THEORETICAL FRAMEWORK OF THE STUDY

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1 Theoretical Framework of the Study THEORETICAL FRAMEWORK OF THE STUDY 4 Contents 4.1 The Value Chain as a Tool for Analysis 4.1 The Value Chain as a Tool for Analysis According to the Handbook for Value Chain Research (Kaplinsky & Morris, 2001: p. 4) The value chain describes the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers and final disposal after use. This definition focuses on the value chain as a descriptive construct where the firms that carry out specific activities can be singled out and their role in conversion examined by considering how a physical transformation of the product occurred within the purview of these firms. In this activity, the value chain becomes a heuristic framework for the generation of data. Several researchers have begun to examine how the value chain could be used as a tool for analysis, especially in understanding the distribution of global income or for the identification of effective policy actions to overcome the unequalising tendencies of globalization. The use of the value chain as an analytical construct is enabled by recognition of the three key elements of value chain analysis. According to Kaplinsky and Morris (2001) three important elements of value chain analysis that enable the concept of the value chain to be used as an analytical tool are: School of Management Studies, CUSAT 105

2 Chapter The value chain is a source of rent The concept of rent has been used in relation to economics- as economic rent. Classical economists like Ricardo have emphasized the importance of economic rent which arises from the possession of scarce attributes or on the basis of unequal ownership or access or control over an existing scarce resource Schumpeterian Rents in Value Chain Research According to Kaplinsky and Morris (2000, p.26) this scarcity can be constructed by purposive action and Schumpeter has ascribed an entrepreneurial surplus to accrue to those who create this scarcity. Schumpeter relates this to the action by entrepreneurs to innovate. They create new combinations or conditions which provide greater returns. This greater return is a form of super profit, which encourages other firms to enter the same business seeking to acquire part of this profit. Over a period this benefit is diffused by entry of competitive firms- but till that time the innovation remains a source of surplus. In short the concept of Schumpeterian rent is integral to value chain analysis because a) It arises because of the differential productivity of factors and the creation of scarcity for those factors by firms b) It can take various forms within the firm. Sources of rent may arise from the use of unique or specialized technologies, from the use of marketing or organizational capabilities or the human resource capabilities. A similar and preceding strand of literature evolves in the use of dynamic capabilities of Teece, Pisano &Shuen (1997) and core competence approach of Hamel and Prahalad (1990). c) Activities taken up between groups of firms are also a source of rent denoted as relational rents. d) Sources of rent have become important since the rise of technological intensity and the growth of differentiated products. 106 School of Management Studies, CUSAT

3 Theoretical Framework of the Study e) As competition increases, more firms may enter into the production of those resources, reducing the profit it can generate. It leads to the generation of consumer surplus in the form of lower prices and/or higher quality Firm or endogenous rents Technological rents relate to the technology related improvements which have been made in firms and which have caused an increase in the output of firms or a betterment of their processes. Firm level enquiry is required for understanding this, together with access to public data sources like newspaper reports which have indicated these improvements as significant. Human resource capabilities are related to the work practices, the training employed, the skills of the work force, their experience or years of service, and their ability to carry out tasks. Firm level analysis is required to understand its contribution. Organizational skill becomes a source of rent when it enables lean production, reduction in inventories, and improvement of quality, new product development and lead time. Organizational abilities are also improved by associating with other firms in the chain, rather than within the firm alone. This data needs to be collected by interaction and interviews with firms. Marketing rents are usually reflected by the presence of brand names, but among developing country producers brands may not be a common occurrence. The use of marketing activities, market promotion measures, marketing expenditures, market development activities need to be explored through firm level interviews and records Resource Based rents These stem from the presence of high yielding deposits and land based mineral accumulations, the presence of specific plantations, or yields of trees or fruits, the presence of specific land or geography based strengths, which are not present in any other region. Data about this is collected at the firm by interviews and through sector based studies or reports related to the region. School of Management Studies, CUSAT 107

4 Chapter Relational or Chain Rents These arise from the development of high quality relationships with suppliers and customers. This may result in improvement in lead times, quality performance, innovations in products, speedy R & D processes, or the development of combined activities, as a synergistic relationship Exogenous Rents These arise from three sources. The policy actions within the industry and at state and central level may provide benefits to firms, the effectiveness of policy actions, the design and delivery of incentives etc are termed as policy rents. Infrastructural rents refer to improvement in transport, communications or facilities for business growth provided by state or center, or by partnerships. Table 4.1 provides a summary of the sources of rent that are significant in the discussion of the firm s value chain linkages. Table 4.1: Different Forms of Economic Rent 1. Economic rent rises in the case of differential productivity of factors and barriers to entry 2. There are a variety of forms of economic rent prevalent in the global economy: Some are endogenous and are constructed by the firm and are classical Schumpeterian rents: Technology rents having command over scarce technologies Human resource rents having access to better skills than competitors Organizational rents possessing superior forms of internal organization Marketing rents possessing better marketing capabilities and/or valuable brand names. Other rents are endogenous to the chain, and are constructed by groups of firms Relational rents having superior quality relationships with suppliers and customers. 3. But rents can also be exogenous to the chain and arise through the bounty of nature: Resource rents access to scarce natural resources 4. Producers can also gain from rents provided by parties external to the chain: Policy rents operating in an environment of efficient government; constructing barriers to the entry of competitors Adapted from: Handbook on Value Chain Analysis Kaplinksy & Morris (2001),p School of Management Studies, CUSAT

5 Theoretical Framework of the Study Relevant data sources An important aspect of the manual for value chain research is that it enables nascent researchers to understand the relevant data sources for obtaining information pertaining to the specific constructs. Table 4.2: Data Sources for Specific Types of Rent Type of rent Rents constructed by the firm firm rents Technology Indicators of rent and barriers to entry Investment in R& D/ patent related statistics Data sources Firm records; dailies and business periodicals/ websites for national data Human resources Skill profile; training Firm records; ILO and UNESCO yearbooks Organization Marketing Rents constructed by the chain Relational rents Resource rents Rents accruing from actions external to chain Continuous improvement schemes, inventory and quality performance, lead time Advertising expenditure, brand performance Continuous improvement schemes, inventory and quality performance, lead time for the chain Yield of mining deposits, coal deposits. Effectiveness of government support; incentives Telecom and roads Financial policies Firm records; published materials and consultancy reports Firm records Firm records particularly for firm at apex of the chain. Firm records, UNIDO, FAO and World Bank industry studies Comparative firm analysis and policy analysis World bank studies Firm analysis Source: Handbook on Value Chain Analysis Kaplinksy & Morris (2001), p. 81 School of Management Studies, CUSAT 109

6 Chapter Value Chains Exhibit Governance This was a term coined by Gereffi (1994). He used it to describe how the various activities and interactions taken up by firms and between firms were subject to some kind of organization and was not random actions. They were repetitive actions that were organized and following certain rules or specifications which were not taken up of their own accord. They were often set by other, more dominant firms in the chain. This means that specifications or parameters regarding the nature of transactions, the product, process and logistic qualifications are set, which will affect, through consequences, the actors, their roles and functions and the bundles of activities they execute. This is called governance. An important aspect of global trade is the splitting up or slicing up of the value chain into specific functions carried out in different countries. Firms take up different functions or activities, which they have specific strengths in, or in which they have a differential advantage. Control or management of these varied activities by actors often located in different countries means that coordination of chains needed to be done. This is usually done by key actors or dominant firms who take responsibility of splitting up of these activities among the various firms which do only some specific part of a set of functions as well as to ensure that the design and quality of final products meets certain prescribed norms. The firms exerting governance in the chain will a) Be able to force other firms in the chain to take particular actions. E.g. to allocate assembly operations to firms down the chain, and design functions with themselves. b) May be in a position to reject or refuse the demands of other firms in the chain, playing a dominant or controlling role that may have detrimental effects to firms down the chain. 110 School of Management Studies, CUSAT

7 Theoretical Framework of the Study Governance In Value Chains In order to enable analytic dissemination of the construct of governance, three forms of value chain governance are recognized by Kaplinsky and Morris (2001). These three forms can be understood in terms of the functions they perform. These functions are described in terms of governmental functions. These are the legislative function, the executive function and the judiciary functions. In the same way governance may be legislative (the making or setting of rules), judicial (enforcing or ensuring rules) and executive (implementing or assisting rule adoption). Another important aspect is whether these rules or governance measures are exerted by parties internal to the chain, or external to it. The following figure will clarify these points. Table 4.3: Type of Governance by Parties External and Internal to Chain Types of governance Legislative governance Judicial governance Exercised by parties internal to chain Setting standards for suppliers in relation to on-time deliveries, frequency of deliveries and quality Monitoring the performance of suppliers in meeting these standards Exercised by parties external to chain Environmental standards Child labour standards Monitoring of labour standards by NGOs. Specialized firms monitoring conformance to ISO standards Executive governance Supply chain management staff assisting suppliers to meet these standards. Producer clusters/ clubs assisting members to meet these standards Representative agents assisting members to meet these standards Specialized service providers Government industrial policy support Producer business associations assisting members to meet these standards Source: Handbook on Value Chain Analysis Kaplinksy & Morris (2001), p. 68 School of Management Studies, CUSAT 111

8 Chapter Types of standards A second aspect is regarding the types of rules or standards. This may be broadly divided into product based, if concerned with the final or end product that goes to the consumer, or process based. A second aspect is the extent to which they are codified or set in legally enforceable terms with fines or penalties if transgressed. Some rules are codified legally, other rules may be internationally recognized but with no legal basis. A third type of rule may pertain to a region or set of product markets in a geographical space, and a fourth set of rules may be set by firms themselves, to maintain a standard for their operations. Table 4.4: Two Sets of Factors Determining Rules and Standards Type of standard Product Process Food hygiene standards, lead content in toys Health and safety standards in work G3 standards for cellular phones ISO 9000 (Quality) SA 8000 (Labour) homologisati on of regulations on product types QS 9000, BS 5750 Firm standards supporting brand name VDA6.1 (VW quality standard Legally codified Internationally agreed Type of codification Regionally specific Firm specific Source: Handbook on Value Chain Analysis Kaplinksy & Morris (2001), p. 69 The function of legislative governance is to establish a set of terms or rules which must be followed if firms become part of the value chain. The definitions of those various sets of rules determine the basis of participation in value chains termed as legislative governance ; or rule setting. The value 112 School of Management Studies, CUSAT

9 Theoretical Framework of the Study chain is described in terms of activities which are usually split up between different firms in different countries. The important aspect of the splitting up of these activities is that they need to be monitored - linked between different actors comprising the links. These products and activities need to be integrated and the design of the components and quality standards with which this integration is achieved are aspects that need coordination. Organizing the logistics between these different points to maintain a national, regional or global set of relationships, as well as ensuring that the smooth flow of operations happen, are important aspects of governance. In an ongoing relationship it is important to continuously ensure that dynamic opportunities or sources of rent are identified and appropriate barriers to entry for other competing firms are in place to prevent dissipation of the economic surplus accruing from the source of rent: and apportioning roles to key players and ensuring that these roles are taken up and executed efficiently or are also important aspects of concept of governance. Kaplinsky and Morris (2001) stress that it is not always the case that a single firm alone takes up these roles. In fact there may be a multiplicity of nodal points of governance and coordination functions further, these nodal points of coordination and governance. Further, these nodal points may shift over time as prominence accorded to different firms/actors changes according to the functions or activities they perform Legislative Governance This refers to the basic rules that are established. These define the conditions under which firms can participate. What basic aspects regarding quality of operations they undertake will they meet? Can they meet the rules or standards that are crucial to specific industries? These rules of participation during the 1990s must have been related to price, deliverability and quality. Recently, more firms are judged greatly, on their ability to conform or meet established School of Management Studies, CUSAT 113

10 Chapter-4 international standards like the ISO 9000 (quality of products), ISO (environment related), SA 8000 (Labor or social accountability standards) or other industry specific standards e.g. the HACCP (for food industry), Reach standards (for dyes and chemicals) etc. Supranational bodies like the European Union often set rules which are legally coded and process based rules. Firms which wish to do business with the EU must ascribe to these rules. Certifying agencies like Der Norske Veritas or Bureau Veritas carry out a certification process for producing firms through country specific offices or nodal agencies. They are either direct branches of the international certification bodies or organizations which take up a membership or agency of these certifiers for an ascribed fee. This ensures that the processes followed in the specific suppliers firms ascribe to the rules specified in the ISO (International Organisation for Standardization). The recertification process which is carried out yearly, across a number of parameters is done to ensure that monitoring of the rules regime is carried out. This may be done by independent certifying firms of a national or international origin. State or country based rules regarding processes, buildings, structures or staff of firms is checked yearly by state or country based agencies. NGOs may independently visit factories and rate them on the basis of their social accountability indicators or fair trade practices. The setting of rules may be done external to the chain, when it is imposed by bodies, organizations or agencies not directly involved in the chain, or internal when it is set by key links or actors in the chain e.g. a very large and established retailer with a regional or country wide presence, an importer wholesaler who has set specifications from all product vendors regardless of country of origin, etc. 114 School of Management Studies, CUSAT

11 Table 4.5: Sources of Legislative Governance Theoretical Framework of the Study External to the chain What to look for Legislative requirements- (e.g. quality standards) Informal rules promoted by civic associations Types of data Regulations (e.g. on shelf-life; safety standards) Data on processes in production (e.g. with regard to safety, environment, or labour standards) Internal to the chain Rules set by key links in the chain which producers need to attain Source: Adapted from Kaplinsky and Morris (2001, p.70) Quality standards (e.g. parts per million defects); environmental standards; % on time delivery Judicial Governance The second aspect of governance involves ensuring that the rules that have been set are followed. This is called judicial governance. It involves auditing performance and checking compliance with these rules. The absence of conformity calls for exercising of sanctions which is a key function of governance. This means an exclusion from a production network or being blacklisted among buyers or channel members for using unethical practices. In most cases sanctions are less strenuous such as decreasing the number of activities they are required to handle, (thus reducing profit) or imposing cost penalties or monetary fines for not meeting delivery deadlines. Positive rewards are also meted out when suppliers continuously meet standards or exceed the requirements of producers. A greater role in higher value or distinctive capabilities invite positive sanctions like less stringent auditing or quality checking, reliance on firm standards or greater trust in the relationship. School of Management Studies, CUSAT 115

12 Chapter-4 Table 4.6: Sources of Judicial Governance External to the chain What to look for Legislative requirements e.g. quality standards Informal rules promoted by civic associations Monitoring agent Government or regional standards offices NGOs or the Press Internal to the chain Conformance to rules set by key links in the chain which producers need to attain. Key buying firms in the chain Source: Adapted from Kaplinsky and Morris,( 2001 p. 70) Executive Governance A third aspect of governance is executive governance. This is the process by which firms are assisted to meet standards or specifications. This may be through assistance in meeting standards, helping firms to meet process standards, by providing classes or interactive sessions to learn product or process related performance standards, or by assisting in meeting product standards by personal attention or enabling learning-by-doing, combined investing in supplier facilities etc. An important aspect of governance is the assistance that producers or suppliers need to be given to be able to meet the standards that their buyers require. In many cases it is seen that the buyer firms may not provide the required quantum of assistance to help firms produce as per buyer standards. This function is seen to be taken up by many other parties. Kaplinksy and Morris, (2001) indicate the following intermediate organizations which take up the role of capability development and skill enhancement of producers. They again, may be part of the particular value chain or external to the chain. 116 School of Management Studies, CUSAT

13 Table 4.7: Sources of Executive Governance Theoretical Framework of the Study External to the chain Internal to the chain Change agents Consulting firms Learning networks Government agents Rule setting firm Buying agent of rule setting firm 1 st tier or other leading suppliers to rule setting firm Sources of data Interviews with consultants, CEO or production control in firms CEO or production control in firms; business associations CEO or production control in firms; interviews with government officers responsible for industrial policy Supply chain management or purchasing function in purchasing firms Interviews with agent and supply chain management firms Supply chain management or purchasing function in purchasing firms; Source: Adapted from Kaplinksy and Morris ( 2001, p 72) In many cases value chains exhibit all three forms of governance and not necessarily by single firms. The rules may be set by one firm and the executive governance or internalizing of these rules may be done by a second firm very often support firms affiliated to government or private auditors. Similarly the legislative sanctions may be dealt with by a third group of firm. Another aspect has to do with whether governance is exhibited by firms in the chain or firms which are not directly part of the chain. These may be independent organizations, or quality monitoring firms Typology of the value chain There is a distinction between different value chains. Gary Gereffi was the pioneer in the field, with the distinction between producer driven chains and buyer driven chains. School of Management Studies, CUSAT 117

14 Chapter Identifying of the type of value chain Kaplinsky and Morris (2001), in the handbook of value chain research use Gereffi s (1994) distinction between producer driven commodity chains and buyer- driven commodity chains as a method of classification. It was originally useful to examine whether the critical governing role is played by a key producer at the apex of the chain, or by key buyers. In producer driven chains, key producers have access to vital technologies and play the role of coordinating the various links. In many cases they take up responsibility for assisting the efficiency of both the suppliers and their customers. Buyer driven chains emphasize the role of branded retailers or powerful final buying firms which usually deal with products like footwear, clothing, furniture and toys. These products are dictated by fads or fashion trends and the producers of such products are subjected to the vagaries of market demand with greater frequency. Production of such goods is carried out by tiered networks of third world contractors that make finished goods for foreign buyers. The specifications are supplied by the large retailers or marketers that order these goods (Gereffi, 1999b, p.45) Humphrey and Schmitz (2000, 2002) introduced a typology of chain governance. They observed that certain types of chains were associated with particular types of upgrading. This was based on the premise that global buyers would govern some kinds of relationships more than others. Based on the extent of upgrading that these suppliers were exposed to, four types of relationships evolved between buyers and suppliers. Humphrey and Schmitz chain topologies are used to distinguish four distinctive types of value chains for the purpose of the study: a) Arms length market relations: the product being made is standard or easily customized, and a range of firms can make the product. This entails low switching costs for both parties. Buyer and supplier do not need to maintain close relationships and there is limited exchange of information and the use of transaction specific assets. 118 School of Management Studies, CUSAT

15 Theoretical Framework of the Study b) Networks: these are relationships which are information intensive, reciprocally dependent, coordinated and shared. The essential value chain competencies are shared between buyer and supplier. Though product performance standards or process standards to be attained are specified by buyer firms, they are confident that the supplier can meet them. c) Quasi hierarchy: one firm exerts a high degree of control ovr other firms in the chain. This firm specifies the characteristics of the product to be produced and sometimes specifying the processes to be followed and the control mechanisms to be enforced. The firm s increased role in deciding what is produced may be because of its position as a key buyer or because it doubts the competence of the supply chain. It may take up controlling roles further down the chain. d) Hierarchy: some of the functions down the value chain are taken up by the lead firm and ensures that those activities are carried out. This type of chain is characteristic of the Upgrading in Value chains In the initial discussion on immiserising growth, firms which follow low road growth paths face the danger of intensifying competition if they are unable to identify a source of entrepreneurial surplus. This leads to a race to the bottom. Firms in high road growth on the other hand were able to actively participate in the global economy and sustain income growth. Kaplinsky and Morris (2001) describe this difference between outcomes and paths caused by the capacity to innovate and to ensure continuous improvement in product and process development. This means that plant and production improvements alone does not guarantee continuous returns but is also hinged on the ability of firms to learn and innovate. (Lundvall, 1992; Nelson and Winter, 1993 cited in Kaplinsky & Morris, 2001). School of Management Studies, CUSAT 119

16 Chapter-4 Innovation per se may not be the only factor that enables firms to earn more but rather, relative to competition, how fast is its rate of innovation. If lower than competitors, it may still lead to decline in value added and lowering of market shares. It may eventually immiserise growth. This means that innovation relative to competitors- is what is important. This is called upgrading. Upgrading is a concept that has received a lot of attention- in the literature. Kaplinsky and Morris (2001) indicate the core competency approach of Hamel and Prahalad (1990) as an initial school of the thought that focused on firm capabilities- they described a core competency as something which provides value to the customer, are relatively unique and are difficult to copy. This may be because of barriers to entry. The dynamic capabilities of Teece and Pisano (1997) built on the concept of Schumpeterian rents and stated that firm profits cannot be sustained by quasi monopolistic control of the market but through the development of dynamic capabilities. These involve Its internal processes which facilitate learning, including the capacity to reconfigure or improve on what it has done in the past. Its position- its access to specific competencies either within its own activities or those derived from the region or state. Its path. How it is able to adapt to change. An important limitation to these methods is that they fail to consider the innovative system and out- of- firm factors that may arise from activities involving groups of firms or regions having people or processes with special skills or work abilities Types of Upgrading This aspect is recognized in Humphrey and Schmitz (2003) trajectories of upgrading which considers product and process development as well as the functional changes that occur when new processes are taken up or obsolete 120 School of Management Studies, CUSAT

17 Theoretical Framework of the Study processes are abandoned. Four trajectories of upgrading which firms may take up are: a) Improvements in process, either within a firm, or as a result of a series of linked actions in the relationships between firms. b) Improvements in product, either within a firm or as a result of a series of linked actions in the relationships between firms. c) Changing functional positions by adjusting activities undertaken within a particular link, or moving to activities taking place in other links. d) Moving out of the value chain, into a new value chain (value chain upgrading) (from Kaplinsky and Morris 2001, p 76) Sources of Upgrading There is a need to analyze both the upgrading practices and the performance outcomes of these practices. It is also necessary to distinguish between the source and origin of upgrading. It may originate from within the chain link (firm) or between the chain links. This means that upgrading may happen as a result of the individual activity of a firm or the combined activities of firms or actors in the chain. The Manual has listed the practices that indicate the types of upgrading that may be exhibited by firms in the chain and the performance outcomes of these practices Relevant Data Sources In examining the degree of upgrading Kaplinsky and Morris describe the necessity to distinguish between the upgrading practices and the performance outcomes of these practices. The following table (Table 4.7) describes a set of the practices that firms may take up in response to or as an outcome of upgrading practices. The performance indicators are useful because they tell us what these upgrading performances may result in. changes in unit prices and link to market share, though the best indication of value are difficult to obtain from firm analysis, though broad descriptions of the same may be obtained from interview data. School of Management Studies, CUSAT 121

18 Chapter-4 Table 4.8: Practices and Performance outcomes of upgrading Type of upgrading Practices Performances Improving process efficiency Within the chain link Between chain links Introducing new products or improving existing products Within the chain link Between chain links Changing the mix of activities Within the chain link R&D; changes in logistics and quality practices; introducing new machinery R&D, supply chain management procedures; e- business capabilities; facilitating supply chain learning Expansion of design and marketing establishments; establishment or strengthening of new product development cross functional teams; Cooperating with suppliers and customers in new product developmentconcurrent engineering New higher value added chain specific functions absorbed from other links in the chain and/or low value added activities outsourced Lower costs; enhanced quality and delivery performance; shorter time to market; improved profitability; enhanced patenting activity Lower final product costs; enhanced final product quality and shorter time to market; improved profitability throughout the value chain; enhanced patenting activity. Percentage of sales coming from new products. Percentage of sales coming from branded goods Number of copyrighted brands Increase in relative unit product prices without sacrificing market share. Division of labour in the chain. Key functions undertaken in individual links in the chain Between the chain links Moving into a new value chain Moving into new links in the chain and /or vacating existing links Vacating production in a chain and moving to a new chain; adding activities in a new value chain. Higher profitability; increase in skill and salary profile Higher profitability; proportion of sales coming from new and different product areas Source: Kaplinsky and Morris, (2001, p 77) 122 School of Management Studies, CUSAT

19 Theoretical Framework of the Study Identification of Critical Success Factors in final markets Kaplinsky and Morris (2001) regard contemporary markets to have certain characteristics: a) They are segmented: segmentation by demographic variables, by usage time and frequency, by benefits, by lifestyle, by life stage or by activity is common. Marketing of goods and services is entering an era of microsegmentation with different implications of market size and growth, which need to be studied. b) Final buyer market characteristics: these are called Critical Success Factors (CSFs). They depend on the sophistication of the final buyer markets. Though earlier low price and large volumes used to be important CSFs, discerning customers now demand high quality, product differentiation and branding as CSFs. Increasingly, non price or non tangible success factors are taking center-stage, with aspects like innovation, customization and order variability becoming critical. This puts increasing pressure on producers or suppliers in developing countries and makes demands on their production, organizational and sourcing capabilities. c) Segmented markets are also characterized by volatility. This means that customers demand changes in the product offerings at a much faster rate. This accounts for increasing the number of selling seasons (from two to four and now to eight), increased frequency of ordering, and more stringent delivery terms, for suppliers Order winning and order qualifying characteristics Kaplinsky and Morris classifies critical success factors into order qualifying (basic levels of competencies to participate in those segments) and order winning (factors or competencies that causes firms to excel, or to command a price premium). School of Management Studies, CUSAT 123

20 Chapter-4 They advocate the use of scored responses on a 1-10 or 1-7 rating scale to conduct analysis of CSFs and examine the order winning and order qualifying characteristics. First pilot interviews should be done to understand which the predominant CSFs in a market or region are. Once a common set of factors are identified then respondents should be asked what they feel are critical CSFs in each market segment, by using the same set of factors in different segments it is possible to understand differences between segments Developing Radar Charts A final aspect of CSF analysis is the construction of a radar chart. These are easily developed through the use of Microsoft Excel and it is possible to compare different segments. In the case where many segments could not be simultaneously examined, a triangulation of evidence is possible by getting the CSF scale rated by both supplier firm and buyer so that biases may be ruled out. The CSFs of different firms can then be compared. A possible comparison can be made in two ways. The first is a comparison between the scored responses of supply firms regarding degree of importance of selected CSFs and their performance on these parameters. There may be few striking differences between these two sets of ratings, except in some aspects the firm may feel it needs a drastic improvement. A second comparison is of the supply firm s own performance rating and the buyer s rating of the supplier performance on these parameters. This is where triangulation can be done so that bias is eliminated Aspects of the buying function Final product markets are of importance in value chains since they determine the nature of products required from suppliers. Kaplinksy and Morris (2001) describe contemporary production systems being market pulled rather than supplier pushed. Understanding the final product market needs is thus an important aspect of value chain studies. 124 School of Management Studies, CUSAT

21 Theoretical Framework of the Study It is necessary to understand the important market segments which represent the final buyer markets for these firms. This is especially important as in the last quarter of the 20 th century. Supply capabilities began to exceed demand and consumers became more demanding as competitive pressures increased. Understanding the various segments of buyers will help in mapping of the value chain, which in turn indicates whether the supplier firms are getting a fair share of value generated through the process and product flow Examining the key buyer segments Gereffi s (1999) description of buyer driven chains are relevant especially in the textile and clothing sector. The main leverage in such chains is exercised by retailers, marketers and manufactures through their ability to shape consumption patterns, by virtue of strong brand names, practices and reliance on global sourcing strategies to meet demand. Among developed countries a pattern of changing specialization is seen among the market based sales establishments. This is especially true for apparel and clothing. Large volume retailers are moving towards greater specialization and increased concentration by product line and store type or price band. Manufacturers who import clothing increasingly face off against retailers. Larger numbers of smaller, less dense retailers are expanding their sourcing of private label or store brand merchandise, cutting off the cost of intermediaries and increasing profits. Understanding which the major buyer segments are will be useful to understand whether producers are directed towards greater or lesser specialization Examining the important product groups Among product classes or groups, a phenomenon called organizational succession is seen especially among buyer driven chains. This mean upgrading of activities is done by suppliers by moving into more profitable and/or technologically sophisticated capital and skill intensive economic niches. This School of Management Studies, CUSAT 125

22 Chapter-4 may be in the items produced, in the functions taken up within firms, in the inter firm enterprise networks and at the national or regional level (Gereffi, 1999, p 52). Knowing what are the important product groups dominating the firms offering reveals whether the firms have moved from simple assembly to integrated forms of OEM AND OBM production involving a greater use of forward and backward linkages Examining the major destinations of sales The importance of retail destinations is seen when one considers how retailing is undergoing greater concentration in almost all markets. A shift in power is seen from manufacturers to retailers and marketers are seen in most markets with retailers, having their own stores and store brands accounting for greatest revenues. This is also seen across countries. The entry of new regions or countries into a dependence of off shore supply chains is seen across all major markets. This may bode well for the Indian industry as well, and it serves to know which the major destinations of sales are School of Management Studies, CUSAT