My previous post introduced the concept of the value chain and value chain management. Today’s post presents different types of value chains. It again draws heavily from the paper Characterizing the Determinants of Successful Value Chains, by the Value Chain Management Centre of the George Morris Centre for the Canadian Agri-Food Policy Institute (February 2012).
Value Chain or Supply Chain?
Some scholars have focused on differentiating or comparing value chains and “supply chains,” a commonly used term that has various possible definitions. Gooch dismisses this debate altogether stating that
“a straightforward simplistic analogy is misleading.”
According to Gooch, every business belongs to a chain. Citing other literature, he states that
the way a business operates in relation to its customers and suppliers determines the commercial opportunities and challenges to which a business is exposed (p. 8).
Types of Value Chains
Four types of value chains are identified in the literature, though the first is not the model that Gooch sees as desirable:
- Fragmented. Traditional model, with most business conducted as a series of short-term, one-off transactions. Price, volume, and quality are commonly paramount to business dealings. Businesses have adversarial and distrusting relationships. Limited ability to adapt well to changing market demands.
- Cooperative. Firms have a mutual understanding of benefits of cooperation over the medium term at an operational level. May develop into a more strategically aligned approach, where the partners can utilize one another’s capabilities for commercial advantage. Often depends on presence of a “champion” to introduce cooperation.
- Coordinated. Firms sharing complementary attitudes, cultures, and leadership styles choose to coordinate their business arrangements over a short to medium timeframe. Over time, benefits of conducting medium-term business deals with chosen suppliers and buyers are realized, leading to increased levels of commitment and VCM.
- Collaborative. Firms have longer-term strategic arrangements that involve collaboratively sharing resources and/or investing in the capabilities required to achieve mutually beneficial outcomes. This model can produce greater rewards than the other models, but it also generates increased risks.
The paper Characterizing the Determinants of Successful Value Chains effectively highlights many of the distinctions between the four types of chain structures in a detailed table, a portion of which is presented below.
Table 1: Four Primary Chain Structures: A Few Comparators
|Each members’ strategic orientation||Self interest||Self interest, mutual benefit||Mixed interest, self benefit||Mutual interest, mutual benefit|
|Extent to which value chains’ and businesses’ strategies are aligned||Not unless accidental||To a limited degree||Closely, regularly evaluated in relation to specific goals||Extensive, regularly monitored in relation to specific goals|
|Most important benefit||Traditional business model, no new skills required||Provides opportunity to learn/adapt with little risk||Enables cost reductions and revenue gain||Enables co-innovation, unique strengths|
|Existence of a chain champion||No||Perhaps, most often not||Usually clearly defined||Defined and articulated|
|Presence of trust and commitment||Little existence of either||Limited existence of either||Considerable existence of both||Extensive existence of both|
|Primary method of mitigating risk||Short-term focus, seek to pass risk onto third parties||Limit catastrophic risk through using preferred suppliers||Medium-term focus, try to ensure correct accountability||Long-term focus; regularly monitor, ensure accountability|
|Number of customers and suppliers||Many customers, moderate importance; many suppliers||Many customers, range in importance; many suppliers||Fewer customers, range in importance; fewer suppliers||A few important customers; often few suppliers|
The above are typologies developed after review of academic literature and empirical studies. They may not neatly describe every real business, though examples of real businesses are presented in the paper. Rather, as Gooch notes,
“the typologies provide a useful method of assessing and comparing the relative nature, benefits and challenges associated with each approach.” (p. 8)
As we REAP researchers begin interviews with immigrant entrepreneurs in agri-food, we are curious to see how the notion of value chain can be applied to the various business models that are successfully operating across Ontario.
- What are some advantages and disadvantages of each chain structure?
- Do you know of a value chain that would make a good case study for REAPontario? If so, let us know!
Sarah Wayland, Principal Investigator