Upgrading Strategies in Global Furniture Value Chains

Abstract

Globalization has given producers an opportunity to participate in the global economy. In both high- and low-income countries, a growing number of firms are targeting external markets to gain economies of scale and scope as well as further technological expertise. This has increased competition, in both domestic markets (from imports) and external markets. Thus, for companies and national economies, globalization offers opportunity and threat. In order to take advantage of the opportunities presented by globalization and to minimize the dangers of competition, firms need to innovate.1 The pressures of competition have become so intense that merely improving the rate of innovation is not enough. If sustainable income growth is to be achieved, firms need to ensure that their innovative rate is faster than that of their competitors. They face a moving frontier of “best practice”. How can it be known if firms have upgraded their activities? Two complementary schools of thought have addressed this issue in recent years. The first focused on core competences (Hamel and Prahalad, 1994). Firms need to identify which of their attributes provide value to the final customer, are relatively rare in the sense that few competitors possess them and are difficult to copy, that is, where there are barriers to entry. In this framework, the capacity to innovate comes from concentration in these competences and outsourcing those functions that do not meet the three criteria. A useful supplement to this line of thought is that in a dynamic world, core competences can easily become core rigidities and part of the task of upgrading is to relinquish areas of past expertise (Leonard-Barton, 1995). Closely related to this is the analysis of dynamic capabilities (Teece, Pisano and Shuen, 1997a). It argues that corporate profitability cannot be sustained by control over the market, by using quasi-monopolistic practices for example, but rather by the development of dynamic capabilities. These are the result of a firm’s internal processes, which facilitate learning, including: the capacity to reconfigure what it has done in the past; its position, that is, its access to specific competences either within its own activities, or those which are drawn from the regional or national system of innovation; and its path, that is, its trajectory, because change is always path-dependent. Both of these concepts provide an important backdrop for understanding the phenomenon of upgrading. They are especially helpful in identifying those factors that arise from the activities of a firm itself and drive or facilitate product and process improvements. But where they are relatively weak is that they look at the firm only, and fail to capture upgrading processes which are systemic in nature and which involve groups of firms linked together. Value chain analysis has two important elements that aid the understanding of this systemic upgrading challenge. First, it helps to show how competitiveness is defined not only by the actions of an individual firm, but also by the suppliers and buyers who ultimately deliver the product to the final customer. As such, it provides taxonomy for upgrading which incorporates not just the efforts of many linked firms but also their functional positions in the chain. And, second, it brings in agency, and in particular it identifies the critical role played by lead firms that take responsibility for enhancing systemic chain competitiveness. It is possible to identify four trajectories that firms can adopt when upgrading. These are process upgrading, product upgrading, functional upgrading and chain upgrading. The first two are readily understood in the light of the core competences and dynamic capabilities literature and innovation studies. What the value chain perspective offers is an insight into the second two. Functional upgrading involves firms engaging in a different mix of activities, both within their individual link (or function) and by moving to other links in the value chain. In some cases, barriers to entry in a particular chain may be so low that there are few prospects of upgrading. In this case, upgrading may imply the ability to move to a new chain. Underpinning this upgrading framework is a classification methodology. We introduce a method that interrogates trade data to measure different types of upgrading for a significant number of countries. This analyse, while still time consuming, is made possible because countries are moving towards a universally accepted norm of collecting and classifying imports and exports. Furthermore, this classification is disaggregated to levels which allow us to interpret flows of trade for specific product and service markets. This paper is the first attempt of applying a theoretical framework using empirical data and, as with any quantitative exercise, the method and the findings should be considered equally. The framework and proposed measures of upgrading can be used not only to update trends in the furniture value chain with future trade data but the method can also be applied to other product and service markets. The findings from this application nevertheless reveal upgrading trends of country producers in furniture product markets during a specific period. This paper looks at the challenges facing the wood furniture value chain and how it can rise to them. The second section describes the value chain of this traditional industry and shows how its size makes it a suitable model for many low-income economies. The third section identifies successful paths of upgrading in the furniture value chain, and analyses the winners and losers in its globalization. The fourth section provides insights into the roles played by buyers in determining upgrading paths. We illustrate the role of buyers with a case study which depicts the interplay between a furniture buyer in the UK and producers in Asia and Africa. The sixth and seventh sections give an assessment of the implications this analysis holds for industrial policy and for UNIDO and other international organizations.