The Governance of Global Value Chains;
Implications for Industrial Upgrading
Timothy J. Sturgeon, Ph.D.
Industrial Performance Center
Massachusetts Institute of Technology
http://web.mit.edu/ipc/www
SEMINAR ON GLOBALIZATION, KNOWLEDGE, AND DEVELOPMENT
Universidad Nacional Autonoma de Mexico (UNAM)
March 13-17, 2006
Mexico City
Frame of Reference — Key Trends for Firm-level
Analysis of Globalization
•
•
•
•
•
•
•
•

Increased outsourcing
Computerization of product design
Computerization of process technology
Formalization and segmentation of work tasks (services offshoring)
Increasing market volatility and industry clock-speed (Fine)
Increasing geographic scope of production systems
Better integration of geographically dispersed production systems
The rise of a new, global-scale supply-base
The global value chains framework is an overarching rubric that can help
to tie these trends together
 New features are global suppliers, global buyers, and value chain
modularity, which eases coordination between the two.
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
From Vertical Integration to Value Chain Modularity
A) Vertical Integration
Market Channel
Traditional Manufacturing Firm
Admin.
Product strategy
Prototype fab.
Product R&D
Parts purchasing
Process R&D
Manufacturing
Functional design
Testing
Form design
Packaging
Dist.
Sales Reps.
Marketing
System Int.
Retail
End
User
Firm boundary
B) Value Chain Modularity
Lead Firms (Brands and Retailers)
Admin.
Full Package Supplier
Product strategy
Process R&D
Product R&D
Design for mfg.
Functional design
Marketing
Admin.
Parts purchasing
Form design
Manufacturing
Prototype fab.
Testing
Market Channel
Dist.
Sales Reps.
Marketing
System Int.
Retail
End
User
Packaging
Codifiable transfer
of specifications (CAE, CAD, CAM, MRP, ERP) at inter-firm link.
What Baldwin and Clark (2000) call a“pinch point” in the chain of activities.
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Elements of Modularity
• Modular product designs (e.g., the PC)
• Modular value chain linkages (the hand-off)
• Modular value chains (internal)
• Modular value chains (external)
 Only modularity in external value chains leads to
capacity pooling and external economies of scale
 Modular product designs make value chain
modularity easier, but only one break point is needed
— full product design modularity is not required
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Elements of Value Chain Modularity
• Codification of complex information eases the hand-off at the
inter-firm link—information technology and widely recognized
standards are key.
• Highly competent suppliers with multiple locations and
customers
• An adequate number of suppliers to allow lead firms to switch
• Generic capacity
– Allows lead firms to add and subtract capacity on short notice
– Allows large suppliers to substitute locations
 Benefits for lead firms: lower costs and risk
 Risks for lead firms: IP leakage, creation of competitors,
attenuated learning by manufacturing, forecasting and
inventory distortions, de-codification with technological
change, ceding of value to suppliers
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Performance Benefits of Modular Production Networks
Preconditions
Information
Technology
Suppliers
Provide Base
Processes
Standards
Generic Capacity
Capacity
Codified Network Linkages
Network Characteristics
Attenuated Interdependence
Open Character of Network
Lower Barriers to Network Entry and Exit
Greater Organizational Flexibility
Greater Geographic
Flexibility
Network Performance
Lower Factor
Costs
Product/Customer
Flexibility
Higher Capacity
Utilization
Lower Total Cost and Risk
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Lead firms with captive supply bases
End users
Competition
Lead firm A
Lead firm B
Value
Chain
Co-evolution
First tier
Supply
Chain
Supply base A
Supply base B
Second tier
Materials
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Lead firms with shared, modular suppliers
Co-evolution
(including
competition)
Lead firm” n”
Lead firm A
Co-evolution
(including
competition)
Shared supply base
Codifiable transfer
of specifications (CAE, CAD, CAM, MRP, ERP) at inter-firm link.
What Baldwin and Clark (2000) call a“pinch point” in the chain of activities.
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Value chain modularity with supplier consolidation
Co-evolution
(including
competition)
Lead firm” n”
Lead firm A
Co-evolution
(including
competition)
Global suppliers
Global Supplier Examples:
Electronics contract manufacturing: Flextronics, Solectron, Sanmina-SCI, Celestica, Jabil, Hon Hai, Quanta, Compal
Auto parts: Magna, Delphi, Visteon, Bosch, Denso, Yazaki, Lear, Johnson Controls, TRW, Continental
Call Center Servvices: Accenture, SNT Group, Atento, Convergys, SR Teleperformance, Wipro BPO, Bertelsmann
Clinical Trials and Contract Medical Research: Quintiles, Covance, IMS Health, Parexel
IT Services and Enterprise Computing: IBM, Accenture, PriceWaterhouseCoopers, McKinsey, Cognizant
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Revenue Growth at the Top Five Electronics Contract
Manufacturers, 1994 through 2001, $M
Flextronics
Solectron
Sanmina-SCI
Celestica
Jabil Circuit
Top 5
Top 100
1994
$211
$1,642
$2,364
$1,989
$404
$6,610
NA
1999
$1,808
$8,391
$8,624
$5,297
$2,400
$26,520
$46,029
2002
$13,615
$12,261
$10,168
$8,272
$3,729
$48,045
$68,149
CAGR Share of Top
’94-‘02
100, 2002
68%
20%
29%
18%
20%
15%
20%
12%
32%
5%
28%
70%
NA
100%
Note: All Celestica revenues in 1994 were from IBM.
Sources: Company annual and quarterly reports; Electronic Business Top 100 Contract
Manufacturers, 2003.
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Top Five EMS Contract Manufacturers
Revenues, Employment, and Facilities, and Location, 1999 and 2002; Compound
Annual Growth Rate 1999-2002; and Top Five Share of Top 100, 2002
Revenues ($M)
Employment
Worldwide Facilities
Facilities Outside N. America
1999
$26,520
123,580
244
131
2002
$48,045
280,030
420
257
CAGR Share of Top
’99-‘02
100, 2002
22%
70%
31%
63%
20%
69%
25%
82%
Source: Electronic Business Top 100 Contract Manufacturers, 2000 and 2003.
Notes: Flextronics facility figures are for 2000; growth rates have been adjusted accordingly.
Solectron facility figures are for 2001; growth rates have been adjusted accordingly.
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Product Mix for the Largest Five EMS
Contract Manufacturers, 2001
Other
9%
Computers and
peripherals
28%
Consumer
8%
Military
4%
Medical
6%
Industrial
5%
Communications
40%
Source: Electronic Business Top 100 Contract Manufacturers, 2002.
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
The new global supply-base; Celestica’s global footprint
1997
2001
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Global suppliers offer “total geographic flexibility” in a
shared global supply-base; coordination is internalized
Regional
production
systems are
nested within
global
production
systems
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Upgrading at an Electronics Contract Manufacturing Plant in
Guadalajara, Mexico, February, 2001 – July, 2004 (Jabil Circuit)
Emp loyment
Number of
customers served
Number of products
made
Number of parts
used
Emp loyee turnover
rate (mo nthly)
Februar y 2001- July,
2002
3,500 dow n to 1,750
5
March, 2004
215
600
5,000
12,000
5%
2%
Average prod uction
Long
run
Number of
Few
engineering changes
Represe ntative
 personal
products
computers
 video game
consoles
 mob ile phone
handsets
3,900
17
Short
Many
 communications
switches
 spec ialized hand-held
credit card processing
mac hines
 Internet firewa lls
 electronic controls for
was hing mac hines
Source: Luhnow, David. “As Jobs Move East, Plants in Mexico Retool to Compete.” Wall Street
Journal.com. March 5, 2004.
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
The Role of “Proximate Production Platforms”
(Mexico, East Europe) in GVCs
• Rapid order fulfillment for “lean retailing”
• Last minute customization for pull-through ordering
• Medium technology products and processes that require
moderate degree of design/prodcution co-location
• Product categories that require in-region production (autos,
medical, military and security-related)
• Pass through production location as newer products shift from
US to China
 Competition is with developed country plants, not with China
 Regional integration needs to move beyond trade, to the
integration of production, innovation, and security regimes
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
The governance of global value chains:
an analytic framework
Based on a paper by:
Gary Gereffi, Duke University
John Humphrey, IDS
Timothy Sturgeon, MIT
Published in:
Review of International Political Economy, 12(1) 2005
Summary of approach with related literature can be found at the
Global Value Chains Initiative website:
www.globalvaluechains.org
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Theoretical Underpinnings
(starting point: industrial organization)
1.
Transaction Costs Economics
Key concept: Asset specificity
Academic field: Institutional economics
2.
Production Network Theory
Key concepts: Trust, reputation, repeat transactions, social networks,
geographic proximity, power
Academic fields: Economic sociology, economic geography
3.
Complementary Competencies
Key concepts: Resource view of the firm, learning, core competence,
co-evolution (buyer-supplier and industry)
Academic fields: Strategic management, operations management,
evolutionary economics
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Five GVC Governance Types
Complexity of
transactions
Ability to codify
transactions
Capabilities in
the supply-base
Market
Low
High
High
Modular
High
High
High
Relational
High
Low
High
Captive
High
High
Low
Hie rarchy
High
Low
Low
Gove rnance
Type
Network
org.
forms
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Degree of
explicit
coordination and
power
asym metry
Low
High
Some Dynamics in Global Value Chain Governance
Governance
Type
Complexity of
transactions
Market
Modula r

Abili ty to codify
transactions
Capabilities in the
suppl y-base
Low
High
High
High 
High

Low
High


Relation al
High
High
Captive
High
High
Low
Hierarchy
High
Low
Low

 increasing complexity of transactions (harder to codify transactions; effective decrease in supplier competence)
 decreasing complexity of transactions (easier to codify transactions; effective increase in supplier competence)
 better codification of transactions (open or de facto standards, computerization)
 de-codification of transactions (technological change, new products, new processes)
 increasing supplier competence (decreased complexity, better codification, learning)
 decreasing supplier competence.(increased complexity, new technologies, new entrants)
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
Supplier Upgrading (and Downgrading) in Global Value Chains
Few customers
More customers
Few capabilities
•Product upgrading
•Inter-sectoral upgrading
•Base process focus
CAPTIVE
MODULAR
De-codification and reduced
competence
RELATIONAL
More capabilities
through
technological change, new
requirements, and new
competitors
FULL
PACKAGE
SUPPLIER
•Process upgrading
Many customers
•Functional upgrading
Many capabilities
•Functional bundling
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006
GVC Governance Types
Links to Policy
Governance Type
Linkage mechanism
Firm roles and
competencies
Policy emphasis
Market
Arms-length exports
Branded exporter and
importer of standardized
goods and services
Brand and product development, market
research and access, import substitution
and export promotion
Modular
Buyer-supplier
complimentary
specialization in crossborder value chains
“Deverticalized” lead firms
and full package suppliers
with generic, base process
competencies, and a global
footprint
Knowledge of global standards, processand information technology upgrading
Relational
Collaboration with colocation or in cross-border
value chains with lots of air
travel
Captive
Foreign direct investment
Dependent supplier,
customer-specific
competencies
Recruitment of MNC affiliates and
suppliers, local content rules
Hierarchy
Foreign direct investment
Lower tier supplier
Recruitment of MNC affiliates , education
and training, infrastructure development,
local content rules
Clusters of specialists buyers Competence building, support of clusters
and suppliers with process
and districts, focus on building tacit
and/or domain-specific
domain knowledge
competencies
Copyright Timothy J. Sturgeon, Industrial Performance Center, MIT, 2006