(Weekly Article Series): What is a value chain? – first article

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Date: 28 - 03 - 2019

Dr..Eng. Ali Mohamed El Khouri

An article published in Al-Ahram on March 28, 2019

Article No. 1

From this article, we will start a series of articles examining the  importance of the digital economy and its role in reviving and developing national economies, especially with the great and unprecedented potential of modern technology or what has been termed the Fourth Industrial Revolution, especially that humanity has begun to enter into eras that will be characterized by the future. What can be compared to the era of the dominance of digital technology, especially artificial intelligence, which will enter into all aspects of activities and businesses, which we will single out for in this series of individual articles.

First, we must define what the economy is, its nature, how its growth is achieved, and the concept of recession and boom. Before entering into the role that digital technology can play in the development of the economy, we will discuss here two examples.

The first example shows the link between the economy and the societal circle. If we consider bees and ants as organisms characterized by their need for group living, cooperation and diversity of roles among them; Which is the reason for describing them as kingdoms (i.e. the kingdom of bees or ants), so we find that there are bees who are responsible for collecting nectar from flowers, and some of them are responsible for raising the larvae, and some of them are responsible for defending the kingdom or the hive, and some of them are responsible About building and repairing the cell, and so the roles are varied to complement each other. This example shows the application of the concept of social integration to build the productive (economic) system, which embodies the fusion between social and productive life to form a solid unit upon which the life of living beings is based.

Then we come to the second example. In the past, population centers such as villages were the geographical area that contained such social and economic systems, through which they could secure and cover humanitarian needs and requirements to achieve self-sufficiency from the available resources.

The economic construction of such villages was integrative, as each profession was viewed as a complementary component of the production cycle (by its members occupying professions such as the butcher, shepherd, merchant, doctor, blacksmith, carpenter, and so on), and the individuals at that time exchanged part of their production for goods produced by others.

In the recent past, the economy was built according to this simple concept; That is, on the principle of barter and exchange of goods or services, which is regulated by the principle we know today as supply and demand. To the extent of the need for the offered material and the extent of its abundance or scarcity, the higher or lower its exchange value. All of this was before the emergence of the currency, which is today replacing the alternative to barter transactions, and this development was an expression of a state of economic intellectual maturity that assesses the need and scarcity of money, which today is considered as the storage container for value.

Today, many believe that money is the true and only expression of the economic situation, and before we endorse or criticize this belief, we must define an important economic concept, which is the concept of “VALUE”. Value is the result of an effort in which one or more types of resources are used—and who finds and appreciates them, and this is the centerpiece of the economic process. In sum, we can define these resources as:

  1. The effort made by the workers or the person in general.
  2. Time It is the amount of time it takes for the effort to produce the desired product.
  3. The knowledge that is employed to produce the product, including the use of production tools, whether they are simple or complex tools.
  4. money.
  5. Physical resources such as (mining results such as coal, oil, iron, copper and silicon – plants – natural resources such as trees and timber).
  6. Technical skill, including recreational outcomes that society demands, such as arts and sports, for example.
  7. These six inputs can be applied to any process intended to produce a desired value. We note here that money is one of the inputs in the process of producing value, and certainly it is one of the most important outputs, but it is not required that the value always be sold for money, for example, the moral appreciation may be the required return, or a moral value such as the feeling of security, which is the product of the security services, for example. Example, or justice, which is the product of governments in general, and so on.

From this point of view, money is not the exclusive expression of economic capacity, but it also enters with it and before it the production of value, which has those who demand it, and on the contrary, any product of a production process that does not have a demand for it, it does not enter into our definition of value, nor does it express a state Positive economic capacity, and it can even be considered a harmful negative value, for example pollution or diseases that result from human activities but are not required.

So what is the economic value?
Economic value can be considered as everything tradable (with the same concept of exchange and barter in the past) starting from agricultural products and raw materials through manufactured materials and ending with services, ideas and consultations, and works of art such as musical melody and theatrical. The efforts of employees who implement work procedures that are integrated with each other to produce the service also is a link in the very long chain of production of the economy and an integral part of the economic process that in the event of its disappearance (ie jobs) will arise a need to fill this deficit, and with its availability, the product or service can be produced and exchanged With money or other economic consideration of an acceptable value equal to the exchange.

And if we look in more depth to understand what is happening on the global economic scene today, we see that any product, service, commodity or property when sold or transferred, falls in the last chain of productive work and added values.

Let’s take a simple example, a loaf of bread. The first of its production chain will fall into the stage of wheat cultivation and service from the farms until it is harvested, then it moves through transportation, where wheat is extracted, milled and turned into flour. Bread suitable for human consumption, and to be sold in its final form, which we all know, before it is consumed.

The loaf of bread went through tens of stages, and applied on it multiple added values, and it was sold several times, whether in the form of an agricultural crop or in the form of grains of wheat or flour, before it was finally sold as a loaf of bread. Where does this fall into the value-added chain? It is located at the end of the series, which is universally called (Value Chain), which was known by Dr. Michael Porto, one of the most important marketing and strategy scientists in the last century.

Some depict the creation of value-added as being through (longitudinal) chains, as is clear in the example, but in fact it is more like a complex spider web, because, in addition to the original chain line extended from agriculture to the baking process, but what permeates the middle from entering For other processes that intersect with the original chain accidentally, such as the process of transportation, marketing, and others, they are end lines for other products such as the product of the vehicle industry itself and the process of oil refining and selling it through fuel stations, and without these services and products, the baking process would not have been possible to end up reaching its consumers.

Fuel as a product was located at the last stage of the value-added chain, which began with the extraction and storage of oil, then filling it with oil tankers, then transporting it to refineries, then redistributing, transporting and storing it to the fuel supply station. This vehicle was the same as the last point in another economic production chain in which many manufacturers and engineers participated. The designers and finished manufactures the vehicle.

This example can be expanded and entered into every product that crosses this series to merge with it crosswise. In short, this means that all economic transactions intersect in one way or another and are complementary, making them appear as a network of integrated and overlapping relationships without which economic value is not complete.

Contrary to what we used to see in the old economic reality, where the villages were self-sufficient and almost all the components of production and their economic network were located inside them, but today the economic network extends to cover the entire surface of the planet. The student for the value produced, which would enhance the chances of popularity as a commercial term. Popularity is one of the secrets of economic power and is no less important than value, as it expresses the state of transferring value through the production chain and reaching the hands of the consumer and the parties requesting it. With the cessation of this movement and movement, the phenomenon of depression occurs, and its seriousness is that it equals valuelessness.

The rapid technological development enabled the expansion of the economic network, and with it the value increased, as an inevitable result of the second industrial revolution and then the third industrial revolution. But without a doubt, the role that the Fourth Industrial Revolution will play will have great impacts on the Arab and global economic and social scene that may simply go beyond our human imaginations. What could be the role of digital communications and smart applications in supporting the convergence of value-producing points on this network? This is what we will talk about in the next articles, God willing.

Dr..Eng. Ali Mohamed El Khouri

Advisor to the Council of Arab Economic Unity and President of the Arab Federation for Digital Economy