The Value Chain and its Added Value

Commodity Chains and Added Value

Source: Adapted from the Stan Shih “Smile Curve” concept.

The setting of global value chains and their related commodity flows has led to the growing importance of the concept (activities behind creating a good) and logistics (activities making goods available on markets) segments. This leads to new forms of competition as different value chain segments require additional capabilities. Therefore, a value chain offers three main dimensions over which competition may take place:

  • Competition over concepts. In a global production and consumption market, R&D (1), branding, and design (creating a product; 2) can be a component of competitiveness and added value. This requires specific scientific, technical, and design (aesthetical) capabilities. Last, the procurement (3) of all the components and processes required to fabricate a good must be set. These are also known as pre-fabrication services.
  • Competition over processes. The manufacturing function (or fabrication; 4) of many corporations has been hollowed out by globalization, in which manufacturing accounts for one of the functions with the least added value, particularly if it takes place within an outsourcing and offshoring framework. They enable lower conventional input costs such as labor and raw materials. The entry of low-cost manufacturers led to a high level of competitiveness in fabrication, reducing profit margins, as well as its overall contribution to added value. Still, fabrication remains functionally the most important process within a value chain and is influenced by production and location factors.
  • Competition over markets. The growing complexity of products and market imperatives have reinforced the importance of the logistics segment (making a specified product available in markets). It includes distribution (5), marketing (6), and sales / after-sales services (such as customer support; 7), activities that generate significant added value. This is also known as post-fabrication services.