VALUE CHAIN ANALYSIS AND DEVELOPMENT (ABVM 232)

Reading Material

VALUE CHAIN ANALYSIS AND DEVELOPMENT (ABVM 232) 1

 1. Introduction
For a large part of the world’s growing population, the increasing integration of the global
economy has provided the opportunity to achieve significant prosperity gains. For developing
countries, the globalization of manufacturing has opened up new prospects of upgrading their
industrial and service sectors. It also holds the promise of higher incomes, increasingly
differentiated final products and a greater availability of quality goods. Most notably, free
trade agreements and other accords have created new export opportunities – mainly for food
products – as the demand for variety continues to grow in developed countries. These market
changes have encouraged governments and investors, including farmers, to expand agro-
industrial activities and linkages to export markets as a means of increasing local food
production, employment, business development and international trade. This has led to
competition among producers to meet export market demands in terms of cost, quality and
delivery times. Consequently, a wide range of companies have evolved to provide goods and
services to help agro-industries meet those demands. At the same time, policies, regulations,
support services, tax and trade instruments and their associated actors and institutions have
also developed to become intrinsic parts of so called “value chains.”
Such a move, globalization, is changing the environment in which poverty reduction
strategies are being implemented. In this new context, two things are clear: poverty alleviation
cannot be sustained without economic growth; and economic growth cannot be sustained in
non-competitive industries. Hence, a value chain approach which focuses on industries
employing large numbers of the poor and with the potential to become and remain
competitive in global markets should be in place. This approach therefore has relevance in a
wide array of programs for which poverty reduction and/or wealth creation is either the ends
or the means.
In general globalization of markets ties the sustainability of firms to the competitiveness of
the industries in which they participate. Firms within an industry in a country or region must
increasingly compete—even in local markets—with firms and industries from across the
globe. To succeed in global markets, entire industries (or value chains) must be able to deliver
a product to the consumer more efficiently, with a higher quality and/or in a unique form than
the value chains in competing countries. This tells us that competitiveness at the firm and
industry levels is interdependent.
Course Description
In this course, learners will gain clear insights into the process of value chain formation,
structure, networks, relationships and chain development strategies. Students will be able to
conduct value chain analysis and apply value chain approach in development intervention.
They will also discuss matters pertinent to business environment, industrial policy assistance,
enhancing institutional support, specific and direct interventions and programs. They will

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also appreciate the importance of different organization’s value chain development
approach.
Course objectives
This course provides the basic to develop a new value chain as well as improving an existing
value chain by developing value chain strategies. Specifically, the course is intended to enable
student to;-
 Explain the basic steps in value chain analysis
 Explain the concept of value chain development and formation
 Apply different value chain approaches and principles for the improvement of the
chain
 Determine chain governance or leadership to facilitate chain development
 Apply different value chain development and improvement strategies
1.1 Basic concepts of Value Chain
Definition of Value Chain

Dear learner before we define what a value chain is, let’s first define what value is?

Value is defined as:

 A fair return or equivalent in goods, services, or money for something exchanged.

 The monetary worth of something: market price.

 Relative worth, utility, or importance.

 A numerical quantity that is assigned or is determined by calculation or measurement.

 The relative duration of a musical note.

 A: relative lightness or darkness of a color: luminosity B: the relation of one part in a

picture to another with respect to lightness and darkness.

 Something (as a principle or quality) intrinsically valuable or desirable! Value is what

makes something desirable!

In connection to the value chain concept Porter (1985) defined the term ‘value’ as the amount
buyers are willing to pay for what a firm provides, and he conceived the “value chain” as the
combination of value added activities operating within a firm – activities that work together to

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provide value to customers. In some cases, value is a subjective experience that is dependent
on context. For instance in the context of a busboy clearing a table, a glass of water sitting
there has no value, or even negative value – it’s just more work for him. But for the man
dying of thirst, that same glass of water is extremely valuable. On the other hand value occurs
when needs are met through the provision of products, resources, or services – usually during
some form of transaction or exchange. Hence, value is an experience, and it flows from the
person (or institution) that is the recipient of resources – it flows from the customer.

From this simple example (water – busboy and thirsty man), we see that value has meaning in
a number of contexts, including trading relationships, consumer purchases, and the interests of
company shareholders. For the value chain aspect we may focus on the context of value as
linked to needs satisfied and experience developed through the provision of goods and
services in order to satisfy human wants.

Most corporate initiatives are really about developing appreciation and awareness of customer
needs and values, and then organizing the firm’s activities around efficiently providing for
those needs – quickly, accurately, and at minimum cost. This is because value tries to express
how customer needs are satisfied through an exchange of products and/or services for some
form of payment. The degree to which the needs that are met exceed the price paid in the
exchange is one objective way that value can be measured. That is why paying $1,000 for a
gallon of water in the desert when dying of thirst might seem reasonable if there were no other
alternatives.

A key distinction in defining value is whether the exchange that generates value is between
firms – i.e., Business-to-Business (B2B) – or between a firm and a consumer – i.e., Business
to Consumer (B2C).

Three forms of value occur in B2B commercial transactions:

1. Technical (Resource Value);

2. Organizational (Business Context); and

3. Personal (Career and Idiosyncratic).

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Technical value - intrinsic to the resource being provided and occurs in virtually all
exchanges. For the thirsty man, the water has a technical value regardless of the source or any
other consideration. The water will have technical value regardless of some aspects such as:
the type of cup used or even dirty or the man providing it is a criminal.

Organizational value- It is value built upon the context of the exchange, and may derive from
a range of factors such as ethical standards, prestige, reliability, and association. Brand image
may build organizational value, as well as company reputation. When at a fine dining
establishment, the label on the water bottle generates value far in excess of the bottle’s
content.

Personal value is derived from the personal experiences and relationships involved in the
exchange of resources and the benefits provided. While technical and organizational values
accrue to the firms involved in a commercial exchange, personal value accrues to the
individual. Manager motivation, preferences, feelings of comfort and trust create value for
individuals that engage in trading relationships on behalf of firms, and can be extremely
influential in the determination of successful exchange.

Measuring Value

Before we try to measure, let us see what gives things a value or importance. Or what makes
something desirable?

Things that make something desirable could be price (cheap or high value); Appearance
(looks); Experience (taste); Ease of use (fresh-cut and washed); Availability (year round like
Coca Cola). In all the attributes, which make things desirable, consumer is the basis. In other
words, consumers are the basis to determine value.

Value to Customer involves branding (good feel, quality, image….), Product (quality,
technical specification, usability…), service (availability, customization, friendliness…) and
other factors. These will set what the consumers are willing to pay for that particular good or
service.

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Value to producer (Cost) involves costs for promotion (Advertisement…), operations
(manufacturing, logistics,), Management (human resource, organization structure, finance…)
and other factors. These all together set the cost of supplying a particular good or service.

Measuring the net value for both producers and consumers will give us consumer premium
for consumers (difference between willingness to pay and actual product price) and profit for
producers (difference between selling price and cost of production).

The diagram below illustrates what the different actors in chain value regarding a product or
service provision. It also shows how the values develop along the chain.

Figure 1: Measuring Value

Value Chain versus Supply Chain

Supply Chain

Many use the terms “value chain” and “supply chain” interchangeably; however, we
differentiate these two terms.

Supply chain: the physical flow of goods that is required for raw materials to be transformed
into finished products. Supply chain management is about making the chain as efficient as
possible. In supply driven systems, the focus is rarely on quality delivery and quality

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improvement but mostly on capacity utilization within a given quality specification range
(lower end).The focus is always on pie-sharing rather than on pie-growing. Almost always the
incentives are not aligned fairly. For instance in most cases the farmer who puts in the most effort for
the longest period of time gets the least return. In contrast the middlemen take a greater share of
the pie with least efforts for a shorter time period. In essence, the supply chains are push based
systems. By definition the organizations within the chain work to maintain the status-quo rather than
to innovate.

On the other hand when we talk about supply chains, the focus is on a downstream flow of
goods and supplies from the source to the customer. Value flows the other way. The customer
is the source of value, and value flows from the customer, in the form of demand, to the
supplier. That flow of demand, sometimes referred to as a “demand chain”, is manifested in
the flows of orders and cash that parallel the flow of value. Hence values flow in the opposite
direction to the flow of supply. Thus, the primary difference between a supply chain and a
value chain is a fundamental shift in focus from the supply base to the customer need. Supply
chains focus upstream on integrating supplier and producer processes, improving efficiency
and reducing waste, while value chains focus downstream, on creating value in the eyes of the
customer. The supply chain:

 Supply driven

 Supply chains are concerned with what it costs and how best we can utilize our
capacity profitably (individual business profit).

 The main objectives of supply chain management are to maximize capacity utilization

 Focus is on Pie-Sharing, Capacity and Profit optimization, maintaining status-quo

Hence, creating a profitable value chain therefore requires alignment between what the
customer wants, i.e., the demand chain, and what is produced via the supply chain. So, supply
chains focus primarily on reducing costs and attaining operational excellence, while value
chains focus more on innovation in product development and marketing.

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 Figure 1. Supply chain

A value chain refers to:- an entire system of production, processing and marketing from
inception to the finished product. It is a full range of activities that are required to bring a
product (service) from conception through the different phases of production to delivery to
final consumers and disposal after use. It consists of a series of chain actors, linked together
by flows of products, finance, information and services. A value chain is a group of
companies working together to satisfy market demands.

Value chain players organize/align the work among themselves based on market signals and
capabilities. They are always on the look-out to build new and complimentary capabilities
(e.g., aggregators and traders focus to build primary processing, packaging and other value
add capabilities). This implies that value chains can be competitive only when they innovate
and not by maintaining the status-quo. With innovation, a larger pie is created which provides
greater incentives to share which in turn fosters further innovation (as a result new and higher
value products would come out of the chain). This will result in innovatively processed
products such as fresh fruits juices, smoothies… coming out of the fresh produce value chain.

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Figure 2. Basic value chain map

Table 1. Supply chain vs. value chain

Supply chain (mainstream SC, conventional Value chain (value-based SC)

SC)
Mainly product oriented Mainly consumer oriented. Take in to account
consumer interest.
Competitive and adversarial. No or less Combine cooperation with competition to
cooperation. Seek to buy as cheaply and sell achieve advantages in the market place.
as expensively as possible. Cooperation within the value chain,
competition with other value chains.
Business relationships are framed in win loss Business relationships are framed in win-win
terms (pie sharing) terms with in partners (pie growing)
Benefits and profit are not evenly distributed Welfare of all partners is taken in to
across the supply chain. Processors and consideration including appropriate profit
marketers usually receive disproportionately margins and long-term business agreements.
higher share
Farmers are often operating in restriction Farmers are strategic partners with rights and
markets or under short term contract; bear responsibilities related to information,
much
The risk; and may be treated risk taking, governance and decision making

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interchangeably (and exploitable) in put
suppliers.
Lack of trust among marketing channel High level of interdependence and trust
members
Tactical and operational processes Strategic interest in the performance and well-
being of other partners
Internally focused on the creation of physical view on organization from the customer’s
good perspective-the integration of goods and
services to create value.

The definition of value chain can be interpreted in a narrow or broad sense:

In a narrow sense, a value chain includes the range of activities performed within a firm to
produce a certain product. In a broad sense, value chain is concerned with a complex range of
activities implemented by various actors (e.g. primary producers, processors, traders,
consumers).

The key issues for successful value chain are good information flows and good
communication across the chain and they are demand driven, not product driven. Value chain
involves a chain of activities that are associated with adding value to a product through the
production and distribution processes of each activity. The purpose of every organization is to
provide value to its customer and stakeholders. Value is what makes something desirable.
Value is the perception of the benefits associated with a good, service, or bundle of goods and
services (i.e., the customer benefit package) in relation to what buyers are willing to pay for
them.

Value adding activities can include:

✓ -Bulking ✓-Cleaning ✓ Drying

✓ Sorting ✓-Processing ✓ Storage

✓ Packaging ✓ Labelling ✓ Branding

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One of the simplest functional forms of value is Value = Perceived benefits/Price (cost) to the
customer. If the value ratio is high, the good or service is perceived favorably by customers,
and the organization providing it is more likely to be successful.

To increase value, an organization must: (a) increase perceived benefits while holding price or
cost constant, (b) increase perceived benefits while reducing price or cost, or (c) decrease
price or cost while holding perceived benefits constant.

Generally, a value chain is a network of strategic alliances between independent companies

that together manage the flow of goods and services along the entire value-added chain.
Strategic implies that the partnership is entered into deliberately by groups of people who
jointly undertake activities they could not undertake themselves. The result is “competitive
intelligence,” and win-win strategy whereby information that could not be accessed
independently is gathered and shared. A firm's value chain is part of a larger system that
includes the value chains of upstream suppliers and downstream channels and customers.

In order to understand value chain, begin by drawing a simple diagram that shows the key
processes and inputs that contribute to the final product. In general, the value chain of most
agribusinesses looks like the following.

Input supply -----> Agricultural production ----> first level handling -----> Processors ----->
wholesalers/distributors ----> Retailers -----> consumers

You can now replace these generic boxes with more detail where appropriate. Once the
discrete activities are defined, linkages between activities should be identified. A linkage
exists if the performance or cost of one activity affects that of another. At each stage of the
chain the value of the product goes up, because the product becomes more convenient for the
consumer. Besides value, costs are added at each stage in the chain.

Michael Porter initially coins the term value chain in 1985. Porter’s value chain a
company’s value chain consists of a linked set of value-creating activities performed
internally. The value chain contains two types of activities Primary activities–where most of
the value for customers is created. Support activities–facilitate performance of the primary

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activities. Michael Porter introduced a generic value chain model that comprises a sequence
of activities found to be common to a wide range of firms.

Figure 3. Porter generic value chain model

Primary activities

The goal of primary activities is to create value that exceeds the cost of providing the product
or service, thus generating a profit margin. They contribute to the physical creation of the
product or service, its sale and transfer to the buyer, and its service after the sale.

 Inbound Logistics: - Include the receiving, warehousing, and inventory control of

input materials.
 Location of distribution facilities
 Warehouse layout and designs

✓ Operations: - Are the value-creating activities that transform the inputs into the final
product. Associated with transforming inputs into the final product form

 Efficient plant operations

 Incorporation of appropriate process technology
 Efficient plant layout and workflow design

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  Outbound Logistics: - The activities required getting the finished product to the
customer, including warehousing, ordering fulfilment, etc.
 Associated with collecting, storing, and distributing the product or service to
buyers
 Effective shipping processes to provide quick delivery and minimize damages
 Shipping of goods in large lot sizes to minimize transportation costs.

✓ Marketing and sales: - Those activities associated with getting buyers to purchase the
product, including channel selection, advertising, pricing, etc.

 Associated with purchases of products and services by end users and the
inducements used to get them to make purchases.
 Innovative approaches to promotion and advertising.
 Proper identification of customer segments and needs

✓ Service: - Activities are those that maintain and enhance the product’s value including
customer support, repair services, etc.

✓ Associated with providing service to enhance or maintain the value of the product

 Quick response to customer needs and emergencies

 Quality of service personnel and ongoing training

✓ Support activities

 Support activities often viewed as “overhead”, but some firms successfully

have used them to develop a competitive advantage, for example, to develop a
cost advantage through innovative management of information systems.
 They are activities of the value chain that either add value by themselves or
add value through important relationships with both primary activities and
other support activities.

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✓ Procurement: - The function of purchasing the raw materials and other inputs used in the
value-creating activities.

 Procurement of raw material inputs

 Development of collaborative “win-win” relationships with suppliers
 Analysis and selection of alternate sources of inputs to minimize dependence on one
supplier

✓ Technology Development: - Includes research and development, process automation, and

other technology development used to support the value-chain activities.

 Related to a wide range of activities and those embodied in processes and

equipment and the product itself
 Effective R&D activities for process and product initiatives
 Positive collaborative relationships between R&D and other departments
 Excellent professional qualifications of personnel

✓ HRM: - The activities associated with recruiting, development, and compensation of

employees.

 Effective recruiting, development, and retention mechanisms for employees

 Quality relations with trade unions
 Reward and incentive programs to motivate all employees

✓ Firm Infrastructure: - Includes activities such as finance, legal, quality management, etc.

 Typically supports the entire value chain and not individual activities
 Effective planning systems
 Excellent relationships with diverse stakeholder groups
 Effective information technology to integrate value-creating activities

In summary value chain:

 Works aligned with consumers or end users- consumer and demand driven

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  Value chains are concerned with what the market will pay for- market driven.
Hence, the focus is to make what you can sell profitably
 The main objectives of value chain management are to deliver quality as desired
by the customers/consumers
 Focus is on Pie-Growing, Coordination, Continuous Improvement & Innovation
 A chain in which all partners create added value and share value

1.2 Value Chain Actors

Value chain approaches have been used to analyze the dynamics of markets and to
investigate the interactions and relationships between the chain actors. A value chain is made
up of a series of actors (or stakeholders) from input (e.g. seed) suppliers, producers and
processors, to exporters and buyers engaged in the activities required to bring product from its
conception to its end use. Value chain stage defines the various chain actors and their roles for
the functioning of the entire chain.

Actor is a corporate person, a natural person or other entity, that is able to influence its direct
surroundings. Actors are usually defined through their input-output transformations and
inter-actor transactions. The concept can be nested, i.e. a chain or network can also be
considered as an actor within a larger network. The various actors in the value chain can be
grouped under three levels or stages based on the roles they play. They are:

1 Value chain main actors: The chain of actors who directly deal with the products.
Activities of value chain main actors regarding a specific product or group of products
involves producing, processing, trade and owning the produces. Actors in a value chain
may include input suppliers, producers, itinerant collectors (small and mobile traders who
visit villages and rural markets), assembly traders (also called primary wholesalers who
normally buy from farmers and other itinerant collectors and sell to wholesalers),
wholesalers (who deal with larger volumes than collectors and assemblers and often

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 perform important storage functions), retailers (who distribute products to consumers),
and processors (firms and individuals involved in the transformation of a product).

2 Value chain supporters: The services provided by various actors who never directly deal
with the product, but whose services add value to the product. Closely related to the
concept of value chains is the concept of business development services or value chain
supporters. These are services that play supporting role to enhance the operation of the
different stages of the value chain and the chain as a whole. In order for farmers to engage
effectively in markets, they need to develop marketing skills and receive support from
service providers who have better understanding of the markets, whether domestic or
international. Local business support services are, therefore, essential for the development
and efficient performance of value chains. The business development services can be
grouped into infrastructural services; production and storage services; marketing and
business services; and financial services.

Basic infrastructural services include market place development, roads and transportation,
communications, energy supply, and water supply.

Production and storage services in value chain include input supply, genetic and production
material from research, farm machinery services and supply, extension services, weather
forecast and storage infrastructure.

Marketing and business support services include market information services, market
intelligence which tells a company about its environment in the market (Supply and demand
for its products, Drivers that influence demand, Who the buyers and suppliers are, Overall
economic outlook for the product), technical and business training services, facilitation of
linkages of producers with buyers, organization and support for collective marketing.

Financial services include credit and saving services, banking services, risk insurance
services, and futures markets. Nevertheless, roles of the business development services have
mostly been neglected. The neglect was a result of the mistaken assumption that profitable
business development services will emerge as value chains develop or that the public will
provide business development services where they are needed and when markets are
insufficient to provide profitable niches for competitive services to develop.

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3 Value chain influencers: These are the third group of chain actors. These include the
regulatory framework, policies, etc. Specific policy and regulatory service elements
influencing value chain performance include land tenure security, market and trade
regulations, investment incentives, legal services, and taxation.

Topic two; - Value Chain Analysis (VCA)

Pre-test

 Is a value chain approach important for economic growth?

 Do you see any purpose of Value chain analysis?

 What are the basic requirements in value analysis?

2.1. Basic Concepts in Agricultural Value Chain Analysis

There are four major basic concepts in agricultural value chain analysis: Understanding the
value chain and context; Development of interventions and innovations; Testing and
implementation; and Evaluation and recommendations for improvement. Since value chains
are composed of hierarchy of chain stages, the concept of stages of production is basic in
value chain analysis. Closely related to the stages of production is the concept of vertical
coordination. A value chain needs business support services to function. Hence, the fourth
basic concept is the concept of business development services.

Value chain analysis is an attempt to assess or estimate how competitive a selected

commodity or product is likely to be in a target market, even before it gets there. Value chain
analysis describes the activities within and around an organization, and relates them to the
analysis of the competitive strength of the organization. Therefore, it evaluates the value each
particular activity adds to the organizations products or services. The value chain analysis is
the base for value chain improvement, development or the set-up of complete new value
chains. This idea was built upon the insight that an organization is more than a random
compilation of machinery, equipment, people and money. Only if these things are arranged

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into systems and systematic activities it will become possible to produce something for which
customers are willing to pay a price. Porter argues that the ability to perform particular
activities and to manage the linkages between these activities is a source of competitive
advantage.

Value chain analysis facilitates improved understanding of competitive challenges, helps in

the identification of relationships and coordination mechanisms, and assists in understanding
how chain actors deal with powers and who governs or influences the chain. Developing
value chains is often linked to one of the chain strategies like improving access to markets and
ensuring a more efficient product flow while ensuring that all actors in that chain benefit.
There is a constant pressure for change in the value chain. Changing agricultural contexts,
rural to urban migration, and resulting changes for rural employment, the need for pro-poor
development, as well as a changing international scene (not least the increase in oil prices) all
indicate the importance of value chain development and the need for value-chain analysis to
do the right things and do the right things better.

Value chain analysis plays a key role in understanding the need and scope for systemic
competitiveness. The analysis and identification of core competences will lead the firm to
outsource those functions where it has no distinctive competences.

Value chain analysis is useful for identifying constraints and opportunities for the provision of
financial services. The process of value chain analysis helps to identify demand for services
within value chains; recognizes that optimal levels of investment requirement of a range of
services from a range of providers, including enabling institutions and value chain actors; and
prioritizes needs for donor intervention in financial services and limits of Value Chain
Finance are tied to the quality of cooperation between actors.

In summary, the concept of value chain provides a useful framework to understand the
production, transformation and distribution of a commodity or group of commodities. With its
emphasis on the coordination of the various stages of a value chain, value chain analysis
attempts to unravel the organization and performance of a commodity system.

The issues of coordination are especially important in agricultural value chains, where
coordination is affected by several factors that may influence product characteristics,
especially quality. The value chain framework also enables us to think about development
from a systems perspective.

Key issues that can be addressed through the value chain analysis

 Share of benefits and costs from value chains and market development.

 Distribution of added value along the chain.

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  Market share of the different actors and corresponding size of sub-sector.

 Institutional and legal framework, such as regional production and processing zones,
trade protocols, regulations on movement of people, agriculture marketing policies
and financial institutions.

 Growth potentials (nodes with market potential).

 Infrastructure development.

 Potential for poverty reduction and rural income generation.

 Potential for sustained food supply at affordable competitive prices for consumers.

 Potential for maximization of returns on capital investment at different levels of the

value chain strategy.

 Potential for strengthening sector and regional complementarities and interdependence

through implementation of horizontal and vertical integration approaches in the
commodity production value chains strategy.

2.1 Purposes of value chain analysis

Value chain analysis is conducted for a variety of purposes. The primary purpose of value
chain analysis, however, is to understand the reasons for inefficiencies in the chain, and
identify potential leverage points for improving the performance of the chain, using both
qualitative and quantitative approaches. Value chain analysis is a useful analytical tool that
helps understand overall trends of industrial reorganization and identify change agents and
leverage points for policy and technical interventions. It is increasingly used by donors and
development assistance agencies to better target their support and investments in various areas
such as trade capacity, enterprise competitiveness, income distribution and equity among
value chain participants.

Value chain analysis involves breaking a chain into its constituent parts in order to better
understand its structure and functioning. Thus, the analysis consists of identifying chain actors
at each stage and discerning their functions and relationships; determining the chain
governance, or leadership, to facilitate chain formation and strengthening; and identifying
value adding activities in the chain and assigning costs and added value to each of those
activities. The flows of goods, information and finance through the various stages of the chain
are evaluated in order to detect problems or identify opportunities to improve the contribution
of specific actors and the overall performance of the chain.

By going beyond the traditional narrow focus on production, value chain analysis scrutinizes
interactions and synergies among actors and between them and the business and policy

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environment. Thus, it overcomes several important limitations of traditional sector
assessments which tend to ignore the dynamic linkages with and among productive activities
that occur outside the particular sector under assessment or involve informal operations.

Value chain analysis also reveals the dynamic flow of economic, organizational and coercive
activities involving actors within different sectors. It shows that power relations are crucial to
understanding how entry barriers are created, and how gain and risks are distributed. It
analyses competitiveness in a global perspective. By revealing strengths and weaknesses,
value chain analysis helps participating actors to develop a shared vision of how the chain
should perform and to identify collaborative relationships which will allow them to keep
improving chain performance. The latter outcome is especially relevant in the case of new
manufacturers – including poor producers and poor countries –that are seeking to enter global
markets in ways that can ensure sustainable income growth.

Value chain analyses are conducted through a combination of qualitative and quantitative
methods, featuring a further combination of primary survey, focus group work, participatory
rapid appraisals (PRAs), informal interviews, and secondary data sourcing. The information is
useful by itself to understand the linkages and structure of the value chain and serves as the
basis for identifying many of the key constraints and policy issues that require further
exposition.

Agricultural value chain analysis can be conducted for the purposes:

- Understand how an agricultural value chain is organized (structure), operates

(conduct) and performs (performance). Performance analysis should concern not only
the current performance of the value chain, but also likely future performances, as
well.

- identify leverage interventions to improve the performance of the value chain

- analyze agriculture–industry linkages

- analyze income distribution

- analyze employment issues

- assess economic and social impacts of interventions

- analyze environmental impacts of interventions

- guide collective action for marketing

- guide research priority setting

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 - conduct policy inventory and analysis

In summary, the concept of value chain provides a useful framework to understand the
production, transformation and distribution of a commodity or group of commodities. With its
emphasis on the coordination of the various stages of a value chain, value chain analysis
attempts to unravel the organization and performance of a commodity system. The issues of
coordination are especially important in agricultural value chains, where coordination is
affected by several factors that may influence product characteristics, especially quality. The
value chain framework also enables us to think about development from a systems
perspective.

2.2 Steps in Value Chain Analysis

As noted above value chain analysis is a useful tool for working out how you can create the
greatest possible value for your customers. In business, we are paid to take raw inputs, and to
add value to them by turning in to something of worth to other people.

Value chain analysis is a process that requires four interconnected actions: data collection and
research, value chain mapping, analysis of opportunities and constraints, and vetting of
findings with stakeholders and recommendations for future actions. These four actions are not
necessarily sequential and can be carried out simultaneously.

The value chain team collects data and information through secondary and primary sources by
way of research and interviews. Mapping helps to organize the data, and highlights the market
segments, participants/actors, their functions and linkages. The collected data is analyzed
using the value chain framework to reveal constraints within the chain that prevent or limit the
exploitation of end market opportunities. The resulting analysis of opportunities and
constraints should be vetted with stakeholders through events such as workshops, focus
groups or “reporting-out” days. The steps are explained below.

Step One: Data Collection

Good value chain analysis begins with good data collection, from the initial desk research to
the targeted interviews. The value chain framework—that is, the structural and dynamic
factors affecting the chain—provides an effective way to organize the data, prioritize
opportunities and plan interventions.

The desk research consists of a rapid examination of readily available material. The aim is to
familiarize the team with the industry, its market and the business environment in which it
operates, as well as to identify sources for additional information. Information such as
statistics on exports/imports, consumption reports, global trade figures, etc., can be obtained
through the Internet, phone calls and documents from trade, commerce and industry
ministries, specialized industry journals, and professional and trade association newsletters.

21 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

Once the desk research is conducted, an initial value chain map can be drafted for refinement
during the primary research phase.

Interviews are conducted with 1) firms and individuals from all functional levels of the chain,
and 2) individuals outside the value chain such as writers, journalists or economists. In
addition to providing information about the movement of product and the distribution of
benefits, the interviews should inform on value chain actors’ current capacity to learn; how
information is exchanged among participants; from where they learn about new production
techniques, new markets and market trends; and the extent of trust that exists among actors.
Interviews can help to identify where chain participants see opportunities for and constraints
to upgrading. Missing or inadequate provision of services necessary to move the value chain
to the next level of competitiveness can be identified locally, regionally or nationally.

In addition to individual interviews, focus group discussions are a useful way to explore
concepts, generate ideas, determine differences in opinion between stakeholder groups and
triangulate with other data collection methods. The group may consist of 7-10 people who
perform the same or a similar function in the value chain. Guided discussion better captures
the social interaction and spontaneous processes that inform decision making, which is often
lost in structured interviews.

The qualitative data gathered by these methods will reveal dynamic factors of the value chain
such as trends, incentives and relationships. To complement this, quantitative analysis of the
chain is necessary to provide a picture of the current situation in terms of the distribution of
value-added, profitability, productivity, production capacity and benchmarking against
competitors. Analyzing these factors highlights inefficiencies and areas for reducing cost.

Step Two: Value Chain Mapping

Value chain mapping is the process of developing a visual depiction of the basic structure of
the value chain. A value chain map illustrates the way the product flows from raw material to
end markets and presents how the industry functions. It is a compressed visual diagram of the
data collected at different stages of the value chain analysis and supports the narrative
description of the chain.

Porter distinguished two important elements of modern value chain analysis: The various
activities which were performed in particular links in the chain. Here he drew the distinction
between different stages of the process of supply (inbound logistics, operations, outbound
logistics, marketing and sales, and after sales service), the transformation of these inputs into
outputs (production, logistics, quality and continuous improvement processes), and the
support services the firm marshal to accomplish this task (strategic planning, human resource
management, technology development and procurement).

22 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

The importance of separating out these various functions is that it draws attention away from
an exclusive focus on physical transformation.

Porter distinguishes between primary activities and support activities. Primary activities are
directly concerned with the creation or delivery of a product or service. They can be grouped
into five main areas: inbound logistics, operations, outbound logistics, marketing and sales,
and service. Each of these primary activities is linked to support activities which help to
improve their effectiveness or efficiency. There are four main areas of support activities:
procurement, technology development (including R&D), human resource management, and
infrastructure (systems for planning, finance, quality, information management etc.).

Some thought about the linkages between activities: These linkages are crucial for corporate
success. The linkages manifested through flows of information, goods and services, as well as
systems and processes for adjusting activities. A certain commodity value chain can be
mapped as:

Figure 4: A comprehensive value chain map

The purpose of a visual tool in the analysis process is to develop a shared understanding
among value chain stakeholders of the current situation of the industry. The mapping exercise
provides an opportunity for multi-stakeholder discussions to reveal opportunities and
bottlenecks to be addressed in subsequent stages of the chain development. Maps are also
used to identify information gaps that require further research.

Step Three: Analysis of Opportunities and Constraints Using the Value Chain
Framework

Step three uses the value chain framework as a lens through which the gathered data is
analyzed. The framework is a useful tool to identify systemic chain-level issues rather than

23 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

focus on firm-level problems. While interviews give the value chain team the chance to gather
information from individual firms, the value chain framework helps to organize this
information in such a way that the analysis moves from a firm-level to a chain-level
perspective. If the chain cannot be competitive, the success of individual firms is
compromised. Therefore, taking a systemic approach is key to sustaining the competitiveness
of the chain and the micro and small enterprises (MSEs) operating within it.

The factors affecting performance of the chain are further analyzed to characterize
opportunities and constraints to competitiveness. These factors are classified under structure
and dynamic components. The structure of the value chain influences the dynamics of firm
behavior and these dynamics influence how well the value chain performs in terms of two
critical outcomes: value chain competitiveness and MSE benefits.

Structure

The structure of a value chain includes all the firms in the chain and can be characterized in
terms of five elements:

1. End market opportunities at the local, national, regional and global levels—the
framework prioritizes this element because demand in end markets defines the
characteristics of a successful product or service.

2. Business and enabling environment at the local, national and international levels—this
includes laws, regulations, policies, international trade agreements and public
infrastructure (roads, electricity, etc.) that enable the product or service to move
through the value chain.

3. Vertical linkages between firms at different levels of the value chain—these are
critical for moving a product or service to the end market and for transferring benefits,
learning and embedded services between firms up and down the chain.

4. Horizontal linkages between firms at the same level of the value chain—these can
reduce transaction costs, enable economies of scale, increase bargaining power, and
facilitate the creation of industry standards and marketing campaigns. E.g.
cooperatives.

5. Supporting markets—these include financial services, cross-cutting services (e.g.,

business consulting, legal advice and telecommunications) and sector-specific services
(e.g., irrigation equipment, design services for handicrafts).

Dynamics

The participants in a value chain create the dynamic elements through the choices they make
in response to the value chain structure. These dynamic elements include:

24 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

 1. Upgrading—increasing competitiveness at the firm level through product development
and improvements in production and marketing techniques or processes

2. Inter-firm cooperation—the extent to which firms work together to achieve increased

industry competitiveness

3. Transfer of information and learning between firms—this is key to competitiveness

since upgrading is dependent on knowledge of what the market requires and the
potential returns on investments in upgrading.

4. Power exercised by firms in their relationships with each other—this shapes the
incentives that drive behavior and determines which firms benefit from participation in
an industry and by how much

Each plays a role in influencing value chain competitiveness. Using a table format, these
factors of the value chain framework can be evaluated in terms of offering opportunities for
upgrading and the constraints to taking advantage of these opportunities.

Value chain Framework

Who are the members? Who performs which process?

What is their role/s? Network structure What is the level of integration
What arrangements? of processes?

Chain Chain
Chain Chain business
objective process performanc
management
s e

What management
structure used in each link?
What type of contracts? Chain resources What resources (ICT,
Governance? human, techno) are used in
each process by each
member of VC?

Figure 5: Value chain framework

Step Four: Vetting Findings of Chain Analysis through Stakeholder Workshops

Value chain analysis helps develop a private-sector vision to reflect stakeholders’ interest in
improving the efficiency and competitiveness of the chain. The fourth step, vetting findings,

25 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

uses value chain analysis through a structured event (or series of events) like a workshop or
reporting-out day to facilitate discussion with and among selected participants.

The objective of these events is to bring participants together who are responsible for critical
market functions, service provision, and the legal, regulatory and policy environment. The
goal is to have these participants—who have an incentive to drive investments in upgrading—
to develop and assist in implementing a private sector-led competitiveness strategy. To
develop this strategy, the stakeholders will need to prioritize the opportunities and constraints
identified during the value chain analysis. With an open format, such structured events foster
buy-in to the analysis process.

Participants are selected based on the role they play in the value chain, or their responsibility
for critical market functions. There should also be MSE, medium and larger firm and
association representatives who, during the interview phase, exhibited an understanding of the
issues related to the value chain (especially the opportunities), a strong interest in the types of
questions posed during the interview, and leadership skills among peers or the community.

Vetting events can take on several forms from simple one day reporting-out sessions to more
structured workshops that stretch to two or three days. The events are planned to reinforce the
importance of knowing and understanding the end market. In presenting the findings of the
value chain analysis, workshop leaders should stress that to remain competitive, stakeholders
and other participants must continuously learn what end markets demand in terms of product
specifications, quality, and other requirements.

It can be powerful to have a series of buyers present at the workshop. Where not possible, a
phone call or pre-recorded video interview can be an effective means for stakeholders to see
and hear directly from the buyer.

The event should include facilitated discussions, review and adjustments of value chain map
and a review of the analysis table. For this exercise, it is recommended that the completed
table be projected on a screen, and additions and modifications made during discussions
inserted with the computer projecting the table. This assures a participatory process and on-
the-spot adjustment witnessed by attending participants. If changes are made, the updated
table can be immediately printed and distributed to participants before they leave.

In environments characterized by a number of donor partners working with the same group of
firms, burn-out and skepticism particularly among the most important change drivers is likely.
In some instances, the firms most important to driving change may not attend a full-day
workshop even though they may be highly committed to the upgrading process and strategy
for making the industry more competitive. If time allows, the analysis team can meet with
these firms in advance of the workshop to convince them of the value of the competitive
planning process. If this is not possible, the analysis team should meet with these firms soon

26 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

after the workshop to vet findings and secure buy-in or commitment to the industry
competitiveness planning process.

In most industries, it is rather unusual that a single company performs all activities from
product design, production of components, and final assembly to delivery to the final user by
itself. Most often, organizations are elements of a value system or supply chain. Hence, value
chain analysis should cover the whole value system in which the organization operates.
Within the whole value system, there is only a certain value of profit margin available. This is
the difference of the final price the customer pays and the sum of all costs incurred with the
production and delivery of the product/service (e.g. raw material, energy etc.). It depends on
the structure of the value system, how this margin spreads across the suppliers, producers,
distributors, customers, and other elements of the value system. Each member of the system
will use its market position and negotiating power to get a higher proportion of this margin.
Nevertheless, members of a value system can cooperate to improve their efficiency and to
reduce their costs in order to achieve a higher total margin to the benefit of all of them (e.g. by
reducing stocks in a Just-In-Time system). For instance hierarchy firms are vertically
integrated, so that they can directly control all or most of the activities of the chain

Some value chains can best be described as balanced networks. Firms form networks and in a
balanced network the power relations among them are fairly equal, no one firm or group of
firms dominates the network. In balanced networks supplier and buyer jointly define the
product and combine complementary competencies. An example might be collaboration
between producers of ‘eco-friendly’ knitted fabric and garment manufacturers who make this
fabric into fashion garments. Since both are involved in high value-added production, they
can work together more or less as equals.

Other value chains are governed by lead firms. We call these directed networks. The lead
firms do not merely buy goods in the market. Rather they specify what is to be produced by
whom, and they monitor the performance of the producing firms. In some cases, the networks
are directed, or “driven”, by large producers such as transnational corporations or other large
integrated industrial enterprises. The automobile industry is a good example of a producer
driven value chain. The large automobile companies dominate the chain by setting the
specifications that must be followed by firms joining their networks of component suppliers.

Other chains are driven by the buyers of the products. In clothing and footwear, many leading
brand-name companies do no production themselves. Instead, they concentrate on design and
marketing. Their strength as buyers enables them to dominate certain value chains. They
determine what fabrics will be used, what styles will be produced, and in what colors.

Finally, some chains are characterized by vertically integrated firms. In these cases, firms,
acting through their own decision-making hierarchy, can directly control chain activities.

27 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

 Topic three; - Value Chain governance
Pre-test

 What is governance?

 Do you think governance is a necessity in value chains?

 How do you relate value chain with networking?

3.1 Concepts of Governance

A value chain has to be regulated to enhance performance. Governance refers to ‘the basic
rules of the game that determine behavioral conduct and action for vertical coordination and
cooperation. There are two components of governance namely legislative and executive
governance, and the reach and richness of governance mechanisms.

Legislative governance includes negotiations and/or specifications of prices, product quality,

delivery time and other transaction attributes linking the business partners. Executive
governance covers monitoring of the provision of the product and other transaction attributes

28 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

such as reliability. Also important under executive governance are incentives, including price
bonus and other embedded services like training. Identify leverage points and designing
appropriate strategies for improvement requires knowledge of linkage between value chain
actors and level of cooperation. Possible interventions in strengthening interventions include:
enhancing trade links by supporting the shift from traditional inefficient and fragmented
middlemen/ broker structures to specialized, dedicated trading systems.

Figure 6: Linkages between Value Chain operators and levels of cooperation

Governance refers to the role of coordination and associated roles of identifying dynamic
profitable opportunities and apportioning roles to key players (Kaplinsky and Morris 2001).
Governance implies that interactions between firms along a value chain reflect organization,
rather than randomness. The various activities in the chain, within firms and between firms,
are influenced by chain governance. Value chains are characterized by repetitiveness of
linkage interactions. The governance of value chains emanate from the requirement to set
product, process, and logistic standards, which then influence upstream or downstream chain
actors and results in activities, actors, roles and functions. Therefore, power asymmetry is
central in value chain governance. In other words, some key actors in the chain shoulder the
responsibility to allocate roles (inter-firm division of labour) and improve functions.

Value chain governance describes which firms within a value chain set and enforce the
parameters under which others in the chain operate. Much of the focus is on the power of
firms at different nodes of the value chain to control or govern upgrading activities, and the
terms on which different firms participate within the chain. Embedded in governance are
inter-firm relationships, power dynamics both symmetrical and asymmetrical and the
distribution of benefits.

29 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

Governance is particularly important for the generation, transfer and diffusion of knowledge
leading to innovation, which enables firms to improve their performance and sustain
competitive advantage. While the form of value chain governance is influenced by the
characteristics of the product and the degree of specification in the end market, governance
patterns evolve over time with changes in markets, products and inter-firm relationships.
Increasing the competitiveness of a value chain typically requires an emphasis on consistent
product quality, traceability and on-time delivery.

Importantly, governance patterns also affect the ability of in-country supply chains to
integrate into global markets. Where there are no systems for introducing global standards,
national value chains are excluded from global opportunities. Without knowledgeable and
resourced lead firms providing information on end market demand and services to facilitate
upgrading, in some cases, it is impossible for a value chain to become or remain competitive.

Thus, value chain governance is a level of organization that facilitates or hinders upgrading
and the ability to respond to market changes, especially in global markets. Value chain
governance can be internal or external. Internal Value Chain Governance refers to the
structure of relationships and coordination mechanisms that exist between actors in the chain.
It basically ensures the interactions between chain participants are organized, rather than
being simply random. It occurs when some actors in the chain work to criteria set by other
actors in the chain, e.g. quality standards or delivery times and volumes set by processing
firms.

External Value Chain Governance: This is important from a policy perspective by identifying
the institutional arrangements that may need to be targeted to improve capacities in the value
chain (e.g. research), remedy distributional distortions, and increase value added in the sector.
It is also related to chain specific legislation and regulation, but also describes general public
sector interventions relevant to value chain development.

Power in value chain governance can be categorized into three major areas of responsibilities:
setting basic rules for participation in the chain, monitoring the performance of chain actors in
complying with the basic rules, and assistance to help chain actors adhere to the basic rules
(Kaplinsky and Morris 2001). It must, however, be noted that some value chains may exhibit
very little governance at all, or very thin governance. In most value chains, there may be
multiple points of governance which may involve setting rules, monitoring performance and/
or assisting producers. The powers of governance may be vested within the chains
themselves, in local communities, or in business associations.

Chain governance should also be viewed in terms of ‘richness’ and ‘reach’, i.e in terms of its
depth and pervasiveness (Evans and Wurster 2000). Richness or depth of value chain
governance refers to the extent to which governance affects the core activities of individual
actors in the chain. Reach or pervasiveness refers to how widely the governance is applied

30 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

and whether there are competing bases of power. In the real world, value chains may be
subject to multiplicity of governance structures, often laying down conflicting rules to the
poor producers (Kaplinsky and Morris 2001)

Governance can also be referred to as the inter-firm relationships and institutional

mechanisms through which non-market coordination of activities in the chain is achieved.
Within global value chains, for example, leading supermarkets in European country may
exercise control over their fresh vegetable supply chains. Not only do they specify the type of
products they wish to buy (including varieties, processing and packaging), but also processes
such as the quality systems that need to be in place. These requirements are enforced through
a system of auditing and inspection and, ultimately, through the decision to keep or discard a
supplier. Clearly, governance in value chains has something to do with the exercise of control
along the chain. At any point in the chain, the production process (in its widest sense,
including quality, logistics design, etc.) is defined by a set of parameters. The four key
parameters which define what is to be done are:

a. What is to be produced? We refer to this as product definition.

b. How it is to be produced. This involves the definition of production

processes, which can include elements such as the technology to be used,
quality systems, labour standards and environmental standards.

c. When it is to be produced.

d. How much is to be produced.

To these four basic parameters one might add a fifth parameter, price. Although prices are
usually treated as a variable determined in the market, it is frequently the case that major
customers (particularly those competing more on price than, for example, product quality)
insist that their suppliers design products and processes in order to meet a particular target
price. From the point of view of the analysis of inter-firm linkages in the global economy, the
critical parameters for value chain governance are the first two: what is to be produced, and
how it is to be produced. These parameters are often set by buyers. In each case, the level of
detail at which the parameters are specified can vary. In the case of product definition, the
buyer can provide different levels of specification. It can set a design problem for the
producer, which the producer then solves by providing its technology and design. The buyer
might provide a particular design for the producer to work on, or the buyer might even
provide detailed drawings for the producer. Buyers can also specify process parameters. This
has been most evident through buyer involvement in their suppliers’ quality systems, but it is
also increasingly evident in specification of process parameters in relation to labour and
environmental standards. Once again, these can be specified at different levels of detail. In
some cases, the buyer may merely refer to the process standards to be attained. In other cases,

31 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

the buyer will specify precisely how particular standards should be attained by requiring and
perhaps helping to introduce particular production processes, monitoring procedures, etc.
When the buyer plays this role, we refer to it as the ‘lead firm’ in the chain.

The question of governance arises when some firms in the chain work according to
parameters set by others. When this happens, governance structures may be required to
transmit information about parameters and enforce compliance.

Product and process parameters can also be set by agents external to the chain. Government
agencies and international organisations regulate product design and manufacture, not only
with a view to consumer safety, but also in order to create transparent markets (for example,
by defining standard weights and sizes or technical norms). Examples of such parameter
setting by agents external to the chain include food safety standards, norms with regard to the
safety of products such as children’s toys, electrical equipment and motor vehicles and control
of hazardous substances in a wide range of products. Once again, these norms can refer to the
product (are its physical characteristics and design in conformance with requirements?) or to
the process (is it being produced in ways which conform to particular standards?). In some
cases, process norms are pursued as a means to achieving product standards (for example,
hygienic food preparation systems are designed to produce safe food) and in others because of
the intrinsic value of particular types of processes (for example, animal welfare requirements).
Governments may set standards which are compulsory and have legal force. Standards may
also be set by non-legal agreements (code of conduct, etc.) and by a variety of unofficial
agencies, such as NGOs, which pressure for compliance with labour and environmental
standards.

Parameters set from outside the chain lead to chain governance when one agent in the chain
enforces the compliance with parameters of other agents or translates the parameter into a
set of requirements which it then monitors and/or enforces. This situation usually arises when
agents at one point in the chain might be held responsible for actions by agents (or the
consequences of these actions) at other points in the chain.

Governance can be exercised in different ways, and different parts of the same chain can be
governed in different ways. Governance, in the sense of arrangements that make possible the
non-market coordination of activities, is not a necessary feature of value chains. Many goods
are traded in markets through a series of arm’s-length market relationships between firms.
The parameters are defined solely by each firm at its point in the chain. So, for example, a
firm might make a product according to its own estimations of market demand (‘make to
forecast’), using a design that has no reference to any particular customer (i.e. either a
completely standard product, or a product developed in-house) and using its own processes.
The buyer then encounters a ready-made and ready-to-buy product. There are various ways in
which inter-firm relationships can differ from this pattern. For example, the decisions about
‘when’ and ‘how much’ will be made jointly by the producer and the buyer when production

32 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

is scheduled according to ‘make-to-order’ rather than ‘make-to-forecast’. This is typical when
products have many possible variants, which renders make-to-forecast uneconomic.

Generally speaking, we can identify three governance regimes: Open spot market which is
based on price, quality standards and bargaining and negotiation (every batch); partnership
which is based on trust, network agents or family, quality differentiation, contracts,
coordination and co-operation; and fully vertical integrated based on ownership.

3.2 Importance of governance in value chain

The issue of governance in value chains is important for the following reasons:

a) Provide market access to small growers or producers in developing countries

b) Fast track to acquisition of production capabilities: lead firms transmit best practices
and provide hands-on advice on how to improve layout, production flows and raise
skills.

c) Distribution of gains: Understanding the governance of a chain helps to understand

the distribution of gains along the chain

d) Leverage points for policy initiatives: The fact that some chains are governed by lead
firms from developed countries provides leverage for influencing what happens in
supplier firms in developing countries. This leverage point has been recognised by
government and nongovernmental agencies concerned with raising labour and
environmental standards.

e) Funnel for technical assistance: The central idea is to combine technical assistance
with connectivity. The lead firms of chains become the entry point for reaching out to
a multitude of distant small and medium sized suppliers.

3.3 Dimention of value chain governance

The connections between industry activities within a chain can be described along a
continuum extending from the market, characterized by "arm's-length" relationships, to
hierarchical value chains illustrated through direct ownership of production processes.
Between these two extremes are three network-style modes of governance: modular,
relational, and captive. Network-style governance represents a situation in which the lead firm
exercises power through coordination of production vis-à-vis suppliers (to varying degrees),
without any direct ownership of the firms

Market. Market governance involves transactions that are relatively simple, information on

product specifications is easily transmitted, and producers can make products with minimal
input from buyers.

33 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

Modular. Modular governance occurs when a product requires the firms in the chain to
undertake complex transactions that are relatively easy to codify.

Relational. In this network-style governance pattern, interactions between buyers and sellers
are characterized by the transfer of information and embedded services based on mutual
reliance regulated through reputation, social and spatial proximity, family and ethnic ties, and
the like.

Captive. In these chains, small suppliers are dependent on a few buyers that often wield a
great deal of power and control. Such networks are frequently characterized by a high degree
of monitoring and control by the lead firm.

Hierarchy. Hierarchical governance describes chains that are characterized by vertical

integration and managerial control within a set of lead firms that develops and manufactures
products in-house. This usually occurs when product specifications cannot be codified,
products are complex, or highly competent suppliers cannot be found.

3.4. Steps in analyzing value chain governance

The analysis of interactions among value chain actors not only identifies how actors are
linked with one another, but also the reasons for those linkages and whether the linkages are
beneficial or not. Improving the linkages between the different actors in the value chain lays
the foundation for improvements in coordination, cost reduction, product quality and
marketing. An identification of the benefits (or lack) of interaction helps identify the
constraints to effective linkages and trust among value chain participants.

Step 1. Identification of governance structures

Understanding the nature of relationships and the power structure in value chains is crucial
when trying to make value chains work for a specific target group. Therefore, it is important
to analyze and take into account existing governance structures when designing development
interventions in value chains and market systems.

Step 2. Assessing potentials and constraints of governance structures

How can a governance system contribute to sustained benefits of smallholders and how can it
contribute to upgrading their position in a value chain? When thinking about future visions
and intervention strategies, it is important to understand the potentials and constraints that
governance structures have for economically and socially disadvantaged producers.

Step 3. Interventions for strengthening potential benefits

When designing development interventions in market systems, potential leverage points can
be:-

34 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

a) Economic interests: Facilitate win-win situation between lead firms and poor producers.
Assess and promote the lead firm’s economic interest and incentives to provide supporting
services and invest in trustful, long term business relationships.

b) Competition and strategy: Increasing the level of competition or changes in lead firm
strategies can pressure buyers, traders and others to change predatory behaviour.

c) Social structure: Work with respected social figures, such as key farmers, chiefs and elders
who can influence others to adopt or purchase new techniques, technologies, services, inputs
or organisational structures. The more competitive and innovative the producers, the more
powerful they are in business relationships.

d) Standards and rules: Support public and private actors in setting, codifying and monitoring
standards and rules that are fair and transparent for poor producers.

e) Coordination: Enhance coordination and general performance on the upstream side of

value chains.

f) Assess lead firm behaviour in captive governance systems: When projects intervene in
captive value chains, where power asymmetry is higher, they should ensure that the lead firm
has a corporate social responsibility policy, which is implemented and monitored.

Topic four;- VALUE CHAIN DEVELOPMENT AND IMPROVEMENT

Pre-test
• How chains form and develop?
• What factors do you know facilitate relationship and networking in businesses?
Value chain is made of interlinked value-adding activities that convert inputs into outputs,
which, in turn, add to the bottom line and help create competitive advantage. Which
means businesses within the value chain are engaged in handling and adding direct value
or consuming the product and also the service network indirectly involved in the
production (for example quality control, ICT, financial partners, banks, insurance, and
training and research).

35 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

 Value Chain Development means positive or desirable change in a value chain to extend
or improve productive operations and generate social benefits: poverty reduction, income
and employment generation, economic growth, environmental performance, gender equity
and other development goals.
It is improvement of cooperation between stakeholders of a particular sector and the
coordination of their activities along different levels of a value chain with regard to the
following five triggers. The ultimate goal of developing value chain is to increase the
competitiveness of the sector on the (international) market.
The five triggers for value chain development are: system efficiency, product quality and
specifications, product differentiation (competition), social and environmental standards,
and enabling business environment. Each of them is discussed as follows.
Value chain development generally
• Empowerment of producers
• Improve quality
• Improve logistics (= planning)
• Cost price reduction (improvement margins)
• Scaling Up  Increase of Volume

Commonly used Terminologies

Actor: a corporate person, a natural person or other entity, that is able to influence its direct
surroundings. Actors are usually defined trough their input-output transformations and inter-
actor transactions. The concept can be nested, i.e. a chain or network can also be considered
as an actor within a larger network.
Chain: a number of actors who have a sequential exchange relationship to each other.
Usually, goods flow is the guiding principle for defining what is considered to be a chain.

Exchange relationship: regular exchange of goods, money, information or relational signals,

as part of the primary process of two actors involved. The unity of exchange is the
transaction.
Value: the money worth of an asset or product. Early economists such as Adam Smith and
David Ricardo suggested that the value of an asset or product depended upon the amount of

36 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

labour needed to produce it, while later economists like William Jevons emphasized that the
utility of a product to a consumer determined its value. Nowadays economists accept that both
supply and demand factors are important in determining the value of a product, by
establishing a market price for it.
Value chain can be defined as an alliance of enterprises collaborating vertically to achieve a
more rewarding position in the marketplace. Through working together, suppliers (producers
and processors) invest in the relationship with the retail or food service customer, to provide a
better understanding of the consumers’ needs. A successful value chain will strengthen this
strategic relationship with the goal of helping the relationship become a valuable and integral
asset. This asset provides a competitive advantage that is difficult for competitors to copy or
substitute.
Add Value: Value should be added to the product at each link of the chain. Value does not
necessarily include dollar value only. There could be value in information exchange, in
building networks and in learning new processes. Examine what value you and your potential
value chain partners add to the product. Identify any businesses in the chain that are not
adding value and question if they need to be part of the value chain.
Is a value chain, supply chain, and demand chain management the same?
Value chain management, supply chain management, and demand chain management are
terms used to describe slightly different business strategies.
 Value chain management takes the perspective that members in the chain earn their
place by adding value to the product or service. In return, members are compensated
for the value they add.
 Supply chain management is used when a system employs the most efficient and
effective means for delivering a product or service to the customer.
 Demand chain management looks backwards at the chain. It strives to deliver
products and services to a market, ensuring an adequate demand for a product. This
demand pulls the product through the chain, rather than producers/processors pushing
their product into the market place.
Some writers encompass the meanings of all three terms in describing value chain
management. Regardless of the strategy applied, value chains begin and end with the market.
They are driven by market pull.

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Share Value: Sharing value among value chain partners means partners get a share of the
rewards that is congruent with their contributions. Identifying a process to decide how value
will be shared is an important discussion and can be difficult. If chain members are not
satisfied with their share of the rewards, they are unlikely to stay committed. The discussion
can be difficult because “value” can be quite subjective and difficult to quantify.
Outline the Opportunity: determine the most important opportunity or problem to be
addressed using a value chain approach. Be creative by considering all the possibilities and
opportunities at hand.
Pay Attention to Logistics and Distribution: the speed and efficiency of taking a product to
market are critical areas in value chain management; with perishables it is even more
important. Poor logistics and distribution increase costs and detract from product quality, a
key to satisfying consumers.
Share Information: objective decisions are based on reliable information. Sharing
information is needed to successfully solve problems and explore opportunities such as
reducing costs, minimizing market risk or identifying new market opportunities. A
distinguishing factor in value chains is more transparent communication. It involves value
chain partners sharing information, problem solving and exploring new opportunities
together. Communication is the start of a healthy relationship; withholding information invites
distrust. By sharing information, risks and rewards, partners can do more together than acting
independently.

4.1 Building a Value Chain

Value chain building is a deliberate initiative to promote potential value chain development in
a sustainable manner. It involves working for inclusion of target groups, improving
participation and benefits of the target group, incorporating other developmental concerns.
Building a chain begins chain formation. Chain Formation includes all activities and
conditions necessary to design as well as implement collaborative relations between chain
links/actors with the purpose of supporting a productive functioning of the chain efficiently.

4.1.1 Principles of Value Chain Development

Chains start from formation. Chain formation encompasses all the activities and conditions
necessary to design as well as implement collaborative relations between chain links with the

38 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

purpose to support the productive functioning of the chain efficiently. Once chains are formed
they need to be org anized. Chain organization is about formal as well as informal structures
and procedures advancing the efficient and effective differentiation and co-ordination
between entities at all levels within a chain.

A value chain improvement project involves the selection and prioritization of value chains to
be analyzed at the first step which certainly entail some of the most important decisions to be
taken. Such decisions need to involve all stakeholders and encompass their interest.
Therefore, there is a need for procedures that ensure a successful value chain development.
Thus value chain development procedure should ensure the following points:

- Transparent external facilitator role

- Build upon the initiatives of VC actors and existing organizations

- Serving clients impartially and share results fairly

- Sticking to division of tasks between VC actors

- Enhancing environment of respect, safety, trust and autonomy of actors

- Focus on practical implementation and rapid visible results and impact

- Openly acknowledge potential conflicts

- Creating balance between participation and results

- Coordinating efforts of supporter (donors) along chain

Value chain formation

• Chain Formation & organization
• Chain design
• Chain behavior
• Chain Culture

Chain Formation: all activities and conditions necessary to design as well as implement
collaboration relations between chain links with the purpose to support the productive
functioning of the chain efficiently

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Chain Organization: it is about formal as well as informal structures and procedures
advancing the efficient and effective differentiation and co-ordination between entities on all
levels within a chain.
Chain behavior; - refers to interaction of a chain with its environment at a cognitive, an
evaluative and an active level, as well as the interaction between the constituting links of the
chain.
Chain culture; - is the norms and values shared by the links of the chain with respect to
mutual interaction as well as interaction with the outside world. Outside the shared norms and
values there will be a set of individual norms and values within each link in the chain too.
This fact is the ground for subcultures within a chain.

4.1.2 Requirements for Successful Value Chain Development

There are a number of key organizational considerations in building a successful value chain.
These include among others:

 I) Establishing common objectives;

 II) Building trust and establishing co-operative working relationships.
 III) Managing information flows;
 IV) Upgrading in value chains.

I). Establishing common objectives in value chain

The objectives of the value chain will depend on the product, market circumstances, and the
participants, among other factors. The aim might be to bring a new product to market, or to
introduce an existing product to a new market; it might be to provide assurances of food
safety, traceability and/or quality to end consumers; it might be to maintain or expand market
share in the face of increased competition from imports or from domestic competitors; it
might be to respond to new government regulations which affect product design, processing,

40 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

or traceability; or to strengthen and deepen existing relationships with a view to increasing
market share.
It is crucial that the parties establish and share a set of mutually agreed-to objectives. If
individual objectives differ, information will not flow freely between the partners. If we take a
lesson from the collective experience of companies involved in joint ventures, one of the
principal causes of failure in such ventures is that the objectives of the partners are
incompatible. The same is true of a value chain. Most other organizational issues stem from
this one point.

II) Building trust and establishing cooperative working relationships.

Trust is one of biggest issues in the formation of a value chain. Potential participants must
trust that their partners’ motives are not solely self-serving, and that there are benefits to
working together. Ideally, the value chain will create a win-win relationship whereby all
participants benefit through the establishment, maintenance, or expansion of secure and
sustainable markets. This is often referred to as governance of the value chain in different
literature.

Trust building is an often a painstaking process. Mistrust has to be overcome before trust can
be build. In some less developing countries, mistrust between larger private sector and SMEs
is deep rooted and has a long history to deal with. At times it is an issue of attitude change,

41 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

which takes time. In the former socialist oriented countries trust between private and public
sector was so big.

The issue of trust highlights the importance of continuous dialogue among all parties to
ensure that the objectives of the alliance are being met, and that no one member has tried to
create a situation in which they benefit at the expense of the other partners.
Experience suggests that one way of building trust is around tangible activities in a carefully
designed step by step process. Experience has shown that through schemes like Market
Linkages facilitation, or out grower schemes that are becoming common these days,
development organizations acting as facilitators have managed to bring together larger private
sector companies to enter into a contractual arrangement with smallholder farmers. In this
way long-term trust building is build up.

Focus on Your Customer and Consumer: Many of us are very focused on our product.
Expanding that focus to include your customer and the final consumer is an important shift. It
is important to identify and define your suppliers and your customers. Each business in the
supply chain has suppliers and customers as well as consumers at the end of the chain.

Value Chain Suppliers and Customers: Suppose, with the pork supply chain, the consumer
could be looking for increased loin eye depth. The processor will go back to his supplier, the
pig producer, to find a way to deliver this attribute to the customer, Marcy’s Meat Counter.

Differentiate Your Product: Companies today are looking for ways to differentiate
themselves from their competitors by developing new or improved products. Working
together with your suppliers and customers to deliver a superior product may allow you to
achieve things you otherwise would be unable to deliver.

Contribute Resources: Each business in the value chain has a unique collection of resources
that collectively will contribute to the capacity of the new value chain. Taking an objective
look at your resources will be a useful step in the initial stages. You’ll then have an accurate
description of all the resources available for the new venture. For example, one business may

42 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

have a very skilled workforce while another business may contribute a newer equipment line,
and yet another business in the chain may have excellent industry contacts.

III) Managing information flows

Knowledge is power. Often the farmers are in a disadvantaged information position. They
have no information about the performance of their own organization, let alone of the market.
By contrast, companies downstream in the chain tend to have elaborate information systems.
For example, supermarkets register the daily buying behavior of their customers, while
processing companies register the yields, volumes and prices of major crops. The more
information someone manages, the better he or she can manage a company, and the higher are
the returns. To improve the position of the farmers in the chain, their management of
information has to improve. Some elements of information management are:

• Record-keeping of the use of labor and farm inputs. This is necessary to give a proper
understanding of the costs involved, to base farm management decisions upon information,
and to build the ability to negotiate the price of the product.

• Traceability means keeping records to guarantee the buyer on the source of the product and
the inputs that were used.

• Market information involves knowing about prices and trends in the market so that the
farmers can bargain with potential buyers.

IV) Upgrading the chain

• Process upgrading

43 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

This means producing the same product more efficiently – perhaps by using new technologies
or management methods. For example, farmers may grow more by switching varieties or
applying fertilizer; they may reduce pest attacks and save costs through integrated pest
management rather than spraying; they may husk maize more quickly using a machine rather
than by hand; or they may invest in build new grain bins to improve storage. Farmers can also
improve their links with other actors in the chain – for example, they can sign contracts with
input suppliers or processors

• Product upgrading

Farmers can improve their product in various ways. For example, they may plant a new
variety that has more desirable characteristics; or they may stop using agrochemicals and
apply for certification so they can sell their produce as “organic”.

• Functional or intra-chain upgrading

Farmers can take on new activities in the chain, either upstream or downstream, or change the
mix of activities they undertake. For example, they may start grading and sorting their
produce; they may bulk it to make pick-up more convenient for buyers; or they may process it
(drying, milling, etc.) to improve its value or increase its storage life.

• Chain or inter-chain upgrading

Farmers can also set out on a new value chain: they can start growing a new crop, keep a new
species of livestock, or start a new enterprise such as dairying or agro-tourism. They may be
completely new to these activities, or they may transfer their skills and experience from their
existing enterprises.

4.1.3. Stages in Building a Value Chain

Three stages in building a value chain have been identified. The following sections deal with
the stages and how you might apply them to specific situation.

Stage 1: Identifying the Opportunity

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In this first stage, you will identify some opportunities for a value chain by mapping and
evaluating the existing supply chain. It probably comes from some idea of available resources
but may need to further define a clear project objective or focus. In this stage we learn how to
gain the support of some members of the chain and perhaps identify someone who will
champion the value chain. As a next process to identify opportunities for value chain
development, the following points need attention.

1. Map and evaluate the supply chain

2. Outline the opportunity by developing a project summary and evaluating the market

3. Assess resources, risks and capabilities of a value chain project.

1. Map and evaluate the Supply Chain

Mapping the existing supply chain is the first step in identifying opportunities. By mapping
the major companies who are suppliers and customers, you will better understand how the
product moves through the market channel and identify who you need to involve in the value
chain project. Mapping and evaluating supply chain is important to create a buy-in for
building chain and also partners can provide valuable perspectives on the strengths,
limitations and opportunities for the chain.

Mapping current supply chain enables chain members to better understand how events are
linked in the supply cycle and identify duplications, bottlenecks or gaps. Once we develop a
better understanding of consumer needs and wants, value chain partners will be able to
establish a competitive advantage by delivering exactly what the consumer and customer
want.

After mapping the next step is to evaluate the Supply Chain. What are being done well? What
we need to improve? This process can be helpful in determining where the greatest
opportunities are for value chain development such as product quality, systems efficiencies or
differentiated or specialized products.

2. Outlining the opportunity and evaluating the Market

45 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

Now that we have completed the evaluation stage, we need to determine the most important
opportunity or problem to be addressed using a value chain approach. This stage requires
being creative by considering all possibilities and opportunities at hand. Having a project
summary will be helpful while talking to potential partners and in developing the pilot project
plan. Remember that opportunity will often emerge when people in a supply chain start to
brainstorm.

Evaluate the Market: If we are considering taking a new product to market or expanding into
a new market, we need to do a market review. Developing new products and markets requires
considerable work. In most cases, expert advice is critical.

3. Assess resources, risks and capabilities of a value chain project.

After having a good sense of the opportunities, it is time to prepare a summary of group’s
(chain actors) resources and capabilities that is accessible for a value chain pilot project.
Then, the potential risks will be evaluated and used for choosing and talking to potential
partners and developing the pilot project plan. Regarding risks, there is a need to ensure that
risk factors that could interfere with the success of the project are identified. Then determine
the likelihood of indentified risks and at what stages they might occur. Identify any risks that
are relevant at this early stage, and design some strategies to lessen them. For example, an
early risk might be that the idea is shared with competitors. So there is a need that some
groups develop a confidentiality agreement to protect their ideas.

Figure 7: Risk factors in outlining Opportunities

Stage 2: Developing a Pilot Project Plan

At this stage we look at developing a pilot project plan with clear goals, plans and measures.
A pilot is a small, trial-size version of a commercial-scale value chain. It minimizes some risk

46 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

by allowing stakeholders to commit themselves and work out any bugs while proceeding on a
small scale. This is the stage where you identify suitable partners for the value chain, select a
manager and achieve commitment from all partners perhaps in the form of a written
agreement. Steps in developing the pilot plan are:

e. Identify Value Chain Partners

You should now have a clear project goal and a list of resources needed. These resources will
become list of criteria for searching and selection of additional value chain partners. We may
already have existing partners and resources that we want to include in this venture. Once this
is fulfilled it is time to also look for other partners that will bring, to the chain, expertise and
resources that are lacking. Some resources, such as contract work or rental equipment may be
more cost-effective if obtained outside the chain.

Carefully selecting the right partners is the most important factor in establishing a successful
value chain. The best alliance strategy or market opportunity may still not be successful
without the right partners.

But how do we find the right partner? Knowing what you’re looking for is a key. This
underlies the importance of identifying your needs and what you have to offer to a value
chain. The best fit between organizations involves interdependence where partners can
achieve their goals, which in turn help you achieve yours.

When choosing partners, compatible business approaches are important. To partner in a

value chain means to share and collaborate to reach a common goal. Once you bring
partners into the value chain, they must be treated fairly, given a voice and respected for what
they bring to the alliance. You may see the selection factors in the figure below.

47 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

Figure 8: Stakeholder selection factors

f. Initial Contact

Once we have short-listed the companies (stakeholders) that might fulfill the requirements,
the initial contact with them should be tentative. This requires outlining the basic value chain
idea, what the partners hope to achieve and how they think it will benefit them. While
providing them with some information, we will also want to leave the options open, reserving
full commitment until know the potential partner known better. We have to be sure to
withhold any sensitive information that might allow companies to become the competitor if
they choose not to become an ally. It is probably best to delay detailed contracts until we’ve
reached a solid verbal understanding with key decision-makers.

Once a successful alliance with other companies or farmers established, you can probably
proceed with greater confidence to forge a stronger value chain. You will likely have a better
understanding of the prospective partners’ true capabilities and can build on the existing
relationship.

g. Steering or Working Committee

Once potential partners have expressed an interest, it’s time to pull all interested parties
together. A steering committee, with representatives from each of the partner organizations, is
an effective way to begin. In the initial planning stages, senior people who can make decisions

48 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

on behalf of their organization to attend a meeting are to be invited. After bringing a steering
committee together, the next step is to build strong relationships among members.

While it is important to have senior leaders on the steering committee, they may not have the
time and expertise to actually manage the project. In these early discussions, include
someone, or several people, who could potentially manage the project. Ideally, if resources
allow, a dedicated project leader would be named. This could be a staff person or consultant
who is hired as project manager. In situations where this isn’t possible, groups may choose to
hire expertise as required at specific stages in the project.

An outside facilitator is preferable. Someone within the chain could assume the role as long
as he or she stays neutral and hears all points of view without disagreeing.

h. Build Relationships

Building a collaborative business relationship when relationships have traditionally been

competitive takes effort and attention. While the business case may drive a value chain,
personal relationships can make or break its long-term success. Even the most “bullet-proof”
business case will not survive long-term interpersonal problems. Value chains need a
foundation of cooperation, trust and mutual respect to thrive. As in other relationships, value
chain relationships are built by both working together and getting to know each other in an
informal setting. The most successful value chains allow opportunities for partners to interact
and get to know each other better through recreational and social activities outside of the day-
to-day business schedule.

i. Manage Key Discussions

During value chain formation and pilot project implementation, there will be key discussions
that require a collaborative attitude, excellent communication skills and possibly the help of a
facilitator. These discussions will need general environment like:

• A positive attitude towards mutual continuous improvement among value chain partners

• Sharing of strategic and operations data

• Adapting the organizational systems to support the value chain alliance.

49 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

 j. Develop a Pilot Project Plan

The first value chain project should be a pilot project; a pilot is a small, trial-size version of
the full potential value chain. It allows stakeholders to commit themselves in stages by
minimizing risk and allowing you to work out the bugs while proceeding on a small scale.
Most value chains take a while to show benefits, and initially demand a lot of resources. If the
project succeeds, you can take what you’ve learned and go full scale with more confidence.

To identify a suitable pilot project, begin by identifying one portion of your business that
could be separated and operated differently as an independent test case. Build the pilot project
around this small portion. Examples include a specific product line (e.g., a milled oat cereal, a
specialty meat product, etc.) or one specific market, such as a small, high-end retail shop. It
may also mean finding a new way to work with your partners. While a pilot project can take
many forms, it should meet the following criteria.

 Demonstrate the potential of larger-scale collaboration

 Allow all parties to evaluate their involvement and decide whether to continue the
arrangement

 Provide clear measures of success, based on quantified measurable objectives

(e.g., percent increase/decrease, revenue, etc.)

 Have pre-determined check-in points and an end date.

Before detailing goals and objectives for your pilot project, you need to build understanding
on the following points.

Build a Plan and Develop measures: - Once a suitable pilot project is identified, the next task
is to build a plan. Building plan starts by setting goals, objectives, measures and action plans.
Involving chain partners in developing these plans is necessary to building commitment and
trust, as well as preventing misunderstandings down the road.

50 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

 • Goal–identifies what you hope to achieve with the pilot project

• Objectives–specific, practical and easy to understand steps to achieve your

goals

• Measures–indicators of reaching the goals

• Action plans–the “to-do” lists that partners take on in order to fulfill their
commitments towards reaching the goal. Be sure to include timelines and
who’s responsible for completing each task.

Develop Measures: - It is important to determine performance measures in the planning stage

of value chain development. When the measures are monitored and reported, the results of the
measures can be used as an early warning sign that there may be a problem in the process and
something may need to be changed or addressed. There are four main categories of measures:
cost, quality, speed and volume. Each category may be applicable for your business; however,
each measure requires data be collected and managed. The greater the number of different
measures you use, the more time required to collect the data. When you are selecting a
measure, make sure that you will be able to collect the required information and that the data
you are collecting will actually tell you something about your progress towards your goals.

It is not enough to report on the measure; all parties involved need to understand what the
expectations are for the project. This is also an opportunity to plan for improvement. For each
quarter/timeframe defined by the group, you can improve the targets so that you are working
in a continuous improvement cycle. Using clear, quantifiable measures before, during and
after the pilot project allows the group to assess project progress and success.

Possible Measures

• Cost: profit margins, return on investment, reduced capital costs

• Speed: reduced time to market, decreased turn-around time

• Quality: improved quality of product/service, improved market image, customer satisfaction

• Volume: increased productivity, increased market share, sales into new markets

51 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

Once we arrive at clear goals, objectives and action plans, decide as a group how and when
the objectives will be reviewed. It’s also a good idea to agree with your partners on what will
happen if objectives are not met. While clear goals and objectives are necessary to get your
pilot project off the ground, they are also useful when talking to value chain customers,
suppliers, new partners and perhaps even the media.

Identify, Measure and Manage Risk:- In Stage 1 you identified some early risks and assigned
strategies to deal with them. In collaboration with your partners, identify all of the risks that
might affect the project. Next, assess the importance of each of these risks, and rank them so
that the most important ones can be dealt with first. The final step is to develop appropriate
risk management strategies and incorporate them into your plan. You may wish to use a
formal risk assessment process. This approach helps you to estimate the likelihood of each
risky event occurring, as well as the impact it would have on the business, should it occur.
The next step is to brainstorm for appropriate risk responses, of which there are really only
four: avoid, transfer, mitigate and accept. The overall effect is to simplify the complex process
of risk management into several understandable and achievable components.

A few examples of risk management strategies that have been applied to value chain
development include the following actions by value chain partners (the risk response category
is in parentheses):

• Sharing information and problem solving in order to address emerging risks

(mitigate, transfer)

• Implementing traceability or identity preservation to improve the ability to find

the source of problems and implement improvements (mitigate)

• Involving additional partners in a potentially lucrative but risky new venture

(transfer, mitigate)

• Agreeing to stay away from some certain volatile market sectors (avoid).

Collaborative Planning Sessions:- It’s hard to plan a value chain in your spare time. Day-to-
day pressures make it difficult to find the opportunity for meaningful dialogue between
partners. Collaborative planning sessions are a critical step in value chain development.

52 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

Planning sessions should last a day or two, and are conducted on neutral ground, preferably
away from the workplace. Key decision makers from each value chain member must attend
(may be steering committee members). At the planning session, representatives reach
consensus on critical issues and plans before the pilot project is fully underway.

The goals, objectives, measures and action plans mentioned previously are typically
developed at a collaborative planning session. You’ll also want to establish protocols for
decision making, communication and resolving problems. Setting up regular meeting times
ensures you don’t meet only when there are problems to sort out.

Business Structures:- Now that you may be entering a value chain, does your business
structure still fit? Do you need to grow, find outside money, add suppliers or hire
management? Choose a business structure that fits your unique needs. Tax and liability
separation issues can direct you to a corporation. Groups of people with a “democratic”
viewpoint can direct you towards a cooperative or a partnership. Intense independence can be
expressed through a corporation or a single proprietor.

The type of business structure you choose can be influenced by the following factors:

• The size of the value chain and the need to access larger markets.

• The motives and goals of the owners. The business structure needs to fit the
philosophy of the owners and how they wish to share the risks and rewards.

• The ability to raise money. Finding money outside your own business is a
major issue and each structure is unique in facilitating investment.

• The amount of tax you are willing to pay on the profits in the business.

In short, all participants in the value chain need to discuss the type of business structure that
would best fit.

Written Agreements:- Full legal contracts should not be developed until you’ve reached
agreement and can ensure that value chain partners are compatible with one another. This
getting to know each other better more formally can be done on the basis of a letter of
intent/memorandum of understanding (MOU) outlining broad goals and generally agreed

53 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

upon working relationships between enterprises or groups. It is possible to proceed into a pilot
project (where risks are manageable) with a completed MOU. However, as value chain
partners proceed, working into a scaled-up value chain structure, specific requirements of a
legal contract will start to emerge and the contract you sign will more accurately reflect
everyone’s best interests. Delaying a contract allows you to build a trusting relationship
before you start discussing things like risk and cancellation clauses.

Importance of Leaders: - In order to move forward on a plan, value chains rely on the support
of high-level decision-makers. Employees look for signals from the top; if they see the leader
dedicating resources and energy to the value chain, they’ll follow suit. Leader support is a
very important success factor. Equally important to successful implementation is the
commitment of operational people. Include them in the planning process to develop a
practical implementation plan and ensure their buy-in to the project.

Collectively, companies involved in a value chain may select an individual to act as chain
manager to monitor progress and facilitate communication and collaboration. The manager
should also be in touch with project champions (if they’re not part of the steering committee),
to share success stories, keep champions apprised of progress and to offer insights about
maintaining support for the project.

Stage 3: Monitoring and Evaluating the Pilot Project

This is the stage where you will implement and monitor your pilot project. You will adapt and
build in order to determine whether a full scale value chain is a possibility.

Monitoring the Pilot Project

As you move along in the pilot project, make sure you schedule regular steering committee
meetings to report on the status, or communicate the progress, of the project to date. At these
meetings check for any challenges or problems with the pilot’s progress, conflicts that may
have arisen and any new opportunities. Define and plan your next steps to address these
issues.

At a meeting with partners, try to answer the following questions.

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 • Are objectives being met?

• Have the objectives changed?

• Are all partners satisfied with progress?

• What needs to change to increase satisfaction or ensure continuing support?

Integrate Systems

Often there are multiple connections between value chain partners. As you operate in a value
chain, opportunities to build and sustain the extended enterprise arise because of the multiple
connections created between value chain partners. The closer and tighter these connections,
the more you can consider:

• New roles

• Implementing new technologies

• Deploying new models of operation

• Cost reductions, delivery, time savings and quality improvements

• Risk management tools.

Working cooperatively, you can share data and decision-making to the point where
transactions between value chain partners are seamless, almost as if they were within the same
business. For example, inventory requirements can be anticipated and adjusted with little
paperwork or time lag. Invoicing and payments can occur automatically. Through
collaboration, bottlenecks and obstructions are removed, allowing the flow of goods and
services to become more streamlined. Just-in-time and just-the-right-amount deliveries are
much more likely to be achieved within a value chain with good communication.

Depending on value chain type and level considered, integrating and synchronizing systems
involves both human communication and computer technology. This leads to the need for
developing a system for sharing information among chain partners. This might be an
integrated invoicing system, harvesting/processing protocols, inventory control, customer

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satisfaction, etc. Integrating value chain enterprises through synchronized systems is getting
more economical, due to advances in computer technology. This makes the potential payoff
even greater. The most effective value chains encourage participants to exchange ideas freely,
trade best practices and experiment to continually find better ways to interact. Take the
opportunity to benefit from an outsider’s perspectives on how effective you really are. Always
remember that there’s a better way!

Adapt and Build

Value chains never remain static because they are based on continually shifting market
opportunities, and consumer and customer demands. No matter how well a value chain is
operating, there a need to stay focused on emerging opportunities and be prepared to seize
opportunities as they arise. An advantage of a value chain is that there are many more eyes on
the horizon scouting for opportunities. As value chains mature and commitment builds,
working relationships become closer and more collaborative. Individual companies focus
more on their area of expertise, leaving other tasks to value chain partners who possess
different skills and expertise. Being able to adapt, evolve rapidly and capitalize on
opportunities are some factors that characterize successful value chains.

Once the value chain is underway, there’s still plenty that can be done to enhance it. Schedule
regular meetings with the steering committee, celebrate the achievement of milestones, co-
locate or exchange staff and, most importantly, work with your partners to introduce methods
for continuous improvement. A few examples of where you might continue to make
improvements are in the areas of logistics, inventory management, process improvements,
customer service, and information sharing and product market development. Thriving value
chains realize their potential through ongoing discussions with partners. Challenging each
other and the value chain itself are healthy behaviors. It takes a concerted effort to ensure that
lines of communication remain open and the chain remains vibrant. Plan a formal approach to
ensure that dialogue is practical and relevant and keeps the value chain focused on continuous
learning and change.

Evaluate the Pilot Project

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Once the pilot project is completed, it has to be evaluated and decision has to be made
whether the group wants to establish a more permanent value chain. This needs to complete a
final review of the pilot project with chain partners. Then, identify the learning gained and
discuss the next steps to establishing a more permanent value chain and relationship. In this
ask these questions:

• What was accomplished?

• Can more be accomplished by continuing?

• Can we add to the objectives?

• Are there any new areas we can work on together–cost reduction, safety,
quality, new products or new markets?

• What can we do together that can’t be done independently?

• Are there any new opportunities?

Be sure to provide written copies of project results and all the associated records of its
management for each partner. File and retain these results to provide support for future
projects. Use what you learned in the pilot to transfer to other markets or new opportunities
for yourself and the partners in your value chain. The pilot project experience will help you
work better with these and new partners, and provide a greater chance for success in new
endeavors.

Wrap Up

Whether decided to proceed with a value chain initiative or not, working more collaboratively
with other companies will provide insights into markets, your industry and strategic
relationships. As you gain new insights and abilities to thrive in the new economy, keep in
mind this quote:

“It is not the strongest of the species that survives, nor the most intelligent, but the ones most
responsive to change...” Charles Darwin

4.2 Value chain Improvement

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Value chain approach believes in a continuous improvement to fit in the changing business
environment. Once a value chain is built, there is a need for improvement for sustainability.
Value Chain Development aims at a positive or desirable change in a value chain to extend or
improve productive operations and generate social benefits amounting in poverty reduction,
income and employment generation, economic growth, environmental contribution, gender
equity and other development goals. It is improvement of cooperation between stakeholders
of a particular sector and the coordination of their activities along different levels of a value
chain with regard to the five triggers of value chain development. The five triggers for value
chain development are: system efficiency, product quality and specifications, product
differentiation (competition), social and environmental standards, and enabling business
environment.

4.2.1. Stages in Value Chain Improvement

The ultimate goal of developing and improving value chain is to increase the competitiveness
of the sector on the (international) market. Such development can be indicated by
empowerment of producers, improved quality, improved logistics, cost price reduction
(improvement of margins), and scaling up (increase of volume) on a continuous basis. Stages
in value chain improvement are detailed as follows.

4.2.1.1. Identification of Constraints and Opportunities

Effectiveness of value chain in ensuring value for money, minimizing operational cost and
ultimately enhancing competitiveness, depends to a large extent on the
elimination/overcoming of constraints and seizing opportunities associated with the value
chain (and its components).

Constraints may be defined broadly as any factor that prevents a unit or system from being
effective or achieving its objectives. Constraints may differ from one component of the value
chain to the other; it may also differ from one linkage point in the chain to another. But
generally, they may come in the form of lack of timely information, poorly developed human
resource, mistrust, inadequate material resource, inadequate technology and low commitment.

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Opportunities, on the other hand, may be defined as avenues/openings within a unit or system
which have the potential to enable the unit/system achieve its objectives or enhance its
effectiveness, if utilized.

A combination of the main constraints and opportunities provides the leverage points for the
value chain. Improving the effectiveness of a value chain requires some intervention to
address the leverage point i.e. overcoming constraints and utilizing opportunities. The
subsection focuses on how to identify constraints and opportunities embedded in a value
chain, as a foundation/basis for designing a realistic and realizable intervention strategy for
chain improvement.

Participatory approaches for identifying constraints and opportunities

Design of an intervention strategy (to develop a value chain) is based on an assessment of

constraints hampering and opportunities that would foster the development of the value chain.
Identification and assessment of constraints and opportunities is therefore crucial to value
chain development. Constraints and opportunities can be identified at every level of the value
chain scope i.e. Meta, Micro, Meso, and Macro levels.

In identifying and assessing constraints and opportunities at each level, emphasis must be
placed on the use of participatory approach which enables stakeholders to be involved in the
process. Apart from ensuring that divergent views are taken into consideration in arriving at
the constraints and opportunities, this approach also guarantees the commitment of all
stakeholders for implementation. The participatory approach also prevents the ‘hijacking’ of
the ‘project’ or process by the relatively more powerful stakeholders in the chain.

There are several tools and techniques that can be used to ensure active participation of all
stakeholders during identification and assessment of constraints and opportunities. Prominent
among these are focus group discussions, key informant interviews and semi-structured
interviews. The identification and assessment of constraints and opportunities (using the
participatory approach method) should be done both within and across the components of the
value chain (linkages), using the relevant stakeholders.

Box 1: Four pillars of the Concept of Systemic Competitiveness

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Since there is a need for a coherent, interdisciplinary and multi-level approach the Concept
of Systemic Competitiveness should be applied, which is based on the principle of
sustained public private cooperation and intervention at micro (business), meso
(institutional) and macro levels (framework conditions) building on encouraging attitudes
(meta level), which foster cooperation among all stakeholders.

 Market oriented production and logistics at the level of private businesses (micro
level): value chain coordination, hygiene management along the value chain, design,
strategic management and marketing, continuity and reliability of supplies, product
innovation etc.

 Business oriented services at the level of public and private institutions (meso
level): consultancy and training services, financial services, marketing information,
food control, laboratory services, research and development etc.

 Business oriented legislative and administrative framework conditions (macro

level): food law harmonized to international standards, streamlined food control
systems, liberalized laboratory services etc.

 Effective public private dialogue (meta level): adaptation to market economic norms
and business culture granting SMEs the possibility to lobby for sub sector interests

Constraints and opportunities at various levels of operation in the value chain

The starting point for identification and assessment of constraints and opportunities in the
value chain is at the micro level. This calls for a thorough knowledge and understanding of
the functions and operators of the value chain. Constraints and opportunities assessment at
this level naturally ropes in the Meta, meso, and macro levels in a rather complex relationship
that calls for thorough analysis. Irrespective of this challenge, the appropriate skills and
experience must be applied to effectively link constraints and opportunities to the Meta,
micro, meso and macro levels. The identification of leverage points will involve all
stakeholders (i.e. at the Meta, micro, meso and macro levels). Some of the factors to be
considered at the Meta level are socio-cultural that influence business attitudes, trust and

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hence the effectiveness and efficiency of cooperation within the value chain system. The
micro level will consider factors such as input provision, production, transportation, and
consumption and at the meso level groups, associations, organization, NGO’s, technical
Agencies such as Research and extension are involved. The macro group is made up of
district assemblies, national government and providers of utilities. Let us look at some
possible constraints and opportunities that may be identified at each level.

Micro level

 Fragmented linkages between surplus and deficit areas as well as rural and urban
areas

 Insufficient knowledge on marketing, access to markets and market research to

identify potential markets etc.

 Insufficient management and entrepreneurship skills and mind sets

 Inefficient production, trading and processing systems (including productivity,

good practices and quality assurance)

 Weak value chain governance systems determining the coordination and

efficiency of the information, product and payment flows between value chain
operators

Meso Level

 Inefficient and inappropriate capacities of private and public services to

address needs of value chain operators (service offer)

 Limited capacities and willingness of potential clients to access services

and pay for services (demand for services)

Macro level

 Legislation (e.g. land tenure, standards)

 Economic infrastructure (e.g. road network, telecommunication, market

places)

 Social infrastructure (e.g. education, health)

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  Enforcement (e.g. phytosanitary control, contracts)

 Administrative procedures (e.g. business registration)

 Incentive schemes (e.g. tax holidays, free zones)

Figure 9: Starting Point for Strategy Development: The value Chain Map

4.2.1.2. Identifying Leverage Points from Constraints and Opportunities

Prioritizing constraints and opportunities

A priority constraint is one which when not attended to could impede the whole value chain.
A priority opportunity is one which when utilized has the potential to bring large returns to all
the players along the value chain. Nevertheless constraints and opportunities may be
numerous; some of them are critical to the sustenance of the value chain while others are not.
There is therefore the need to prioritize in order to identify the key constraints and
opportunities so as to determine which of them require immediate attention. This has to be
done with the involvement of all stakeholders along the chain as constraints and opportunities
differ at each level of the value chain. As the value chain continues to operate, some new
constraints and opportunities will emerge while some of the non-critical ones may become

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critical. It is therefore necessary to make identification of leverage points (critical constraints
and opportunities) as a regular activity.

Examples of critical constraints and opportunities

An example of priority constraint is the introduction of EureGap 2. Because standards set in

EureGap are much higher than existing ones, there is the need for major modification and
improvement in operations of value chain operators in order to meet these high standards.
Failure to make amendments within a reasonable time would mean inability to access
European markets that could consequently lead to the disruption of the value chain.

An example of a critical constraint at the micro level could be with the consistency of input
supplies. Non-availability of planting materials, fertilizer and other inputs at certain periods
could have a great effect on the production process. Planting late because planting material is
not available; in the case of rain, fed agriculture could affect efficient utilization of rainfall
leading to poor yield.

An example of a critical opportunity could be the introduction of the American Growth and
Opportunities Act (AGOA). In this case, a new market has emerged with huge potentials.
However, this also requires a radical change in operations in order to meet standards
established. As competition for this market is keen, value chain operators need to strategically
position themselves at every level of the chain in order to be competitive.

Another case of critical opportunities could be an undertaking of a project at the national,

regional or local level that would attract a large crowd, which would require a certain product
for a period. There is, in this case a window of opportunity to meet a large demand and ability
to utilize this opportunity could result in large gains to all operators in the value chain.

4.2.1.3. Selecting priority constraints and opportunities to address

After identifying the priority constraints and opportunities, it may be necessary to select those,
which can be addressed. This is because even though they may all are of priority; resources
available may not be adequate and even sufficient to address all of them may not be practical
owing to different factors. Moreover, value chains operate within a governmental framework
over which the players may have no control. Regulations may even be such that priority
constraints and opportunities cannot be addressed.

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 4.2.1.4. Identifying Changes Required in Leading Change Agents

Every value chain has a vision and the stakeholders must play roles that will ensure the
attainment of this vision. Therefore, each stakeholder is important in the value chain some of
them would have to be classified as active, innovative and leading change agents. These can
be identified using the value chain analysis where their roles and influencing factors are
aligned at micro, meso, macro and Meta levels in the value chain system. Their competences
must also match the roles that they have to play.

Having identified the prevailing constraints and opportunities, it is possible to identify which
roles of the operators need to be modified to ensure sustenance and effectiveness. Role
modification may call for skill upgrading. New knowledge must be given through training
which may require experts in various fields. Some of the services that may be required and the
suppliers of these services are provided in Table 2

Table 2: Business Development Services (BDS)

Potential BDS required Potential BDS providers

VCD facilitation (intervention strategy Consultants, business associations, large

development, linking operators, networking companies (chain leaders)
service prov. etc)

Advisory services (production, processing & Consultants, business associations, other

handling practices, management, marketing etc.) BDS, large companies, govt. extension

Extension and training services Public/ private specialized institutions,

business associations, other BDS

Organizational development of farmer Consultants, NGOs, public organizations

organizations & MSE associations

Research & development, technology transfer, Public/ private research institutes,

product development consultants, business associations

Certification and laboratory control services (accredited) public/ private laboratories/

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 certification bodies

input supplies including information on input suppliers; (cooperatives, NGOs)

appropriate use

transport and logistics services “middlemen”, transporters

marketing information, market linkages, export bus. associations, (public)/ private BDS,
promotion Chamber of Commerce, NGOs

exchange of experiences, joint learning, joint producer organizations (farmer groups?

marketing cooperatives)

consumer awareness campaigning public health services, consumers’

associations, NGOs

lobbying and advocacy business associations, Chamber of

Commerce

Monitoring for Possible Vision Modification

Have you ever changed your mind about something you strongly wanted to buy? Why did you
change your mind? Maybe because the price was too high, or you had to buy another
important item at the time, so you had to make choices. The reasons could be diverse. The
important lesson here is that sometimes you need to change your aim, or vision, or direction.
You do so because you cannot deal with the constraints, so you go round them by modifying
your vision. Sometimes other opportunities make your vision less competitive. Thus we need
to regularly examine our visions and decide whether or not we have to modify them to suit
prevailing conditions. Similarly, the vision of a value chain development must be monitored
for possible reviews.

Need for vision monitoring

Value chain development is always based on a set vision. The vision enables us to know the
direction we want to go and where we finally want to be. The strategies we plan for the value

65 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

chain development therefore depends heavily on this vision. The vision must be realistic,
visible and achievable. We need to ensure that these attributes of the vision, rather than the
vision itself is sustained for the sustenance of the value chain system. We can do this by:

 Examining and re-examining the vision regularly

 Agreeing on performance indicators by which the vision will be monitored

 Building consensus on new directions to move.

While analyzing a value chain development, several factors can be identified that impact on
the validity and relevance of the set vision. Broadly, these may include prevailing
opportunities and constraints, socio-cultural environment, emergence of new groups and
associations, emergence of new technologies, changes in government policies at the local and
national levels, changes in international trade policies and conditions, etc. We have to
regularly assess how close we are heading toward the vision in the context of these categories
of factors.

Developing performance indicators for monitoring

Value chain development mus be seen as adequately addressing two issues: identifying and
addressing critical constraints, and identifying and seizing opportunities. The extent to which
the vision and strategies of the value chain addresses the constraints and utilizes the
opportunities becomes the determining factor for modifying the vision or the strategies, or
both. Therefore our basic performance indicators should be based on:

1. Whether the vision considers and takes advantage of prevailing opportunities

2. Whether the vision can be achieved when critical constraints have been identified and
addressed

Participatory Revision

Who must decide on revising the vision of the VCD? If one stakeholder decides on revision
and the others say no, what events are likely to follow? People will surely be embittered. So
the most acceptable way to revise or review a vision for value chain development is through
participatory agreement. Dialogue, brainstorming sessions and effective communication
channel among the various stakeholders can be used to agree on which way to go.

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Developing monitoring teams and programs

Who monitors the value chain development vision? From which perspective must the vision
be monitored? Should the vision be monitored in isolation from the other aspects of the chain?
Since the value, chain system is a participatory linkage of actors and stakeholders, monitoring
must be the responsibility of all stakeholders. However, for monitoring at the various levels
must be facilitated, regularized and harmonized; there is a need for a monitoring team. This
team must comprise stakeholders from all stages of the chain i.e. from input supply through
production, up to the final consumer. Representation from the entire spectrum of the chain
will ensure that standards set for performance have all been achieved.

Monitoring of the vision must be harmonized with the monitoring of other aspects of the VCD
so as to have a holistic, comprehensive overview of the process for the necessary adjustment
to be made.

4.3. Strategies for chain development and improvement

Value chain strategy is a set of statements and guidelines at chain level with the purpose to
guide the future development of the chain and its links, and based on the shared ultimate goal
of the chain. Chain strategies cover domains like market coverage, coordinated investments,
and extension of the chain with new participants, innovation. Besides chain (oriented)
strategies, every link in the chain has its own (supplementary) strategies. There are three
strategies for chain development:
I. Low cost strategy or Chain optimization
Due to increasing competition, producers and retailers are forced to minimize costs. Dealing
with individual parts in isolation may strengthen the economic efficiency of one part, but at
the expense of others. Therefore, the successive links must together minimize costs. This can
happen by employing ICT facilities, logistics and elimination linkages. Key issues in this
strategy are efficiency and effectiveness.
II. Integral chain care
Consumer choices are increasingly being determined by requirements in the area of health and
safety. Care for the environment and animal-friendly production methods are becoming more
important. Striving for sustainability is the new goal set by the western society. Hence all
companies/actors in the chain need to co-operate together in order to avoid loss of consumers
confidence. Here quality assurance is the key. Isssues that should get attention in this strategy
are consumers’ concerns, quality, sustainability, safety & health and animal welfare.
III. Market segmentation or Chain differentiation

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The other chain strategy option is market segmentation or differentiation. Market
segmentation or differentiation refers to providing product or service to the users by the
elasticity that a user has for the service or product. This enables producers to meet their
customer needs by different value creation and product differentiation.
4.3.1. Intervention strategies

Intermediary organizations can help farmers to get integrated into the chain, to improve as
chain actors, or to move onto another form of chain development – partner, activity integrator,
or co-owner. To improve the position of the farmer in the chain, we can work either on chain
activities or on chain management, or on both at the same time.

I. Vertical integration

One type of intervention is vertical integration. This tries to increase the number of chain
activities the farmer undertakes from farming into processing, transport, and trading. Vertical
integration seems the preferred strategy of farmers. They like to “shorten the chain” by cutting
out traders or other intermediary agents. They think that adding activities to their businesses
will provide them a lot of added value and extra income. This, however, is not always true.
Adding activities also means adding costs and risks. More importantly, it requires a new set of
assets and skills. Some of these are:

Technology: Identifying and using appropriate technologies for the value-adding activities
(grading, processing, transport, etc.). These technologies must be well maintained and be kept
updated. Technological innovation is a permanent concern.

Finance: Securing access to (a) credit or investment in facilities for processing, marketing
and distribution, and (b) working capital to run the operations. Reserves must be built up for
future investments. Profits must be divided in a rational way between the farmers and the
cooperative they are members of. Profits should be paid in accordance with the performance
or contribution of each member.

Human resources: Building up managerial competence and appropriate human resources to

operate these facilities. For example, a specialized marketing manager or quality controls
staff.

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Organization making: sure that the farmer organization has the organizational discipline to
get involved in joint value-adding activities. Farmer-members should adhere to quality
standards, delivery procedures, obligations to sell their produce, etc

II. Chain management

The return to investments in vertical integration may be disappointing unless due attention is
also given to the second dimension of chain development: involving the farmer in chain
management (arrow B in the figure on the previous page). Some aspects are the following:

Quality management

Quality management assures that both the product and the production processes satisfy the
consumer. It assures that the farm product can find its way into the market. Quality can be a
unique selling-point, through which one group of farmers differentiate themselves from other
suppliers. Quality increases the attractiveness of farmers as business partners, hence, their
bargaining power. Some aspects are the following:

• Grading of the product into homogeneous quality grades,

• Implementation of quality control systems at critical points in the production system.

- Implementation of quality certification schemes that are demanded in the market: such as
GAP (Good Agricultural Practices), Food Safety Certification, Europe GAP (quality
management system of European Union supermarkets), etc.

Chain cooperation

Cooperation with other chain actors is a skill in itself. Often chain relations are marked by
distrust. The farmers and traders fight over the price; the farmers may swindle the traders by
putting low-quality produce at the bottom of the crates, and the traders may swindle the
farmers by using inappropriate weights and measures. This situation is bad for all. That is why
it is important to seek cooperation along the chain. Some elements are the following:

 Chain vision

 Trust building

 Joint action plans

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  Negotiation

Marketing intelligence; - This involves making sure that the product finds its way into the
market. Production processes must be tailored to market demands. There must be knowledge
of what the consumer wants. Products should be produced, designed and packaged to attract
the preference of the consumer.

4.4. Supporting Factors for Value Chain Development and improvement

The general environment in which the value chain operates influences their performances
directly and indirectly. The various factors and policy requirements as deemed necessary for a
value chain development are explained as follows.

4.4.1. Logistics in Value Chain

Logistics is the art of moving goods; as a result, logistics management currently is embedded
in close cooperation and communication between companies. The right amount at the right
place, at the right time and at the right quality.

Agri-food logistics is the art of moving agricultural and food products from farm to fork. The
simple idea of a nicely organized one-dimensional chain is just a simplified model of reality.

In reality one might better speak of a multi dimensional network.

Logistics originate from the military. When we speak of agri -logistics or agri food logistics
we focus on the transport, handling and storage of agricultural goods and food products.
Somewhere halfway the last century, probably in the military, the term logistics was coined to
address the specialised control of these functions. Since then, logistics has grown into a highly
specialised profession, which outsiders may find difficult to access by its managerial jargon
and abbreviations.

4.4.2. Value Chain Finance; type and framework

Value chain finance (VCF) can be described as all financial products and services that flow to
or through any point in a value chain in order to increase returns on investment and growth
and competitiveness of that value chain.]. The term value chain finance may also refer to an
approach in which the specific features of trading within a value are exploited to reduce
finance risks and to facilitate services by financial institutions.

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In other words, it describes not just products or approaches of financial institutions, but
equally the features of a value chain that facilitate those services. Others point at the evolution
in time of the way in which finance for agricultural producers has been approached.

Four phases that can be recognized for finance;

- Agricultural credit era (1950 – 1985)

- Donor microfinance era (1980 – 2000)

- Commercialization of MFIs (2000 – present)

- Value Chain Finance (2005 – present)

This evolution in finance approaches shows a gradual movement towards inclusive financial
systems that operate in accordance with the dynamics of the market.

Value chain finance means “linking financial institutions to the value chain, offering financial
services to support the product flow, and building on the established relationships in the
chain”. They further elaborated that the product flow in the value chain is used as a carrier to
provide financial services and way of financing can spread risk among the financial
institutions and chain actors and provides alternatives to traditional collateral requirements. It
provides tremendous potential for unleashing capital, scaling up and sustaining chain
prospects, but it needs to be managed and organized well.

Value chain developing and upgrading initiatives are often challenged by financial service
gap to small-scale rural producers and the Small and Medium Enterprises (SMEs). Standard
banking practices for analyzing risk and requirements for fixed asset collateral are critical
barriers in reaching these markets. The size of loan request of this group is big beyond the
capacity of microfinance institutions. Various researchers studied the financial market gap
existed for small and medium enterprises (SMEs), which has been caught between
microfinance and corporate banking. These researcher suggests value chain finance sourced
either from actors within the value chain itself or from external financial institutions which
offers alternatives to these restrictive practices through unconventional methods for assessing
risk and evaluating collateral. The value chain finance brought new business opportunities for
the financial instaurations. According to Milder, to benefit from this opportunity, there is a
need to change thinking change and amendments to some regulatory frameworks.

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Value Chain financing has three types of finance for the actors in the value chain. These are
chain liquidity, agricultural finance and value chain finance. Chain liquidity refers Short-term
loans from suppliers or buyers within the value chain. Such financing within a chain is
common between farmers or farmer groups and traders. These credit flows are generally
called trade credit, or chain credit. They consist of short-term loans to ensure a smooth flow
of products, keep the chain running and maintain long-term relationships between trusted
business partners. They may be given in cash or in kind. Agricultural finance refers financial
services from commercial banks, microfinance institutions and other financial institutions.
And Finally, Value chain finance financial services that are based on cooperation in the value
chain.

World Council of Credit unions (WOCCU) claim that successful value chain financing when
administered by credit unions are need to have solid financial institutions, organized producer
groups with market potential, basic infrastructure (roads, electricity and telephone), legal
systems that enforce contracts, end buyers who are willing to participate in the value chain,
staff members, technical assistance providers and market data.

WOCCU identifies three value chain financing phases namely: Phase 1: Identify, evaluate,
and prioritize value chains, Phase 2: Facilitate and leverage market linkages and Phase 3:
Tailor, underwrite, and administer the loans. WOCCU proposes more roles to the financing
institution, mainly in researching, coordinating and managing the whole process. Whereas
based on experiences of Royal Tropical Institute and IIRR, leading role or initiation for the
value chain financing could come from actors in the value chain. Both parties agree the
presence of strong trust and relationships between the value chain actors and the financial
institutions.

Finance is a vital component of value chain development (VCD), as often in the early stages
primary producers, processors and even commercial traders, find it hard to access credit. If
access cannot be facilitated, development of the chain will often not succeed. But what is the
role of donors in this sector? Should not the formal financial sector in the country also play a
role? In value chains, donors are working on two frontiers. The first is to ensure inclusion of
primary producers in the chain, usually through value chain development programs. In this
reader value chain development is clearly distinguished from value chain finance, to indicate

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the non-financial interventions leading to development in the chain (such as setting up
farmers’ organizations). The second frontier is to create access to finance for actors in
developing value chains.

Microfinance features prominently in this reader, not just because it is one of the finance
mechanisms at the bottom of the chain, but also because it is interesting to look at the
parallels between microfinance and value chain finance from a donor’s perspective. The circle
diagram helps to illustrate a few features of the connection between the two types of finance.
A part of the primary producers, such as subsistence farmers, has no link yet to a commercial
value chain. They are the target of value chain development programs aiming to establish the
connection to a value chain (inclusion). Some do have access to microfinance. Those that do
produce for a value chain may be financed either by MFIs or by other finance mechanisms in
the chain. Hence, microfinance and value chain finance are partly overlapping, partly
complementary.

The observation that value chains for specific products and specific areas, have greatly
varying degrees of maturity, is a reflection of the fact that value chains are constantly
developing. Each of them is involved in a dynamic process, with the aim of moving forward
in terms of competitiveness and value added. This process of moving from one stage of
maturity to the next can be described as graduation.

As the value chain graduates, so do the finance needs and finance modalities. And therefore,
the instruments and finance modalities have to be sufficiently flexible to grow with the chain.
Microfinance can be appropriate, but with the growth of the chain it may at a certain point
reach its limits. This is why alliances with formal financial institutions are important, a
process that has also been described as building inclusive financial sectors. The role of the
donor changes as the chain develops and matures.

Graduation in the value chain is related to the development of a degree of chain governance,
the forging of vertical links (producers - market), the creation of strong producer groups
(horizontal linkages), the generation of a minimum of chain ‘intelligence’ (data for decision
making), and a chain management function and related control (risk mitigation mechanisms).

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In each of these processes, a donor can play a constructive role, as it deals with ‘building
capacity’ of actors and structures. These are ‘investments’ in the chain with a potential high
‘return’ in terms of development, because once kick-started, value chain programs have a
potential to become growth machines with sustained benefits for producers at the bottom of
the pyramid.

Apart from loans from others in the marketing system, sources of working capital are own
funds, friends and family and local moneylenders. Banks rarely offer a satisfactory alternative
to these sources, even if interest rates are less than those of moneylenders. Working capital
needs are often unpredictable and loans are often required immediately. In most of the case
study countries banks do not presently appear organized to provide such a rapid service.

Trade Finance

Various instruments for trade financing are being employed. Trade loans are required to pay
farmers upon delivery of their produce, or more generally to finance the time that lapses
between production or processing and payment by the consumer in the end market. Trade
credit exists when one firm provides goods or services to a customer with an agreement to bill
them later, or receive a shipment or service from a supplier under an agreement to pay them
later. In order to provide trade credit to their suppliers, chain actors may require trade loans
from financial institutions (usually commercial banks). The bulk of global trade in agricultural
commodities (like palm oil, soya bean, coffee etc.) is financed by sophisticated commercial
financial services. However, especially at the bottom of the pyramid, and certainly when it
involves small farmers, banks have no appetite to lend. Both transaction costs and risks are
considered too high. This is a niche where donors can play a role, through programs that
reduce the transaction costs for banks, mitigate the finance risks and demonstrate the
feasibility of the finance process.

Working capital is the operating liquidity available to a business. It is calculated as current

assets minus current liabilities. If current assets are less than current liabilities, an entity has a
working capital deficiency, also called a working capital deficit. Working capital deficits can

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best be financed with an overdraft facility at the bank, as this allows credit to be adjusted on a
daily basis to the cash flow in the business. However, this will usually require hard collateral,
and thus is rarely accessible to SMEs. Working capital is also financed with other forms of
debt funding or with equity. Donors sometimes provide seed capital, for instance to producer
cooperatives, to meet (part of) their working capital requirements.

Warehouse inventory finance: the use of a warehouse by for example, a producer cooperative
can facilitate collateral management by a financial service provider in the supply chain.
Warehouse Receipts are documents issued by warehouse operators as evidence that specified
commodities, of stated quantity and quality, have been deposited at particular locations by
named depositors. They can be used as credit enhancement instruments in order to structure
finance around the chain which traditional trade finance structures do not allow (alternative
collateral).

Collateral management is an essential component of effective credit risk management. It

enables the lenders to set up operational risk parameters while lending and also to control and
monitor them. Structured finance transfers the risks from parties less able to bear them to
those more equipped to bear them. It diversifies the risks among actors and converts wealth to
capital. Structured commodity finance facilitators include warehousing infrastructure,
logistics management, quality assessment, insurance, and exit options.

Financial instrument

Types of Debt finance:

 Trade loan

 Overdraft / Working capital finance

 Factoring

 Investment loan

 Guarantee mechanisms

 Warehouse receipts – inventory credit

 Contract farming

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  Leasing (micro-leasing, equipment leasing)

 Savings

 Equity

 Financial sector product innovation

Purposes of finance:

 To enable cash payment to suppliers

 To bridge the period between supply and payment by the client

 Purchase of fixed assets

 Reduce risks of FSPs

 To collateralize the credit provided to suppliers

 To reduce the risk of non-payment

 To facilitate asset financing without collateral

 Fiscal advantages

 To stimulate the ability of self financing or to facilitate access to credit

 To improve leverage for debt financing

 To invest in promising ventures with high returns (i.e. capital gain, social return).

 How to facilitate innovative approaches for value chain finance?

Contract farming usually involves a large agribusiness firm forming alliances with groups of
smallholders and, through written or verbal contracts, provides farm inputs such as credit and
extension in return for guaranteed delivery of produce of specified quality, often at a pre-
determined price. This is a form of backwards integration. Such contracting arrangements
may also involve horizontal integration where firms not only provide direct inputs into farm-
level decision making but also encourage integration of various activities across a population
of smallholders through farm groups. These groups may coordinate planting and harvesting in
addition to facilitating or managing storage and transport arrangements. The credit provided
for farm inputs by the agribusiness is ‘embedded’ in the contract. To the extent that the

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agribusiness is refinancing this credit portfolio with commercial credit, it serves as a retailer
of external financial services to the value chain.

The main indicator of the maturity of the chain is the degree of financial self-sufficiency, i.e.
the growth towards full commercial sustainability of all chain actors, including financial
services. A ‘mature’ value chain finance system requires all these aspects to be developed.

Value Chain Microfinance

Value chain microfinance is in fact the application of value chain approach in microfinance
sector to provide microfinance services, such as micro-credit, micro-savings, micro-insurance,
services of money transfer, or microfinance plus (non-financial products/services which
include technical assistance, training, exchange activities, etc.) to different stakeholders
within a particular value chain, for example rice value chain, horticultural value chain, litchi
value chain, catfish value chain, poultry value chain, pig value chain, and so on so forth.

The financial flow into a value chain can come from both internal and external sources. In
case of internal value chain finance, it refers to the vertical flow from a stakeholder of the
value chain to others in the same chain. In other words, it is the interlinked credit arrangement
among value chain actors, or buying and selling on credit. This kind of financing is good in
the sense that it reduces transaction cost since it is embedded in economic transaction among
value chain stakeholders. In case of external value chain finance, it means that the financial
actors provide financial services to stakeholders in the chain, based on their demand, for the
purpose of running their production and business.

In fact, the value chain finance not only provides financial products and services, but also
non-financial ones to value chain actors. Accordingly, both financial and non-financial
services at micro-level can be provided through vertical linkage among actors of a particular
value chain, or by external microfinance actors in the ultimate value chain. The external
microfinance actors can play the role as brokers between strong and weak actors of the chain.
Very frequently, the value chain stakeholders can access to both internal and external
financial source of the chain. Take a nursery of chicken value chain as an example; he can
normally sell chicks to broilers on credit. Or the broilers can be provided with small credit by
banks or microfinance institutions. Another illustration is that the producer can buy industrial

77 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

feed on credit at the agencies of animal feed manufacture. The same thing can happen for
chicken collectors, slaughterhouses, processing companies, supermarkets or retailers at
traditional markets.

In the development world, value chain microfinance usually focus on such stakeholders of the
value chain as small scale enterprises, micro-entrepreneurs, small holders with the aim of
helping them to join in the chain and integrate economically, improve their competitiveness,
productivity and efficiency to be able to access to new market, ensure sustainable livelihood,
and finally increase their living condition. In addition, the small-scale stakeholders are more
independent, have their own voice in the chain and the market and become important and
indispensable links of the chain. The reason is that these people, especially the poor, are
always economically vulnerable within the chain and the market. They are dominated and
managed by bigger ones. For example, the collectors and traders may force broilers and layer
households to sell their chicken and eggs at cheap price. If these producers do not sell their
products to these collectors/traders, they don’t know where and how to sell, except their local
market, which is usually less demanded and at cheap price as well, especially when their
products are not so differentiated in the market. Another illustration is the small scale
slaughterhouses, it is very costly for them to get their products quarantined and certified as
food safety before distributing to the market. While all the work are done manually, the
infrastructure is so simple, the slaughtering technique is so weak…, it is very difficult for
them to convince local authority to certify their products that meets the veterinary and
hygienic standards. Therefore, their products must be sold either illegally, or at higher price in
the market because of corruption for certification.

What is more, providing microfinance services through microfinance can be considered as a

powerful strategy for mitigating rural finance constraints. For example it defines business as
integrated units rather than one single activity of an individual borrower recognizing
interactions of small scale producers and rural small and medium enterprises with each other
and with larger domestic or foreign firms. Another advantage is that it is a demand-driven
approach, reacts to market forces by responding the specific needs for financial products at
any point in the chain.

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To sum up, the application of value chain into microfinance is quite relevant. Firstly because
it starts with what is already happening in the field-the actors, relationships, rules of play,
range of services (including embedded financial services), and bottlenecks to growth. This
increases the likelihood that interventions and innovations will help to close the insufficiency
and inefficiency gaps of rural finance, by recognizing and incorporating market realities rather
than distorting them.

Secondly, it encourages regarding expanded financial services not as ends in themselves, but
as inputs for increasing the competitiveness and earnings of particular value chains-specialty
coffee, grains, horticulture, for example-and particular actors within them.

4.4.3. Value Chain Information Management

To manage the flow of goods and services in a value chain, there has to be an effective
management of information exchange between all members, including managing feedback
from customers and/or end consumers. Open communication and information sharing are
essential to a successful and market-responsive value chain. The development of market
intelligence capacity and market information systems in most value chain supported
programme is in response to this need. Key to the success in most value chains has been
communication and information sharing between chain partners.

Hereby a case of information management: the UK supermarket retailer J. Sainsbury began

forming close value chain relationships with key suppliers of fresh produce, including beef,
veal, lamb, pork, potatoes, onions, and fresh fruit. The company took a proactive role in
linking primary food producers with processors and manufacturers. The rationale behind the
establishment of these relationships was to “implement processes which facilitate true
working together to achieve ultimate consumer satisfaction, maximize business efficiency for
mutual benefit”

The supermarket was the driving force behind the establishment of these value-chain
partnerships, recognizing the opportunity to improve product quality consistency and reduce
food safety risks. To this end, the retailer sought suppliers willing to take a long term view on
successful strategies for continuous growth and development. It was essential that both
suppliers and the retailer openly discussed their respective objectives and were willing to

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share information on product and retailing developments. “The partnerships provided a forum
for all those involved in production, distribution and sales to meet, exchange information and
plan mutually agreeable targets and programs over a longer period than had been the case
previously”

Key organizational points for the partnerships involving apples and pears, for example,
included: • farmer members were provided with the specifications for the selection of
produce;

• Fruit was produced according to HACCP-based “good practices”;

• Information exchange and liaison ensured that all parties remained at the forefront of
technical knowledge with respect to product development and food safety; and

• Routine meetings were held among Sainsbury’s buyers and technologists, marketing
coordinators for the producers and the producers themselves to discuss future objectives and
programming.

However, contracts are just written statement, and even when drawn by lawyers they are still
subject to abuse. There is often the issue of side selling in contract farming arising out of the
need by the smallholder farmer to respond to better prices or even better payment
arrangements instead of sticking to the partners in the chain.

The point is what is important is that critical success factors for a value chain should be drawn
up and discussed with all members of the chain. What should then be evaluated is the extent
to which each member is contributing to the attainment of those success factors. Self-
assessment of each member should be made possible.

Open communication and information sharing is critical so that value chain partners are
receiving continuous feedback from one another and potential problems are identified and
dealt with at an early stage. Communication:

 What to communicate? , How often to communicate? , Who to communicate with?

 How to communicate? Be pro-active, not reactive

A matter of hours or days?

• On time deliveries more and more important à continuous data-exchange

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 • Efficient Customer Response (ECR) à moving the Customer Order Decoupling Point

Topic five;-Value Chain Approaches

Pre-test

 Which value chain development approaches do you know?

 If any which approach do you have practical experience with?

Value chain refers to all the activities and services that bring a product (or a service) from
conception to end use in a particular industry—from input supply to production, processing,
wholesale and finally, retail. It is so called because value is being added to the product or
service at each step. Taking a “value chain approach” to economic development means
addressing the major constraints and opportunities faced by businesses at multiple levels of
the value chain.

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Value chain analysis uses this framework to examine the structure and the dynamics of the
value chain. The structure of the value chain influences the dynamics of firm behaviour and
these dynamics influence how well the value chain performs in terms of critical outcome:
value chain competitiveness indictors –cost, time and value added.

Value chain approaches have been used by development practitioners and researchers alike to
capture the interactions of increasingly dynamic (and complex) markets and to examine the
inter-relationships between diverse actors involved in all stages of the marketing channel.
Such approaches may alert us to inequities in power relationships based on the governance of
the supply chain and highlights potential points of entry (and exclusion) for smallholders.
Moreover, by going beyond firm- or activity-specific analysis, value chain analysis allows for
an assessment of the linkages between and amongst productive activities. The value chain
approach thus provides a framework to analyze the nature and determinants of
competitiveness in value chains in which small farmers can participate. It also provides the
basic understanding needed for designing and implementing appropriate development
programs and policies to support their market participation. Indeed, many development
interventions now utilize the value chain approach as an important entry point for engaging
small farmers, individually or collectively, in high value export markets (GTZ, 2007).

Value chain approach is used to understand trends in global and national markets and
conditions under which micro and small enterprises (MSEs) can contribute to and benefit
from the increased competitiveness that globalization brings. The value chain approach can be
applied to sector, subsector, product or products. The value chain approach has objectives.
The specific objectives include:

- Improve the growth potential of VCs with large numbers of small firms

- Enhance small firm contributions to VC growth

- Ensure small firms benefits

In this regard, the value chain approach involves the following functions to achieve these
objectives

- Links theoretical understanding of how economies work with practical approaches

to making them work better

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 - Informs donor-funded economic growth activities and private sector investment

- Allows stakeholders to drive the process

Illustrative uses of the Value Chain approach in different areas are given below.

 Economic growth—through the mobilization of industry participants, the value chain

approach can be used to increase the competitiveness of industries and the
sustainability of donor interventions in support of economic growth.

 Financial services—value chain analysis can identify mechanisms for financial service
delivery embedded in market transactions and assist lending institutions with
expanding their definition of creditworthiness.

 Natural resources management—the value chain approach can be used to strengthen

the competitiveness of natural resource-based industries and to develop
competitiveness strategies that are beneficial both to the environment and to local
business development.

 Health—value chain tools can be used to mobilize industry participants to identify and
address health-related constraints to competitiveness and can be used to increase the
effectiveness of service delivery in the health industry itself.

 Conflict mitigation and management—value chain analysis can prioritize industry

constraints and opportunities in post-conflict situations and value chain tools can bring
together diverse, even antagonistic, stakeholders to work towards a common economic
vision.

In this aspect four different approaches to value chain, some of these are based on experiences
in Ethiopia, are given in the following paragraphs.

5.1. The Netherlands Development organization (SNV’s) Approach

The Netherlands Development Organization (SNV) is a non-governmental organization

(NGO) operating through funding mainly from the Netherlands Government. The SNV
Business Organisations and their Access to Markets (BOAM) programme, financed by the
Embassy of the Kingdom of the Netherlands and the Irish Embassy, supports the delivery of
vital businesses and organisational development services in Ethiopia along the whole of the

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following selected agricultural value chains: oil seeds and edible oils, milk and dairy products,
honey and beeswax, pineapple, apple and mango.

SNV’s BOAM programme considers that enhancing the participation of small farmers in
local, national and global value chains is a good strategy to increase production, income and
employment opportunities for these small farmers. It follows a demand driven value chain
development approach which is characterized by the combination of strengthening whole
sectors as well as supporting individual businesses as traders/exporters, processors and farmer
organizations and their business to business value chain relationships. Sector development
provides new opportunities to the actors in the sector; business-to-business development
assures that the opportunities are turned into concrete results. These results are related to the
increased number of business to business value chains, increased volumes, value added, faire
distribution of margins, higher efficiency and overall competitiveness of individual businesses
and the value chain(s). SNV and other service providers are providing services, which will be
increasingly market based and with increased volumes to match the up-scaling requirements
of the value chains. To achieve a sustainable up-scaling of the approach to new sectors and
value chain(s), SNV works on knowledge development and increased service provider
capacity building.

Key interventions areas for this demand driven value chain approach are identified as: sector
development; business development; knowledge development and learning; and Service
capacity development (see Figure ). Letters in figure from bottom-up represent chain
actors/functions:

I= input

F= Farmer Producer

C= Coops

P= processor/exporter

R= Retailer

C= Consumer Market

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Figure 10: SNV’s Value chain development approach

Source:

Now let us consider what SNV is doing in each intervention area in order to develop and
enhance demand driven value chain.

Sector development

Sector development is seen as providing opportunities for business development to turn these
opportunities into concrete results. A critical number of value chain actors and other
stakeholders are instrumental to steer the sector development. In particular prominent private
sector actors in trade and processing are important to make use of business opportunities.
Furthermore these private sector actors can develop good relationships with the public sector
and stimulate the interest of the public sector. Other relationships between direct value chain
actors, between actors and private and public service providers provide a multitude of
potential win-win relationships.

Associations and stakeholder events are important in defining critical and implementable
sector development interventions. The enabling environment can be supportive with, for

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example favourable policies, intelligence, control and standardization, accreditation and
sector or value chain promotion, providing the necessary incentives for decreased transaction
costs. This will then result in increased efficiency and improved sector competitiveness.
However, small informal “spot” market transactions and monopolistic market arrangements
are dominant, creating limited opportunities for business development. This requires
financing critical sector projects as public good or as temporary interventions in particular in
the embryonic stages of value chain development.

To support sector or institutional development SNV provides the following products as

services:

(1) Multi Stakeholder Platforms (MSP) - Promoting efficient and equitable linkages for the
economically active poor along the value chain. Promote strategic partnerships with key
stakeholders using the Public Private Partnership (PPP) model. Promote “meaningful
dialogue” focusing on impacts and economic performances, strategic planning, cooperative
implementation or action, collective monitoring and mutual learning;

(2) Sector Association Strengthening (SAS) - Developing the capacities of associations so that
they are able to provide services to members in a sustainable way and are recognized
representatives by other stakeholders;

(3) Market Intelligence (MI) - Promoting access “to both” supply and market information in
an interactive manner along the segments of the value chain capturing market signals (trends,
requirements, standards, new technologies and new products) and fostering pro active
reactions about VC “resilience”;

(4) Effective Public Policy Management (EPPM) - Facilitating processes of design,

implementation, and evaluation of public policies under an analytical framework for
effectiveness and inclusion.

(5) Value Chain Financing (VCF) - Facilitate sustainable business linkages between service
providers and their clients along the segments of the value chain. Advocate for strategic and
digressive “grants”, “subsidies”, and “debt” and “equity” instruments to kick off and spur the
growth of value chain actors.

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(6) Appropriate Technology Promotion (ATP) – Disseminating and propagating locally
developed and successfully tested appropriate technology innovations.

Business development

Business development is seen as turning the opportunities created by sector development into
concrete results. These results are related to the increased number of business to business
value chains, increased volumes, value added, equitability of margins, efficiency and overall
competitiveness of individual businesses and the value chain(s). The B2B chains are
competing. Depending on the business model of the lead firm / entrepreneur there is a
difference how the sector opportunities are translated into a chain strategy and chain partner
development.

Important are here the linking of businesses to new or existing markets in, for example new
processors to farmer organizations, new products for existing markets or new retail or export
markets. Different arrangements can be used like the usage of a joint venture, setting up trade
relations, development of a linkage (e.g. with processing company). In many value chains
there is a change from a transaction based relation towards a contract based relation. Part of
the formal or informal contracting is often all kinds of embedded services provided by private
service providers or own staff. So besides price per volume and differentiated qualities,
arrangements are made about logistical, technical and financial service provision, quality
control and measurement, market information and even organizational services. These
services can include the services provided by the public sector and other development
facilitators. New type of products and qualities means often-different input material, of which
the commercial availability is very important to keep up with the demand. Innovative business
strategies and arrangements are needed for matching the demand and supply of inputs. These
strategies and arrangements contain substantial risks for the individual business or the
business-to-business value chain relationship, which justifies testing in the form of subsidized
pilots.

Value chain development means that farmer (organizational) development is coordinated by

the downstream private sector in the business-to-business value chain. Thus, farmer
organizations are receiving technical, financial and organizational services however the actual
delivery is often the mandate of the public sector and other development organizations. From

87 | VALUE CHAIN ANALYSIS AND DEVELOPMENT

the perspective of the value chain(s) increased market and business orientation is however
required as part of the services delivered to farmer organizations.

Access to capital for input suppliers, processors, traders and farmer organizations to finance
investments is important to make sure that tested business to business pilot innovations are
being copied or up-scaled by other value chain actors. Information on sector development,
key figures, risk profile etc. is therefore needed to give interested outsiders the right
information to make an investment decision.

To support business development SNV provides the following products as services:

(1) Producer Group Strengthening (PGS) - Facilitating the growth and graduation of informal
businesses, producers and natural resource users, to the formal sector. Strengthening
legitimacy, credibility and viability of the different forms of the economic group is required.

(2) Business-to-business support (B2B) – Facilitate the development of business relationships

and arrangements between downstream traders, processors and farmer organizations on one
side and small farmers and their organizations on the other side, to guarantee that a reliable
supply and market outlet is assured.

(3) Private Sector actor Strengthening (PSS) - Develop the capacities of private sector actors
like processors and traders so that they are able to improve business operations in terms of
market response, business partnerships and the accessibility to financial and other market
services.

(4) Value Chain Financing (VCF) - Facilitate sustainable business linkages between service
providers and their clients along the segments of the value chain. Advocate for strategic and
digressive “grants”, “subsidies”, “debt” and “equity” instruments to kick off and spur the
growth of value chain actors.

Knowledge development and learning

To achieve a sustainable up-scaling of the approach to new sectors and value chain(s),
knowledge development and learning is critical. Knowledge areas related to constraints from
embryonic to maturity stages of value chain development are however important. Learning in
the form of testing innovative business to business value chain pilots, exchanging sector

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development experiences and overall program level documentation will have to assure that
critical knowledge is generated.

Replication takes place in the form of up-scaling business to business value chains within a
specific sector, up-scaling sector development to other sectors and up-scaling the overall
value chain approach in new programs.

Business development service provider development

A strong service sector is critical to address the increasing demand for services in the up-
scaling of business to business value chains. It is expected that these services will have to
become increasingly market based, since customer confidence will improve with the
increasing volumes and use of the services in the up-scaling of the business to business value
chains. Therefore service providers are promoted in providing services from the start of any
value chain support intervention and are integrated in business to business value chain pilots.
On top of this specific capacity development programs are developed as the young
professional program and competency pool to assure a substantial increase of the supply of
quality services.

To achieve a sustainable up-scaling of the value chain approach to new sectors and value
chain(s), these service providers will increasingly take over SNV services or products. To
support service capacity development SNV provides the following services:

(1) Service Providers Strengthening (SPS) - Developing the capacities of services providers
so that they are able to capacitate both economic chain actors as well as non-economic actors.

(2) Local Capacity Development Facility (LCDF) - increase the access to funds for local
capacity development in a way that empowers local actors and allows them to acquire tailor-
made services, geared towards their needs.

For practical example of SNV’s value chain development approach, please read its
intervention program in honey and beeswax value chain development (SNV report .... 2011).
In short, SNV, in collaboration with the Honey Exporters Organisation (EHBPEA), organised
national honey promotion events, connecting the Ethiopian Honey Sector with partners
worldwide. This resulted in new business relationships, among others for the export of honey
to the EU. In order to concretize these opportunities, Ethiopia was listed for EU accreditation

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for the imports of honey from Ethiopia. Four honey processors are now operating, or are in
the process of opening, company apiaries in the production areas. BOAM facilitates the
training of rural producers who are now entering into out-grower agreements to supply honey
according to market requirements.

5.2. German Technical Cooperation (GTZ’s) Approach

German Technical Cooperation (GTZ) is also a non-governmental organization engaged in

rural development activities through funding mainly from German government.

Following the definition by Kaplinski and Morris (2003) that ‘value chain describes the full
range of activities which are required to bring a product or service from conception, through
the different phases of production (involving a combination of physical transformation and
the input of various producer services), delivery to final consumers and final disposal after
use’, GTZ promoted value chain of honey in Nepal focusing on two areas: 1) market
orientation meaning the greater volume sold and/or better end price gained, 2) income
distribution- the poor benefit at least equally or above average from the income generated
(poor get their “share of the cake”). GTZ interventions are targeted to strengthening the
relationship between actors at different level of value chain (production, processing, trading).

GTZ used the following value chain integration map to explain its experience in value chain
development in SiriLanka.

Figure 11: GTZ Value chain integration

The following table shows key intervention areas of GTZ in value chains of two commodities
(spices and rubber products).

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Table 3: GTZ Value Chain Analysis result matrix

Key
Value Result
intervention Rationale Status
chain level
area

Acute shortage of
Preparation/feasibility on
Critical skills Cinnamon peelers and Outpu
establishing a Cinnamon
upgrading difficulty in harvesting t
processing training academy
twice a year

Standards, Good Agricultural and

Poor quality produce &
certification Manufacturing practices Outpu
non-compliance with
& quality manuals: Cinnamon and t
HACCP
Spice improvement Pepper

Organizationa Establishment of Pepper Outpu

Un-organized workers
l development Circles in the Central Region t

Facilitation of Contacts
Linkage between the Spice Use of
Marketing difficulty
development council/Auction and Pepper output
circles in the Central Region

First series of technical

Rubber training workshops (e.g.
Critical skills Poor technical know- Outpu
Product compounding) were
upgrading how in manufacturing t
s conducted & 2nd series
planned

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 Inconsistent raw
Facilitation of establishment
Organizationa material supply& lack Use of
of a Peoples Company for
l development of sub-contracting output
bulk purchasing & marketing
opportunities

As

shows GTZ has intervened to upgrade critical skills, in the process of standardization,
certification and quality improvement, and in organizational and linkage development. This is
an important gap filling intervention for a country with low level of technical know-how,
when there is poor quality of produce and non-compliance to certain (HACCP) standards, and
when there are un-organized growers with market difficulty.

Generally, GTZ’s approach in value chain promotion in Nepal considered the following steps:
Selection of subsectors, Mapping and analysis of value chains, Development of intervention
strategies, Interventions and implementation of activities, and Monitoring and evaluation.1

1
For the details of each step, please read GTZ experience report by Surendra Raj Joshi (2008), on Honey in
Nepal: Approaches, Strategy and Intervention for Subsector Promotion.

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Figure 12: Value Links - GTZ‘s Value Chain Approach

Source: Christian Henpecks (2009).

5.3. NIMPF approach to value chain

NIMPF approach follows 11 steps in four phases for value chain development (see ).

Figure 2: Phases of NIMPF approach to value chain

As we can see from , the first step at the diagnosis phase is to decide on the scope of the value
chain, in terms of what level to consider (sector or business to business), what objectives
(transitional or innovation objectives) and which linkages to consider, etc. Then, as a second
step, we carry out stakeholder analysis to identify key actors, their roles, driving forces,
internal and external relations, visions, values, power relations, dependencies, and effect or
role in the project. The third step is to undertake network analysis and identify possible
relationships such as dynamics in the network, transactions, transformations, value flow or
added value, transactions and coordination costs, risks and incentives. The fourth step in this
phase is very important step as it helps us to identify and prioritize bottlenecks and
opportunities in the value chain. We can use a multilevel SWOT analysis; identify incentive
structures, assess infrastructure, socio-cultural, natural, economic and political conditions.
These processes will lead us to the second phase.

The second phase is known as device change phase. In this phase there are three steps. The
first is to invent improvement possibilities which to be followed by valuing and effecting
analysis of each improvement activity. In this step we can also identify decoupling points (the

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points where we can make changes for improvement). In this phase, the last step is to develop
different scenarios from which we select to implement.

The third phase is to carry through change which involves steps of trying out as a first step
and thereby entering into full implementation. The third step in this phase is consolidation.
Phase four is all about evaluation (process and results evaluation). In most conventional
project evaluations, the focus is on the results/outputs. The value chain approach gives
emphasis to the process (who, how, etc.) equal to that of results.

5.4. The ICEBERG approach to value chain

The Iceberg approach is similar to the NIMPF approach that we discussed above. However,
the Iceberg principle is a model considering not only the visible, subject-logic level, but also
the invisible emotional level. According to the iceberg principle, the subject-logic level
(strategy, structures, processes and functions) amounts to 10% of the overall human capacity,
and the cultural level (relationship processes, social skills, attitude and motivation) to 90%.
This principle is valid for corporate entities too. The following figure implies that each phase
is dependent on the process and prior results from previous phases. For example, inventing
improvements in the second phase is nearly impossible or would be misleading without a
carefull identification of stakeholders, their roles and networks as well as carefull analysis of
bottlenecks and opportunities in the first phase.

Figure 13: The Iceberg approach to value chain

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From the four approaches that we have seen above, we can identify four key dimensions of a
value chain:

 It is consumer and demand driven

 It is based on collaboration
between links;

 All partners add vale and share

value; and

 It is a complex network of actors.

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Summary

We have considered four approaches, namely SNV, GTZ, NIMPF and Iceberg approaches to
value chains. There are differences and similarities between the approaches. The SNV
approach focused on sector, B2B development through facilitating knowledge development
and learning and building capacity of service providers. Similarly, GTZ focused on
facilitating critical skill development, organizational development, and upgrading of
knowledge. NIMPF and Iceberg models have similarities in focusing on stakeholder and
network analysis, analysis of bottlenecks and opportunities, identifying improvement
possibilities, implementing and finally evaluating both results and the process. All focused
on filling the gap in knowledge and skills, financial resources and linking producers with
consumers in a way there is a value added in each stage of the value chain.

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