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 the creation of a good) and logistics (activities making goods available on markets) segments. This leads to new forms of competition as different segments of the value chain 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 significant component of the competitiveness and added value of a commodity chain. This requires specific scientific, technical, and design (aesthetical) capabilities. Last, the procurement (3) of all the components and processes required for the fabrication of 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 the process of 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 level of 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 on markets). It includes distribution (5), marketing (6), and sales / after-sales services (such as customer support; 7), activities that are generating significant added value. This is also known as post-fabrication services.