Gereffi [1994] identifies power as the dominant factor influencing the mode of governance adopted in a commodity chain. The GVC’s motivation for focusing on power is based on both the lack of understanding in this area, and the growing importance of multinational firms in global supply chains [Gereffi, 2001]. Gibbon and Ponte [2005] define lead firms as those with the capacity to shape all aspects of the supply chain, including who does what, at what price, to which specifications and on the basis of which delivery schedule [p81].
Governance is therefore understood as the patterns of authority and power relations which structure the parameters under which actors operate [Humphrey and Schmitz, 2001, p 4].
As lead firms develop new organisational capabilities, governance patterns will be adjusted to accommodate any subsequent changes in lead firms’ strategic priorities [Gereffi, 2001].
As such, governance patterns will periodically change in order to ensure the supply chain operates in line with the requirements of the lead firms.
Originally focusing on the manufacturing sector Gereffi [1994] observed two ideal types of governance based on the location of power within the chain. Using the concept of a powerful ‘chain driver’ or ‘lead firm’, chains are classified as being either ‘buyer’, or
‘producer’ driven, based on the location of power within the chain. Both classifications of governance demonstrate that power within the chain is closely linked with the location of greatest value added and distribution of gains from trading [Kaplinsky, 2000].
Producer-driven chains are typically found in technology-focused sectors where production is capital intensive, such as, computers, aircraft or automobiles. Within producer-driven chains power is located in the ‘upstream’ segments of the chain76. Gibbon [2001, p 349] observes how power is developed within the ‘producer’ segment based on the possession of capital and proprietary know-how, which present high barriers to entry.
Profits are achieved through technological proprietorship and innovation. Coordination is
76 Within the ‘chain’ concept, producers are always situated upstream, and functions move logically downstream, so that processing, manufacturing and retailing are considered downstream functions.
86 directed from large corporations that undertake the biggest capital input in the production process, and the nature of coordination is reflective of the strategic needs to protect intellectual property and achieve large-scale production. Producer-driven chains are increasingly structured so that activities with lower value are outsourced to upstream suppliers, usually located within developing countries [Raikes et al, 2000]
Buyer-driven chains are most commonly found in labour-intensive industries with low barriers to entry in production. ‘Buyer driven-ness’ expresses the notion that a lead buyer, or group of leading buyers within a specific segment, exercise control over the chain, even without direct ownership of enterprises throughout the chain. Within buyer-driven chains, power can be located within any of the downstream chain functions including retailing, manufacturing, processing, and trading. Lead firms within buyer-driven chains have been able to transform traditional trade linkages into decentralised production networks, enabling them to capitalise on the efficiency gains in production presented by globalisation [Gereffi et al, 1994].
The typical characteristics of a buyer-driven chain are the importance of marketing, branding and merchandising in downstream segments of the chain, which present high barriers to entry for resource poor upstream suppliers typically located in developing countries [Kaplinsky, 2000]. Gibbon [2001] notes that through control of the higher value functions such as branding and merchandising, downstream actors coordinate the chain through sub-contracting lower value functions to a highly competitive network of suppliers, located in developing countries.
3.3.1 - Beyond the Producer-Driven/Buyer-Driven Dichotomy
In recent years the original producer/buyer-driven dichotomy has been advanced in several studies carried out in both agricultural and industrial supply chains. The main insight from a range of studies in this area77 is that whilst the concept of buyer ‘driven-ness’
77 Sturgeon [2000] in electronics; Fold [2001, 2002] in cocoa.
87 is prevalent across many supply chains, in practice every chain has its own distinct governance structure. Results from studies show each chain displays significantly different degrees of driven-ness, different ways in which driven-ness is manifested, and even differences in the number of drivers.
Equally it is important to recognise that governance structures evolve over time, and thus in any particular time period new governance structures co-exist and interact with earlier forms of governance [Gereffi, 2001]. Therefore, whilst ideal types of governance have been identified in the literature, in many ways such typologies are designed to be reflective of dominant trends across industries, rather than the dynamism of economic actors and the heterogeneity of organisational arrangements that exist in practice. This understanding will be particularly important for the following study of the Ghanaian cocoa chain, where both the Cocobod and powerful multinationals represent two lead actors co-existing within the same supply chain.
Humphrey and Schmitz [2000] further advanced the understanding of governance in buyer-driven chains by asking the question of what determines the ‘mode’ of governance pursued by powerful buyers in global value chains78? [p15]. Similar to Williamson’s [1998]
organisational forms covered in chapter two, Humprey and Schmitz indentify four different governance options, ranging from ‘arm’s length’ market relations to ‘hierarchy’. The writers find that buyers choose closer linkages with suppliers, such as hierarchical forms of governance when there is a high requirement for product definition79, and when buyers face a high risk of loss from supplier failure80. Indeed, Humphrey and Schmitz [2000, p17]
find supply risk to be the ‘key determinant’ of governance. Supply risk is a common feature of agro-food chains originating in the developing world where the unstable market environments and heterogeneous production conditions, have forced buyers to focus on improved coordination as a mechanism to reduce risk [Hobbs and Young, 2001].
78 The modes of governance considered are market relations, network relations, quasi hierarchy and hierarchy.
79 ‘Product definition involves the process of interpreting market demands, creating product concepts and translating these into designs and drawings’ [Humphrey and Schmitz 2000, pg 15].
80 Humphrey and Schmitz [2000, p 17] acknowledge that the factors influencing governance, which they have identified, can be put in the language of transaction costs.
88 Coupled with this, Humphrey and Schmitz [2001] find that there has been an increased importance placed on non-price competition in recent years. Non-price factors such as quality, reliability of supply, and the health and safety of products have increased the degree of risk faced by buyers sourcing from developing countries. In response, leading buyers would therefore be expected to pursue modes of governance that facilitate closer coordination with suppliers [Humphrey and Schmitz, 2000, 2001; Gereffi et al, 2005]. In light of this, the notion of supply risk and its relation to governance will be investigated within the analysis for this study.
Building on Gereffi’s framework of buyer driven-ness, Gibbon [2001] contends that different modes of governance will emerge depending on both the characteristics of the commodity being traded, and changes in the economic and political conditions through which the chain operates. Interestingly Gibbon [2001] categorises the cocoa chain as
‘trader driven’, where lead agents would be expected to prioritise price and efficiency of operations over the quality of product sourced. Based on Humphrey and Schmitz’s [2000, 2001] above model of governance lead buyers in the cocoa chain would therefore be expected to use looser forms of governance, such as market transactions. This governance structure is selected based on the low importance which Gibbon places on product definition and the level of supply risk within the cocoa chain. If, however, lead buyers had a higher quality requirement, then, coupled with the supply risks that can result from market disorganisation within developing country markets, buyers would be expected to pursue tighter modes of governance. In light of this, it is possible that the mode of governance adopted by lead buyers in the cocoa chain may vary between different producer countries based on their assessment of both quality needs and supply risk.
Extending the above argument, Gereffi et al [2005] develop five typologies of governance that chain actors can use to organise different transactions. Adopting a more micro level approach to GVC, by focusing on each transaction at the individual level, Gereffi et al’s [2005] understanding of governance appears to share some similarities with Williamson’s [1985] framework for economic organisation, discussed in chapter two. In a similar vain to
89 Williamson’s framework, Gereffi et al’s five typologies of governance range from the market at one end, used to govern simple transactions, to hierarchy at the other end, used to govern more complex transactions. Though, the authors attempt to extend the somewhat limited buyer/producer driven dichotomy is laudable based on what it is trying to achieve, it may be argued that by focusing on the micro-level and thus reducing governance to something highly similar to transaction cost economics, Gereffi et al [2005]
fail to make a telling advancement on Gereffi’s [1994] original GVC framework. Indeed, as noted by Gibbon et al [2008], once you begin to focus on governance at a micro level within GVC you begin to discard the main advantage of conceptualising economic relations in terms of chains at the macro level. In a similar light, Bair [2008] is critical of Gereffi et al’s [2005] micro-level framework and its proximity to transaction cost economics, finding that it demonstrates a movement away from the macro sociological traditions in which GVC is rooted.
Despite the above criticisms, Gereffi et al [2005] highlight an important lesson, where they note that modes of governance are extremely dynamic and variable depending on ‘the details of how interactions between value chain actors are managed and how technologies are applied’ [p 96]. Furthermore, they broaden the traditional GVC conception of governance by acknowledging that national level rules and institutions affect the governance arrangements of an industry and thus must be considered in analysis. In a similar light, Neilson and Pritchard’s [2009] study of the Indian tea and coffee chains attempts to broaden the GVC understanding of governance by examining the importance of local institutions in shaping the governance and change within value chains. Though the Indian tea and coffee chains may be understood as buyer driven, Neilson and Pritchard find that lead buyers do not operate in a vacuum, but in markets with embedded suppliers, consumers and institutions that are influenced by economic, political and social circumstances at the national level.
Indeed, it is interesting to observe the relative scarcity of GVC studies that recognise the potential role of the government in the market. Though, the vast majority of studies in the GVC have focused on markets that have undergone a relatively comprehensive process of
90 market liberalisation, it should not be assumed that national based institutions have no effect on governance. In light of this, it appears that one of greatest failings of GVC literature to date is the scarcity of research that takes account of the various national institutions affecting different segments of the supply chain. Indeed, the role of national governments in supply chain governance, which is of great importance within this study, has received very little attention within past literature. The absence of government from GVC analysis is criticised by Raikes et al [2000, p 399] who find that ‘the issue of regulation is not adequately incorporated into its [GVC] framework’. Further, they find that in many instances privatisation has not seen the complete removal of regulation, but rather a shift in the type of regulation, which market actors now have to consider. This criticism is echoed by Gibbon and Ponte [2005] who find that GVC analysis has been flawed in its blindness to external regulatory conditions, noting that ‘lead firms do not operate in an institutional and regulatory vacuum’ [pp 84-85]. Based on this an analysis of the broader institutional framework in which lead firms operate is highlighted as a key priority for future GVC research [p85].
Observing both the dynamism and context specificity of governance arrangements is crucial to the way we observe governance structures in practice, as in reality governance structures are constantly being influenced by a variety of economic, political and social factors. In this light, it is not the intention of this research to predict large shifts in governance, or categorise emergent governance arrangements, but rather to observe the factors influencing the changing nature of governance throughout the Ghana cocoa chain.
In doing so it may be possible to make a contribution to our understanding of the way chain actors attempt to shape the different governance arrangements in order to fulfil their sourcing objectives.
3.3.2 - Buyer Driven-ness in Tropical Commodity Chains
The importance of vertical coordination and the emergence of ‘buyer driven-ness’ in commodity trading has risen markedly in recent years, as the breakdown of international commodity agreements, coupled with market liberalisation, has resulted in the virtual
91 termination of government support at the national level [Daviron and Gibbon, 2002].
Government supports, traditionally used to control the variables of price and quality, have been removed placing increased importance on vertical coordination from private sector actors. Daviron and Gibbon [2002] observe how, in the case of tropical agro-commodity trading, ‘market liberalisation and buyer driven-ness have had a symbiotic relationship’ [p 138]. As such, studies of tropical commodity chains have typically focused on the emergence of buyer-driven governance structures in response to the economic restructuring taking place in developing country markets.
Alongside the process of market liberalisation, Daviron and Gibbon [2002] and Gibbon and Ponte [2005] highlight corporate concentration and the outsourcing of lower value added activities, as key factors leading to buyer driven-ness in commodity chains. Indeed, as observed in chapter one, the trends of outsourcing and concentration have been extremely influential in shaping the modes of governance and coordination witnessed in the cocoa chain. Whilst these trends may have taken place regardless of market liberalisation, the impact that they have had on producer countries has been catalysed by the removal of marketing boards and the resultant freedom that the private sector now has in these markets. Therefore, in markets where the process of liberalisation has not been completed, such as the cocoa industry in Ghana, it will be interesting to see how the emergence of lead buyers has affected the market. Indeed, an awareness of the government alongside leading buyers in chain governance raises questions over both: how emergent forms of governance and coordination challenge the government’s traditional role in the market; and how the dynamics of power between different groups of lead actors will affect the development trajectory of the Ghanaian market.