Global Value Chain Restructuring

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Global Value Chain Restructuring
Ursula Huws, Professor of International Labour
Studies, London Metropolitan University
WORKS Conference Fragmentation? The future of
work in Europe in a global economy Rome, 8-9
October, 2008
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The key concepts are not new

• Three key concepts, going back to the 18th
  century enlightenment
• the division of labour
• The division of labour, however, so far as it
  can be introduced, occasions, in every art, a
  proportionable increase of the productive powers
  of labour. The separation of different trades and
  employments from one another seems to have taken
  place in consequence of this advantage. (Adam
  Smith, 1776 Book 1, Chapter I).
• the labour theory of value
• The value which the workmen add to the
  materials, therefore, resolves itself into two
  parts, of which the one pays their wages, the
  other the profits of their employer upon the
  whole stock of materials and wages which he
  advanced. (ibid Book 1, Chapter VI).
• Smith also argues that services contribute to
  this added value
• the concept of comparative advantage (Ricardo,
  1817) adds a spatial dimension

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Put these together and you have a model of a
value chain

• businesses are broken down into trades,
  branches or functions
• the more specialist this division of labour, the
  more value is added in each operation
• the comparative advantage of regions makes it
  profitable to introduce a spatial dimension to
  the division of labour (but this may be
  constrained by limits to free operation of
  markets movements of capital)
• centralised governance is necessary for its
  functioning
• Quesnay (1758) introduced the key concept of
  flows, making it possible to model this at the
  level of a national economy in terms of inputs
  and outputs between sectors

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the generic business function as a basic unit of
analysis

• a functional approach (Quesnay, 1758))
• also found in Marx who uses the term functions
  of labour capacity (1861-64)
• underlies some (but not all) statistical
  classification systems, used, e.g. to construct
  input-output tables
• systematised by Taylor (1911) who broke all
  labour processes down into tasks which had to
  be scientifically managed.
• the concept of the value chain resurfaced in the
  1970s inter alia in work on the new
  international division of labour (Froebel,
  Heinrichs Krey, 1977)
• and in the 1980s in management theory (Porter
  1985) who also used the concept of business
  function
• used for the first time as the basis of a major
  survey by EMERGENCE project, 2000.

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The underlying dynamics of structural change

• The transformation of tacit knowledge into
  codified knowledge
• Standardisation of existing processes which in
  turn makes possible
• Management by results (or performance
  indicators) which in turn makes possible
• Remote management displacement in terms of both
  time and space
• Organisational disaggregation (either internally
  or externally which in turn leads to
• Elaboration of value chains contractually
  (proliferation of separate legal entitities) or
  spatially or both

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Different forms of restructuring
in-house
outsourced

• temp agency
• body shopping
• spin-off company
• external supplier working on premises

• separate cost centre
• market testing
• reskilling
• introduction of new working practices

at existing site

• offshore to dependent company
• offshore to global supplier
• offshore to strategic partner

• back office
• home teleworkers
• nomadic workers
• clients premises
• other branch

at a distance
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WORKS research questions on value chain
restructuring

• Is it really the case that value chains are
  getting longer and more elaborated, both
  contractually and spatially?
• What is the relationship between codification of
  workers knowledge and value chain restructuring?
• To what extent, and how, do national
  institutional environments shape decisions to
  locate particular business functions on their
  territories?
• Is there evidence that new types of value chain
  are emerging in business services? And, if so, do
  they follow the same patterns as those in
  manufacturing?
• What power relationships are emerging between
  managers and employees within the units of value
  chains and between the different units and how is
  this power exercised?
• How well do existing typologies of value chains
  fit the realities to be found in Europe in the
  early 21st century?

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The WORKS qualitative research on value chain
restructuring

• business function as basic unit
• studied within a particular sectoral context
• in contrasting national institutional contexts

RD/ Design Production Logistics Customer Service IT
Textiles/ clothing BE FR DE PT IT BE IT PT HU GR FR DE NL PT HU    
Food   GR BG IT NO DK UK BE NO BG GR UK    
IT DE AT UK BE FR NO DE AT HU BG SW      
Public Sector Administration       AT BE BG HU IT UK SW BE NL UK FR DE NO SW PT
Services Of GeneralInterest Post And Rail       DE AT SW NL GR  
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Conclusions

• Is it really the case that value chains are
  getting longer and more elaborated, both
  contractually and spatially?
• In clothing and textiles, continuing trend to
  relocate operational tasks outside EU
  integration of some functions but also new
  intermediaries
• in IT global sourcing practices make it
  difficult to disentangle contractual and spatial
  restructuring
• in food (and some other cases) re-integration
  still leaves patterns of fragmentation intact
• we can conclude that there is strong evidence of
  increasing fragmentation of functions BUT
  modularisation can form the basis of contractual
  or spatial aggregation or disaggregation
  centralisation or decentralisation
• in general, value chains can be said to be
  becoming more elaborated

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Conclusions

• What is the relationship between codification of
  workers knowledge and value chain restructuring?
• triggers and motives for restructuring vary by
  sector
• market pressures in the clothing industry,
• mergers and acquisitions in the food industry
• need to get closer to market in R D
• rationalisation, standardisation and access to
  economies of scale in outsourcing of customer
  services and IT
• in general, the more low-skill the task, the more
  likely it is to be outsourced. But need for
  quality control places some limits on this.
• we can conclude that workers skills and
  knowledge play an important role in determining
  the forms of value chain restructuring that are
  possible or desirable in any given case.
• However the direction of causality does not
  necessarily flow in only one direction. Just as
  the standardisation of skills and knowledge can
  lead to a greater likelihood of outsourcing or
  relocation, it is also the case that the process
  of outsourcing or relocation may also lead to
  further standardisation, driving a snowball
  effect (Ramioul Huws, 2008) of continuing
  restructuring.

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Conclusions

• To what extent, and how, do national
  institutional environments shape decisions to
  locate particular business functions on their
  territories?
• race to the bottom hypothesis confirmed for
  low-skill production activities in clothing,
  textiles and food
• much greater geographical stickiness in
  high-skill activities such as RD
• in some cases (e.g. clothing industry in Belgium)
  failure of national training strategies led to
  export of jobs
• in the food industry, work was moved across
  borders to take advantage of lower employment
  regulation
• national policy definitely shapes practices of
  outsourcing from the public sector
• sectoral governance may also have a strong
  influence (e.g. in vocational training,
  professional recognition, collective bargaining
  structures)
• We can conclude tentatively that, whilst national
  institutional environments may provide both
  push and pull factors in value chain
  restructuring, these are generally not the most
  important determinants of locational decisions,
  although they may well determine the specific
  forms that employment restructuring takes in any
  given location.

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Conclusions

• Is there evidence that new types of value chain
  are emerging in business services? And, if so, do
  they follow the same patterns as those in
  manufacturing?
• In RD, patterns are strongly sector-specific
  (clothing, software development)
• to a lesser extent this is also the case in
  logistics
• IT services presented a very different case.
  Typically large global companies were supplying
  generic services to customer organisations across
  a range of different sectors, public and private.
  
• Software production was viewed in our case
  studies both as a sector and as a function. As a
  sector it is similar to manufacturing industries
  in many respects.
• There is a developed global division of labour in
  software production which, to the extent that the
  processes are standardised, follows a market
  logic but which generally develops more complex
  and interactive ties with suppliers for a variety
  of reasons, including quality control.
• This division of labour, as in some manufacturing
  industries, is volatile, with movements up the
  value chain by stronger players and the addition
  of new links below them.
• typically large companies with internal
  hierarchically organised value chains
• however relationship with public sector is not
  one of supplying standardised commodities
  contested power relationship
• sector has large scope for expansion in both
  public and private sector markets
• expansion is likely to lead to further spatial
  and contractual complexity
• Customer service appears to have similar
  characteristics but we were only able to study it
  in relation to outsourced public services

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Conclusions

• What power relationships are emerging between
  managers and employees within the units of value
  chains and between the different units and how is
  this power exercised?
• shifts in power relations do not just bring
  pressure to bear on peripheral workforces but
  also on those at the core
• in clothing, contestation of power between
  retailers and producers, played out through the
  market
• in other production industries (e.g. food,
  beverages, clothing and textiles) hierarchical
  directives from head office put pressure on units
  lower down the chain.
• Whether an operation is in-house or outsourced
  may make little difference, especially when
  internal units have to compete with external ones
  (e.g. in software production). What matters is
  the degree of dependency.
• in IT, pressure from units lower down the value
  chain to move up the chain.
• Workers with scarce skills may still be able to
  exert considerable influence on value chain
  restructuring (e.g. Norwegian software RD)
• in the public sector, complex and shifting
  contests between the bureaucratic, regulatory and
  legal power of public sector bodies and the
  market power of global suppliers, played out
  through legal-bureaucratic means, e.g. service
  level agreements
• we can conclude that there is complex landscape
  with a shifting patterns of power and dependency,
  expressed through a variety of different
  mechanisms.

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Conclusions

• How well do existing typologies of value chains
  fit the realities to be found in Europe in the
  early 21st century?
• typologies are more useful for defining segments
  of value chains than value chains as a whole
  because multiple forms of governance may be found
  along the length of a chain
• the variables of complexity, codification and
  capabilities, identified by Gereffi Humphrey
  Sturgeon (2005) are indeed important for
  understanding VCR and can offer a basis for
  further research
• need for distinction between complexity of
  knowledge and complexity of interaction
• codification is strongly linked to likelihood of
  outsourcing, market-like relations and low
  transaction costs in some sectors. However in
  public sector high codification exists alongside
  high transaction costs.
• capabilities may be influenced by institutional
  context. important to link this concept to power
  and dependency relations.
• power is a complex variable that can be exercised
  in multiple ways. further research on power and
  dependency relations within value chains would be
  useful.
• the usefulness of the concept of the business
  function is validated by this research. the
  availability of survey results using this concept
  will add value and enable further studies
• need for further research in differing sectoral
  contexts, with a special focus on generic
  business services

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Finally

• many of the issues touched on in this
  presentation are addressed in greater detail in
  other WORKS deliverables. See especially the
  reports on
• organisational case study results
• quantitative research on finding business
  functions through crossing occupations and
  sectors
• thematic report on skills
• thematic report on collective bargaining and
  institutional shaping
• and coming next year
• outputs from the policy pillar
• future scenarios