain cost leadership thereby adding to the competitive advantage. The competitors from regions across the world having different value chains are competing against established market leaders. With the increasing competition, the companies are competing on their strengths of supply chain. They aim to attain the greatest quality product at a lower price than the competitors. The companies are outsourcing manufacturing or technologies for lower price that helps in adding value across boundaries. For example, Vodafone has a competitive advantage over its competitors since it outsources IT environment to IBM (Thehindubusinessline.com 2016).
Value chain finance can be defined as the financing provided by the value chain for enhancing value chain growth and competitiveness. The finance involves a wide range of products. Trade is not possible without finance. The organizations rely on external capital for covering its upfront costs (Amal et al. 2013). There are several financial factors that significantly affect the organization of global value chains across the territorial boundaries. The multinationals may choose to self-finance or get seasonal loans from buyers. The financial institutions offer short-term or long-term lines of credit, letters of credit and loans. For example, Nike subcontracts to unaffiliated products in Cambodia and Vietnam (Amal et al. 2013). The multinational enterprises are responsible for making three key decisions: the manufacturing location of the host country, integration of production abroad and network decisions for consumer markets. The financial frictions affect the multinational corporation’s location, network decisions and integration (Amal et al. 2013).
Finance acts as a critical input as it provides opportunities for the multinationals to enter into more lucrative markets. Without access to finance, the business would not grow and they can lose opportunities to compete and grow. Finance is relevant for value chain development because there needs to be an in-depth understanding of the global end markets. The approach seeks to facilitate changes in the organizational behaviour that increase competitiveness of chain. Value chain financing also helps in lending arrangement evolving from business relationships. The aspects for transactions also need to be considered. Since the transactions are made globally, the payment and delivery terms are also covered (Milberg and Winkler 2013).
One of the reasons for the rising global value chain is upgrading technology. The global value chain must not be seen as a static structure, because they have the opportunity to erect barriers to entry. Global value chains aim at maximizing profit along the chain. Every value chain looks for commercial opportunities through new technologies or processes for increasing competitive advantage as a whole. The spread of global value chain has been enhanced due to technological advances. The technological advancement has reduced trade barriers and co-coordination cost. The development of Information Communication Technology (ICT) has been an important driver in the emergence of global value chains (Linstone and Phillips 2013). With the emergence of internet and reliable communication infrastructures, the costs of trade between countries have reduced. There has been an expansion in the operations of multinationals through foreign direct investment (FDI) and developing a closer relation with the investor (Adeniyi et al. 2012).
Also, the development of electronic commerce has provided potential benefits in the global value chain. The organizations are getting new perspectives and enhancing their technology structure for economic, operational and competitive benefits. Electronic procurement has increased the availability of information thereby improving customer service by enhancing flow of information. The integration of technology in global value chain has provided tremendous savings to the organization and opened a new world of opportunities (Narula 2014). However, there is a chance of security breach. The information stored in the electronic database may be quicker, but the information technology systems are vulnerable to security breaches. It may lead to disruption of confidential data. Moreover, the start-up costs of implementing the information technology system may be costly. This would add to the administrative and training cost that must be provided to the employees of organization (Antràs and Chor 2013).
People are the most significant source of value as the organizations can create significant competitive advantages. It depends on how well an organization recruits, hires, motivates and retains the employees. The purpose of the value chain is to create value for the companies as well as its customers (Ulrich 2013). Human resources focus on improving employees and organization performance. With globalization, there is a scope for diverse recruitment. The organizations are interacting with the customers and stakeholders in diverse languages and backgrounds. Also, it brings about a range of ideas in the organization. Also, the multinational organizations either try to take the company’s culture into a nation, or emphasizes on localization for addressing market needs. The organizations can try and build good rapport with the local communities (Buller and McEvoy 2012).
If the human resource issues are not established well and there are disparities in hiring and training processes, it shall affect the operations and lead to financial loss. The virtual teams and cross-cultural groups are also used for struggling with conflicts (González-Loureiro et al. 2014). The human resources must work diligently and train the employees as they play a great role in creating value. They must be trained on cultural sensitivity. Additionally, globalization requires the employees to be acquainted with the foreign languages. The human resources help the organizations understand different laws of many jurisdictions in the business. Value can be created as the organization can change the requirements on working hours, minimum wage and tax allowances as per the need (Bratton and Gold 2012).
The success of international trade depends on the local culture adopted by the company. The cultural issues are important in the value chains as in the global market; the culture or every nation is different. Once an organization crosses its national borders, they encounter complexities in the operations, sales and distribution process. The cultural issues become even more complex when people belonging to one geographic area prefer the other (Pieterse 2012). The studies show that the best results can be achieved if the business processes adapt with the local culture. Cultural complexities add to the global logistics. Cultural mixes are the greatest area of complexity as no mistakes can be made. The organizations may mostly get the expertise to cope up with exchange rates, finance and inflation, but they may not necessarily be able to understand the difference between customers in terms of history, language and laws that affect culture (Emmett and Crocker 2016).
If an organization breaks taboo in another culture, the local culture might not want to conduct business with the country, thereby creating barriers to achieve optimum results. Cultural differences can have a huge impact when an organization wants to extend its business crossing boundaries. There may be misunderstandings, loss of contracts or money if the cultural differences are not well accepted (Schmeisser 2013). Different situations can be faced when working in a global environment. Multi-cultural teams may be established for handling business issues and creating value. Culture must be respected when working in the global environment. Value can be created through open and honest communication, transparency and various other techniques. The leaders of the organizations may take into account how each culture prefers to communicate (Emmett and Crocker 2016).
Value chain analysis plays a critical role in policy making. The political risks play a critical role in the value chain. A localized crisis can have global repercussions. Value chain analysis is a valuable tool to investigate the role that value chains can play in achieving specific policy objectives, such as poverty alleviation, sustained growth and inequality reduction. For example, major investments in infrastructures that are crucial for a staple value chain can be planned on the basis of the recognition of the importance of that staple for food security (Ponte and Sturgeon 2013).
The economies are not equally engaged or involved in the global value chains. The various economies participating in global value chains can be used in other economies’ exports (Ponte and Sturgeon 2013). The economic analysis allows analysts to determining for instance, the value added created by the overall value chain, the value added and margins for each economic agent at each stage of the chain, the value added distribution among factors such as capital: profits, labour: wages, other assets: rents (Neilson, Pritchard and Yeung 2014). Pretty much as most Cost-Benefit Analyses (CBAs), the economic analysis of a value chain is carried out both from the perspective of private agents, using market prices, and from the perspective of the society as a whole, using the so-called “reference prices” (Neilson, Pritchard and Yeung 2014).
The organizations are greatly implementing corporate social responsibility practices in developing countries. The changes in the corporate value systems are driven my various factors. The multinational corporations are spread across the globe. With the globalization in production networks, the organization has to extend their CSR reach not just in the overseas subsidiaries but also various degrees of operational control (Caplan, Dutta and Lawson 2013). However, it is a challenge for the organizations to avoid weak CSR practices in the global value chains. CSR are related with international labour, meeting environmental standards and humanitarian practices. The adoption of such CSR practices by the company exerts an upward pull of the performance of suppliers (Caplan, Dutta and Lawson 2013). The CSR activities are focused on provision of environmental services. The multinational corporations are required to implement CSR practices within the country and crossing the borders to enhance the value chains (Bair and Palpacuer 2015).
The value chain is enhanced by CSR practices as it creates high reputation in the global world. The government and other political bodies must ensure that the practices are being followed. The companies can also perform corrective actions using CSR practices that enhance global value chain (Soundararajan and Brown 2014). Some companies engage in more long term CSR projects with their suppliers to help them to reach compliance with their code or to increase their overall social and environmental performance. Emotional and social value appear to be somewhat “expendable” with consumers in a context of economic uncertainty, while CSR that provides functional value can become an even more salient criteria for decision making. CSR is as concept generated outside of the managerial experience, and contains normative connotations that lack clarity and specificity (Green and Peloza 2011).
Conclusively, globalization and value chain analysis are interrelated. The pace of globalization has increased for a couple of reasons. The development in integrated communications technology and transport has accelerated the pace of globalization. Globalization has been a driver significant growth in the industry economics. Value chain analysis can be used to formulate competitive strategies and developing linkages that create value in the global world. Global value chains aim at maximizing profit along the chain. With low cost, the companies can attain cost leadership thereby adding to the competitive advantage. Globalization provides access to cheap raw materials, energy sources and better environment regulations. There are several financial factors that significantly affect the organization of global value chains across the territorial boundaries. Without access to finance, the business would not grow and they can lose opportunities to compete and grow. One of the reasons for the rising global value chain is upgrading technology. The development of Information Communication Technology (ICT) has been an important driver in the emergence of global value chains.
The integration of technology in global value chain has provided tremendous savings to the organization and opened a new world of opportunities. The information stored in the electronic database may be quicker, but the information technology systems are vulnerable to security breaches. The organizations are interacting with the customers and stakeholders in diverse languages and backgrounds. If the human resource issues are not established well and there are disparities in hiring and training processes, it shall affect the operations and lead to financial loss. The success of international trade depends on the local culture adopted by the company. Cultural mixes are the greatest area of complexity as no mistakes can be made. Value chain analysis plays a critical role in policy making. The organizations are greatly implementing corporate social responsibility practices in developing countries.
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