Value Chain Analysis and

Development (ABVM 232)

BY
Bi z uayehu A. (M.Sc.)

Ta rget gro u p s: ABVM 2nd year s t udents

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 WELLCOME TO:
VALUE CHAIN ANALYSIS AND DEVELOPMENT
(ABVM 232)
5 ECTS

May, 2023/2015
Chapter One: The Value Chain Approach:
Concepts, Importance, and Principles

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Value Chain Aproach:Concepts, Importance and Principles

1. What do you understand by the term

value chain? Define your own words
2. Why Value chain approach is
important?
3. How value chain differ from supply
chain?

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 Are markets producer or customer driven?

Relate your answer to the above diagram and focus it on

agricultural produce

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 1.1. Basic Concepts ofValue chain
⚫ What is value? defined as:
⚫ Afair return or equivalent in goods, services, or money for something exchanged.
⚫ The monetary worth of something: market price.
⚫ Relative worth, utility, or importance.
⚫ Anumerical quantity that is assigned or is determined by calculation or
measurement.
⚫ Value is what makes something desirable!
MeasuringValue
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 i s the basis.
⚫ In other words consumers are the basis to determine value. 6
⚫ The term value Chain‘ was used by Michael Porter in his
book "Competitive Advantage: Creating and Sustaining
superior Performance" (1985).
⚫ 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, retail and finally , consumption.
⚫ It is so called because value is being added to the product
or service at each step.
⚫ A value chain is a connected string of companies, groups
and other players working together to satisfy market
demands for a particular product or group of products.

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⚫ A value chain links the steps a product takes from the farmer to

the consumer.

⚫ It includes research and development, input suppliers and finance.

⚫ The farmer combines these resources with land, labor and capital to

produce commodities.

⚫ Avalue 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.

⚫ A value chain encompasses the flow of products, knowledge and

information, finance, payments, and the social capital needed to

organize producers and communities.
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⚫ A value chain is a set of linked activities that work to
add value to a product;
⚫It consists of actors and actions that improve a product
while linking commodity producers to processors and
markets.
⚫ Value chains work best when their actors cooperate to
produce higher-quality products and generate more
income for all participants along the chain.
⚫ Value chains differ from supply chains, which refer to
logistics: the transport, storage and procedural steps for
getting a product from its production site to the
consumer.

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 Value chain vs Supply Chain
A supply chain is a set of linkages between actors where there are no binding
or sought-after formal or informal relationships, except when the goods,
services and financial agreements are actually transacted.
A value chain is a specific type of supply chain – one where the actors
actively seek to support each other so they can increase their efficiency and
competitiveness.
They invest time, effort and money, and build relationships with other
actors to reach a common goal of satisfying consumer needs – so they can
increase their profits.

If a chain is a value chain:

There are certain chain relations
There is a coordination of the chain
There is a (fair) addition of value
 “Each of the actors in the chain is prepared to invest in the chain, and to support the
other actors, to make sure that it functions smoothly”.
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⚫ 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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 An agricultural value chain might include:

⚫ Development and dissemination of plant and animal genetic

material,

⚫ Input supply, farmer organization, farm production, post-harvest

handling, processing,

⚫ Provision of technologies of production and handling, grading

criteria and facilities, cooling and packing technologies,

⚫ Post-harvest local processing, industrial processing, storage,

transport, finance, and feedback from markets.

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 The Value Chain Approach
⚫ A value chain approach in agricultural development helps to

identify weak points in the chain and actions to add more value.

⚫ The Value Chain Approach is a means for examining the

development of competitive advantage which is achieved when
an organization links its activities in its value chain more cheaply
or more expertly than its competitors.

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 Underlying Assumptions of Value Chain Approach
 There are a number of basic assumptions underpinning the VC Approach.
These include:
 The expected role of agriculture in the socio-economic development of the
country is clearly stated .
 Understanding of the gap between agricultural potential and actual
performance.
 An assessment of SWOT analysis in the agricultural sector.
 Clear identification of the various value chains and market opportunities
 All chain actors and facilitators understand and assume their roles with
dedication and purpose.
 Certain actors or change agents are willing and able to motivate others to follow.
 Operators/actors act in their individual and collective interest and assume
responsibility from the start.
 All actors benefit from upgrading.
 Both positive and negative experiences are taken as basis for progress.
 Timely availability of critical information.

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 Importance of Value Chain Approach
The importance of the Value Chain Approach lies in seeing
agriculture as a comprehensive system of agro-based business
activities comprising input provision, primary production,
processing, marketing/trade and consumption.

 In this approach, market and consumer demands determine the

nature, conduct and performance of modern agri-business at any
point of the value chain.

The Value Chain Approach therefore aims at making agricultural

production and marketing more efficient by increasing value
addition as well as improve incomes for all operators along the
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agricultural production system.
 Importance cont….
 The importance of the value chain to the various actors are:
 Enables the Producer to do the following:
 Bring about product differentiation
 Retain his/her customers
 Improve the quality of his/her produce
 Increase quantity of his/her produce
 Produce at minimum cost
 Stay competitive in the market
 Increase his/her income
 Remain sustainable (employed)
 Develop customer and consumer confidence
 Ability to project market supply

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 Importance cont…
 Enables the Processor to ensure the following:
 Reliable supply of raw materials
 Quality supply of raw materials.
 Optimum supply of raw materials (Just-In-Time)
 Production of finished products
 Reduced cost of raw materials
 Reliable employment opportunities
 Reliable supply of finished goods

 Enables the Consumer to enjoy the following:

 Quality products assured
 All year availability of products
 Quality products at reasonable prices
 Wider range of goods to choose from
 Healthier life 17
 The Principles of the Value Chain Approach in Agriculture
⚫ The basic principles underlying the Value Chain Approach
in agriculture are that agricultural markets and consumers
demands determine the nature, structure and conduct of
modern agri- businesses.
⚫ The principles mentioned earlier are listed below:
 The breakdown of the course of production (input supply to
consumption) into chain links;
 Chain links are activities;
 Value is added to each activity;
 Overall output will be with improved quality, improved
quantities and reduced cost; and
 Be able to stay in the competitive world.

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 Characteristics o f Value Chain Approach
⚫ A value chain is characterized by:
 Production line consists of series of chains
 Each chain consists of activities
 Value added to an activity affects all other activities (links)
 Works when there is free and timely flow of information among
the operators/actors
 Each of the operators of the activities monitors and evaluates
along the chain
 All the operator/actors benefit when value is added
 A sequence of production processes (also known as linkages)
from the provision of specific inputs for production,
transformation, marketing and to the final consumption.
 The quality of linkages and coordination between producers,
processors, traders and distributors of a particular product
development determine the success of the value chain.
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 Value chain operators understand that they can access markets
if they succeed to supply competitive products in a joint effort.
 Value chain is competitive and its competitiveness depends
on trust, cooperation and communication among actors.
 The performance of every single partner in the chain
determines the strength of the entire value chain.
 The weakest link in the value chain also determines the
competitiveness of the final product.
 Certain actors or change agents are willing and able to
motivate others to follow.
 Operators act in their individual and collective interestand
assume responsibility from the start.
 All actors benefit from upgrading.
 Both positive and negative experiences are taken as a basis for
progress.
 Timely availability of critical information 20
 Feature of an Effective Value Chain
Differentiate products
Continuously innovate (products, technologies, management,
marketing, distribution).
 Create higher value
Use a variety of organizational mechanisms to achieve efficiency.
Form alliances and achieve coordination
Go beyond spot market transactions and include contracts,
vertical integration, networks, supply chains.
Introduce practices to meet environmental and social
responsibility concerns.

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 Dimensions of Value Chain
⚫ The value chain concept has several dimensions.

⚫ The first is its flow, also called its input-output structure.

 In this sense, a chain is a set of products and services linked

together in a sequence of value-adding economic activities.

 A value chain has another, less visible structure.

 This is made up of the flow of knowledge and expertise

necessary for the physical input-output structure to

function.

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 Dimensions Cont ...
⚫ The second dimension of a value chain has to do with
its geographic spread.
⚫ Some chains are truly global, with activities taking place in
many countries on different continents.
⚫ The third dimension of the value chain is the control that
different actors can exert over the activities making up the
chain.
⚫ The actors in a chain directly control their own activities and
are directly or indirectly controlled by other actors.
⚫ The pattern of direct and indirect control in a value chain is
called its governance.

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 Traditional Marketing Systems Versus Value Chain
Marketing System
1.Traditional Marketing Systems
 Farmers produce commodities that are "pushed“ into the market place.
 Farmers are generally isolated from a majority of end-consumer.
 The primary exception is where local farmers sell produce in local
markets and where there is a direct link from farmer to consumer.
 Have little control over input costs or process received for their goods.
 Mostly farmers/producers tend to receive minimal profit.
 Research and Development is focused on production and on reducing
costs of production, and may not take account of other steps, links,
or dependencies in the chain (e.g. environmental or social costs).

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 2. Value Chain Marketing Systems
⚫ Farmers are linked to the needs of consumers,

⚫ Farmers are working closely with suppliers and processors to

produce the specific goods required by consumers.

⚫ Consumers are linked to the needs of farmers.

⚫ The farmer's market power and profitability can be enhanced.

⚫ The system is market ―Pull. This is based on integrated

transactions and information.

⚫ Consumers purchase products that are produced according to

their preferences.
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 Value Chain Marketing Systems Cont…
⚫ The farmer becomes the core link in producing the products that

the consumers desire.

⚫ Research and development, whilst including techniques targeted

at increased production,
⚫ Attempts take account of all of the links, and dependencies in

the value chain, e.g. processing, environmental and social costs

or considerations, as well factors such as health impacts,
education and learning.
⚫ Communication is in both directions.

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 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.

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 Actors…
 Actor is 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.

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 Actors…

 The various actors in the value chain can be grouped

under three levels or stages based on the roles they play.

1. Value chain main actors

2. Value chain supporter

3. Value chain influencer

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1. Value chain Main actor

 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.

 They are known as direct actors.

 Direct actors are those directly involved in productive processes,

postharvest handling, processing and commercialization.

 These actors take direct possession of and are owners of the

product in one or more links in the chain; they therefore run
direct risks.
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 Actors…
 Actors in a value chain may include input suppliers, producers,
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 perform important storage
functions), retailers (who distribute products to consumers), and
processors (firms and individuals involved in the transformation
of a product).

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 Actors…
2. Value chain supporters:
 They are indirect actors who offer operational services and/or
support services to the direct actors at various points in the
chain.
 Indirect actors include suppliers, operational service
providers, support service providers and regulatory bodies
 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.
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 Actors…
 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.

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 Actors…
3. Value chain influencers
 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.
 External influences refer to the fact that value chains do not
exist in a vacuum; rather, they are part of a larger
socioeconomic and institutional system within a country.
 There are therefore numerous external forces (economic,
legal/political, environmental, cultural) which can produce
effects on value chains and are beyond the control of the
direct actors.

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 Example of Banana value chain map in Arba Minch
consuming Rural Urban
Consumers Consumers

80.30 Qt 3140.39 Qt

Livestock and Irrigation Value Chains for Ethiopia small holders (LIVES)
Retailing, sorting,
leveling, selling to Rural/road side
final consumers Urban Retailers

Government (Arba Minch) Cooperative and marketing office

retailers
3489.46 Qt
Wholesaling,

Government (Arba Minch) Agriculture Office

storage, supplying
to retailers Wholesalers

Banana Marketing cooperatives

95.04 Qt
2,804.24 Qt
Collecting, loading 771.72 Qt
and unloading , Traveling traders/middle
transporting to men
wholesalers

Arba Minch University

Buying from member Farmers marketing
farmers, price, quality

Arba Minch Research Center

3,241.92 Qt cooperatives
information
dissemination 887.04 Qt
Producing, (4224 quintal (Qt) supplied for Market)
harvesting,
Smallholder banana Farmers
transport to road
side

Governmnet
Marketing
Supplying inputs
cooperatives
agriculture Farmers
office

Functions Actors Supporters Influencers

Information flow
Source: Author, 2016
Product flow

Money flow
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Chapter Two: Value Chain Analysis

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 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

 Evaluation and recommendations for improvement

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 Cont...

 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.

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 Value chain analysis (VCA)
⚫ VCA is a process where a firm identifies its primary and
support activities that add value to its final product and then
analyze these activities to reduce costs or increase
differentiation.
⚫ VCA 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.
⚫ VCA describes the activities within and around an organization,
and relates 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.

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 Value chain analysis...
⚫ The Value chain analysis is the base for value chain

improvement, development or the set up of complete new

value chains.

⚫ Value chain analysis is a way to visually analyze a company's

business activities to see how the company can create a

competitive advantage for itself.

⚫ Therefore, Value chain analysis helps a company understands

how it adds value to something and subsequently how it can

sell its product or service for more than the cost of adding the
value, thereby generating a profit margin.
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 Value chain analysis...
 Value chain analysis facilitates an 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 about improving access to
markets and ensuring a more efficient product flow while
ensuring that all actors in that chain benefit out of it.
 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
prospect (not least the increase in oil prices) all indicate the
importance of value-chain analysis.

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 Value chain analysis...

 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.

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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.
⚫ 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.
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 …
⚫ 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.
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 2.2. 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.
⚫ Value chain analysis involves breaking a chain into its constituent
parts in order to better understand its structure and functioning.
⚫ Thus, the VCA 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. 45
 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.

 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.
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 Agricultural value chain analysis can be conducted for
the purposes:
⚫ Understand how an agricultural value chain is organized
(structure), operates (conduct) and performs (performance).
⚫ 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
⚫ Conduct policy inventory and analysis

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 2.3. Steps in Value Chain Analysis
⚫ VCA is a useful tool for working out how you can create the

greatest possible value for your customers.

⚫ VCA is a process that requires four interconnected actions:

1. Data collection and research,

2. Value chain mapping,
3. Analysis of opportunities and constraints, and
4. Vetting of findings with stakeholders and recommendations
for future actions.
⚫ These four actions are not necessarily sequential and can be

carried out simultaneously.

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1. The value chain team collects data and information through
secondary and primary sources by way of research and
interviews.
2. Mapping helps to organize the data, and highlights the market
segments, participants/actors, their functions and linkages.
3. 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.
4. The resulting analysis of opportunities and constraints should
be vetted/examined with stakeholders through events such as
workshops, focus groups or ―reporting-out days.
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 The steps in VCA...
Step One: Data Collection
⚫ Good VCA begins with good data collection, from the initial desk
research to the targeted interviews.
⚫ 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.
⚫ 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. 50
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.

Figure 2. A comprehensive value chain map 51

 Cont…
⚫ 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.

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 Porter distinguished two important elements of modern value
chain analysis.
 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:
1. Inbound logistics,
2. Operations,
3. Outbound logistics,
4. Marketing and sales, and
5. Service. 53
 Value chain analysis frame work
 When an organization applies the value chain concept to its
own activities, it is called a value chain analysis.
 The value chain framework is made up of five primary
activities
 Inbound operations the internal handling and management of
resources coming from outside sources -- such as supply chain
sources.
 These outside resources flowing in are called "inputs" and may
include raw materials.
 a long-term relationship with the customers who have
purchased a product or service.
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 Operations: Activities and processes that transform inputs
into "outputs" -- the product or service being sold by the
business that flow out to customers.
 These "outputs" are the core products that can be sold for a
higher price than the cost of materials and production to
create a profit.
 Outbound logistics: The delivery of outputs to customers.
Processes involve systems for storage, collection and
distribution to customers.
 This includes managing a company's internal systems and
external systems from customer organizations.

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 Marketing and sales: Activities such as advertising and
brand-building, which seek to increase visibility, reach a
marketing audience and communicate why a consumer should
purchase a product or service.

 Service: Activities such as customer service and product

support, which reinforce a long-term relationship with the
customers who have purchased a product or service.

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 There are four main areas of support activities:
1. Procurement,
2. Technology development (including R&D),
3. Human resource management, and
4. Infrastructure (systems for planning, finance, quality,
information management etc.).

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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 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.
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 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
2. Business and enabling environment
3. Vertical linkages between firms at different levels of the value
chain
4. Horizontal linkages between firms at the same level of the value
chain
5. Supporting markets
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 Dynamics
 The participants in a value chain create the dynamic elements
through the choices they make in response to the value chain
structure.

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.

4. Power exercised by firms in their relationships with each other60

61
Step Four: Vetting Findings of Chain Analysis through
StakeholderWorkshops
 Value chain analysis helps to develop a private-sector vision to
reflect stakeholders’ interest in improving the efficiency and
competitiveness of the chain.
 The fourth step, vetting findings, 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. 62
 Horizontal and Vertical Linkage in Value Chain
⚫ Linkages are defined as a business relationship between two parties
of the value chain/network.
⚫ Trust is social capital formed between two parties enabling a
more efficient linkage through the reduction of transaction costs.
⚫ Analysis of linkages involves not only identifying which organization
and actors are linked with one another, but also identifying the reasons
for those linkages and whether the linkages are beneficial or not.
⚫ Actors in the value chain link with one another because they obtain
benefit from those linkages.
⚫ An identification of the benefits (or lack of them) goes a long way to
identifying the constraints in increasing linkages and trust amongst
value chain participants.
⚫ Linkages within a value chain are mostly business linkages, and
could be formal but are often informal.
63
⚫ The informal linkage refers to the domain of social capital , in
which trust can play a central role.
⚫ Many studies have shown that in a dynamic traditional
community the degree of social capital in business activitieis high
with numerous linkages based on trust .
⚫ The linkages in value chain can be classified into vertical linkages
and horizontal linkages.
1.The vertical linkages are the relationship between actors along the
chain.
⚫ Examples of interactions of farmers with other actors in the chain
can take diverse forms:
⚫ Sales contract directly with state agro-processing enterprises
⚫ Production contract with foreign companies
⚫ Sale to private merchants by oral engagement
⚫ Sale through service co-operatives
64
⚫ Effective vertical linkages between firms at different levels of the
value chain play a key role in supporting the upgrading capacity
of the chain.
⚫ When vertically linked firms are willing and able to share
information on new products and technologies,then the value chain
as a whole is more competitive because it can adapt more
rapidly to changing market conditions.
⚫ Such win-win interactions between firms benefit the entire value
chain by improving productivity, product quality and reliability
of supply.
⚫ On the other hand, if vertical relationships are characterized by

mistrust, misinformation and opportunistic behavior, the entire

value chain may struggle to remain competitive.

65
 Vertical linkages...
 Effective vertical linkages are generally characterized by:

Mutually beneficial relationships:

Knowledge transfer:

Quality standards:

Embedded services:

66
Element of effective vertical linkages

1. Mutually beneficial relationships

2. Knowledge transfer

3. Quality standards

4. Embedded services

67
 Mutually beneficial relationships

 Are symbiotic relationships that benefit all of the actors in a value

chain and are a major trait of effective vertical linkages.

 Trust, long-term joint vision, and mutual respect usually form the
foundations for developing such relationships.

68
 Knowledge transfer:

 It is often difficult for small firms to access information about

global best practices.

 Effective vertical linkages facilitate the transfer of knowledge

between firms and create the incentives and knowledge platforms
required for effective upgrading of MSEs.

69
 Quality standards:

 Well-defined, widely understood, and constantly upgraded

quality standards are another defining element of effective
vertical linkages.

 Vertically linked firms are proactive, not reactive in a sense

that large firms empower and help small firms to understand
and adopt the quality standards to meet market demand.

70
 Embedded services:
 Lead firms can provide a wide range of embedded services to
affiliated suppliers and buyers to ensure consistent quality of end
products and services.

 Often seen as an integral part of business transactions and

considered a necessary cost of doing business.

 A service is provided as part of the transaction at no extra cost

71
2. Horizontal linkages on the other hand are linkages between
actors at the same level of the value chain,
⚫ Through horizontal linkages, firms at the same level of the value

chain interact to accomplish what a single firm working

independently could not do so well.

⚫ Effective horizontal relationships can promote efficiencies,

reduce costs, open markets and spur beneficial competition

⚫ e.g. Farmers working together with other farmers, or

companies in the same sector liaising with each other on a

regular basis.

72
 Horizontal Linkages...
 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.
 In a value chain, horizontal linkages are longer-term cooperative
arrangements among firms that involve interdependence, trust
and resource pooling in order to jointly accomplish common
goals.
 Horizontal linkages can help
 Reduce transaction costs

 Create economies of scale

 Contribute to the increased efficiency and competitiveness of

an industry.

73
 Horizontal Linkages...
 In addition to lowering the cost of inputs and services inter-
firm horizontal linkages can contribute to shared skills and
resources and enhance product quality through common
production standards.
 Such linkages also facilitate collective learning and risk
sharing while increasing the potential for upgrading and
innovation.
 Small-scale producer groups have strong potential to increase
their bargaining power in the marketplace, while processors,
suppliers and traders may also form their own groups to
strengthen their position within industries.
74
 Why Horizontal Linkages?
 Through effective coordination, horizontal linkages can benefit
firms in many of the following ways:

 Facilitate bulk purchasing of inputs and services

 Reduce transaction costs for buyers

 Increase bargaining power of smallholders

 Promote collective learning

 Enable risk sharing

 Influence the creation of industry standards

75
 Cont...
 Catalyze the implementation of marketing strategies and
provide access to new markets (for smallholders who cannot
sell individually, but can do so as a group)

 Encourage firms to advocate for change

 Pool resources to purchase expensive shared equipment or

services

 Supply large quantities demanded by buyers and importers

76
77
Chapter Three: Value Chain Governance

78
 3.1. Concepts of governance

 What is governance?
 Do you think governance is a
necessity in value chains?
 How do you relate value chain with
networking?

79
 What is value chain governance?
 Governance refers to the inter-firm relationships and
institutional mechanisms through which non-market
coordination of activities in the chain is achieved.
 Inter-firm relationships : This refers to the nature and quality
of the interactions between stakeholders in a value chain.
 Within global value chains, for example, leading supermarkets
in European country may exercise control over their fresh
vegetable supply chains.
 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.

80
 Governance ...

 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.

81
 Value Chain 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.
⚫ 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. 82
⚫ 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.
⚫ Power in value chain governance can be categorized into
three major areas of responsibilities:
1. Setting basic rules for participation in the chain,
2. Monitoring the performance of chain actors in complying
with the basic rules, and
3. Assistance to help chain actors adhere to the basic rules
(Kaplinsky and Morris 2001).

83
⚫ Clearly, governance in value chains has something to do
with the exercise of control along the chain.
⚫ Governance is about power and the ability to exert control
along the chain — at any point in the chain, some firm (or
organization or institution) sets and/or enforces parameters
under which others in the chain operate.
⚫ The four key parameters are:
1. What is to be produced? This includes product design and
specifications.
2. How it is to be produced. This involves the definition of
production processes, which can include elements such as
the technology to be.
3. When it is to be produced: This refers to production
scheduling and logistics.
4. How much is to be produced
84
⚫ Chain governance exists when some firms work to the

parameters set by other powerful firms in the chain.

⚫ The firm that sets the parameters with which other firms in the

chain must comply is referred to as the lead firm in the chain.

85
 Value Chain Governance
 Value chain Governance is refers to the relationships among the
buyers, sellers, service providers and regulatory institutions
that operate within or influence the range of activities required to
bring a product or service from inception to its end use.

 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.

86
 Value Chain Governance...
 Value chain governance is a concept that is fundamental to the
value chain approach.
 Governance describes which firms within a value chain set and
enforce the parameters under which others in the chain operate.
 Embedded in governance are inter-firm relationships, power
dynamics both symmetrical and asymmetrical and the distribution
of benefits.
 While the form of value chain governance is influenced by the
 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.
87
 Value Chain Governance...
 Increasing the competitiveness of a value chain typically requires
an emphasis on consistent product quality, traceability and on-
time delivery.
 These changes, in turn, often require a different relationship
between buyers and sellers to exert the control needed to meet
the demands of higher value markets.
 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.
88
 Value Chain Governance...
 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.

 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. 89
 3.2 Importance of Governance in Value Chain
(Why does governance matter?)
 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

provide knowledge and support to supplier or producer. 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. 90
 Importance of governance in value 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 recognized 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.

91
 Why chain governance needed?

 Governance by the buyer is costly, requiring asset-specific

investments in relationships with particular suppliers.

 Such investment also increases the rigidity of supply chains

by raising the costs of switching suppliers.

 Nevertheless, many instances of parameter setting and

enforcement along the chain are evident.

92
 3.3. Types of Value Chain Governance
The connections between industry activities can
be described in five types of chain governance.
These are:
i. Market
ii. Modular
iii. Relational
iv. Captive
v. Hierarchy
 Modular, relational, and captive have network-style of
governance

93
 There are five generic ways that firms coordinate, or ‘govern’
the linkages between value chain activities:

1) Simple market linkages, governed by price

2) Modular linkages, where complex information regarding the

transaction is codified and often digitized before being passed to
highly competent suppliers.
3) Relational linkages, where tacit information is exchanged
between buyers and highly competent suppliers;
4) Captive linkages, where less competent suppliers are provided
with detailed instructions;
5) Linkages within the same firm, governed by management
hierarchy.
94
95
 Types of Value Chain Governance...
 Each governance type provides a different trade-off
between the benefits and risks of outsourcing.

 As shown in the last column of the above Table, the

governance types comprise a range running from low
levels of explicit coordination and power asymmetry
between buyers and suppliers, in the case of markets,
to high levels of explicit coordination and power
asymmetry between buyers and suppliers, in the case
of hierarchy. 96
 Types of Value Chain Governance...
1. Markets: When transactions are easily codified, product
specifications are relatively simple, and suppliers have the
capability to make the products in question with little input
from buyers, asset specificity will fail to accumulate and
market governance can be expected.
• In market exchange buyers respond to specifications and prices
set by sellers. Because the complexity of information
exchanged is relatively low, transactions can be governed
with little explicit coordination.
• Producers/suppliers can make products with minimal input
(skill) from buyers.
• Producers are capable to make product in question with little
input from buyers.
• It requires little or no formal cooperation between buyers and
suppliers participants.
97
 Market...
 The cost of switching to new partners is low for both parties.

 The buyers have no controlling interest in the production, they

set few if any standards, and provides producers with little to no
information on what the market wants and how to produce.

 The parameters are defined solely by each firm at its point in the
chain.

 The central governance mechanism is price rather than a

powerful lead firm.

 Price and standards are mostly set buy suppliers.

98
 Types of Value Chain Governance...
2. Modular: In this type of network system, switching
customers and suppliers is relatively easy.
 Power asymmetries remain relatively low because both
suppliers and buyers work with multiple partners.
 In general, the modular type of governance occurs when:
 Turnkey suppliers exist: they use different production
technology to satisfy buyers.
 Very complex buyer-seller interaction/transactions
 Complex transactions are easily to codify.
 Supplier make products / services to customer specifications
 Suppliers take full responsibility for process technology.
 Supplier often uses generic machinery to produce
99
3. Relational value chains
 The power balance between the firms is more symmetrical or
balanced, given that both contribute key competences.
 There is a great deal of explicit coordination in relational
global value chains, but it is achieved through a close dialogue
between more or less equal partners, as opposed to the more
unidirectional flow of information and control between unequal
partners as in captive global value chains and within hierarchies.
 In general, the relational type of value chain governance occurs:
 Buyers and sellers rely on complex information that is not easily
learned or codified
 Lead firm specify what is needed and ability to exert some level of
control over suppliers.
 Producers supply more differentiated products based on quality,
place. 100
 Cont...
4. Captive value chain
 power is exerted directly by lead firms on suppliers, which is
similar to the direct administrative control that top management
at headquarters might exert over subordinates in an off- shore
subsidiary or affiliate of a vertically integrated firm.
 Such direct control suggests a high degree of explicit
coordination and a large measure of power asymmetry with
the lead firm (or top management) being the dominant party.
 Small suppliers are dependent on one or a few/larger buyer that
often exercise a great deal of power.
 High degree of monitoring and control by lead firm.
 High switching cost for new parties.
 Lead firms most likely to invest in the product and process
upgrading of their suppliers. 101
5. Hierarchy (vertically integrated value chain governance):
Hierarchy type of governance occurs when:
Chains are characterized by vertical integration and managerial
control within a set of lead firms that develops and manufactures
products in-house.
This is due to in hierarchy governance product specifications
cannot be codified, products are complex, and highly competent
suppliers cannot be found.
This leads high degree of explicit coordination and power
asymmetry between parties and direct ownerships of
production processes by lead firm.

102
 Determinants of Governance Structure
 The form of governance can change as an industry evolves and
matures, and governance patterns within an industry can vary
from one stage of the chain to another.
 The dynamic nature of governance can be largely accounted for
with three variables:
1. The complexity of information that the manufacture of a
product entails (design and process);
2. The ability to codify or systematize the transfer of knowledge
to suppliers; and
3. The capabilities of existing suppliers to efficiently and
reliably produce the product.

103
 Cont...
 These linkage patterns could be associated with predictable
combinations of three distinct variables:

 The complexity of information the production of a good or

service entails (design and process)

 The ability to codify or systematize the transfer of knowledge

along the chain

 The capabilities of existing suppliers to produce efficiently

and reliably, for which the dynamic nature of governance can
be largely accounted.

104
 Information Complexity refers to the intricacy/complexity of
information and knowledge that must be transferred to ensure a
particular transaction can occur.

 Information Codification is the extent to which lead firms can

convert tacit, implied information and knowledge into explicit,
concrete and situation-specific information and transmit it to
producers effectively, efficiently and at minimal cost.

 Supplier Capability refers to the ability of suppliers to meet

all transaction requirements. These may include quantity and
quality specifications; on-time delivery; and environmental,
labor and safety standards.
105
106
Table 2. dynamics of value chain governance

107
Chapter Four: Value chain development and
improvement

108
 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 with 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. 109
4.1.1.Principles of Value Chain Development

1. Role external facilitator transparent

2. Build upon initiatives of VC actors and
existing organizations
3. Serve clients impartially and share results
4. Stick to division of tasks between VC actors
5. Enhance environment of respect, safety, trust
and autonomy of actors
6. Focus on practical implementation and rapid
visible results and impact
7. Openly acknowledge potential conflicts
6 8. Create balance between participation and results
7 9. Coordinate efforts of donors along chain
4.1.2. Stages in Building a Value Chain
 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 situations.
Stage 1:Identifying the Opportunity
 In this first stage, you will identify some opportunities for a value
chain by mapping and evaluating the existing supply chain.
 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.
A. Map and evaluate the supply chain
B. Outline the opportunity by developing a project summary and
evaluating the market
C. Assess resources, risks and capabilities of a value chain project.
112
A. 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.
 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.

113
B. Outlining the opportunity and evaluating the Market
 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.
 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.

C.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.

114
 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.
⚫ 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:
A. Identify Value Chain Partners:-
• You should now have a clear project goal and a list of resources
needed. These resources will become a list of criteria for
searching and selecting of additional value chain partners.
• 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. 115
 B. 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
⚫ Once a successful alliance with other companies or farmers
established, you can probably proceed with greater confidence to
forge a stronger value chain.

116
C. 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 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.

117
 D. Build Relationships
⚫ Building a collaborative business relationship when relationships
havetraditionally been competitive takes effort and attention.
⚫ 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.
E.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.
118
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.
⚫ 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?
119
4.1.3. Requirements for Successful Value Chain Development

⚫ There are a number of key organizational considerations for

successful value chain development.

⚫ The major requirements for value chain development are:

1. Establishing common objectives;

2. Building trust and establishing cooperative working
relationships;
3. Managing information flows; and
4. Upgrading in value chains. Upgrading processes and
activities results in value add products and services.

120
 cont....
1. Establishing common objectives;

 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;
To provide assurances of food safety, traceability and/or quality to end
consumers;
To maintain or expand market share in the face of increased competition from
imports or from domestic competitors;
To respond to new government regulations which affect product design,
processing, or traceability; or to strengthen and deepen existing relationships with
a view to increasing market share.
 2. 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.
 Some of the suggestions are:

Focus on Your Customer and Consumer:

Value Chain Suppliers and Customers:

Differentiate Your Product:

Contribute Resources:

Trust is the acceptance of the truth of a statement without evidence or

investigation. Or it is a person’s belief in the reliability, truth, or ability of
someone or something.
3. Managing information flows
Elements of information management
Record-keeping of the use of labor and farm inputs.
 the costs involved, farm management decisions, and to build
the ability to negotiate the price of the product.
Traceability: it is accessing information about the product or
service in exchange.
 To guarantee the buyer on the source of the product and the
inputs that were used.
Market information: knowing about prices and trends in the
market so that the farmers can bargain with potential buyers.

125
4. Upgrading the chain
Upgrading is the process of replacing a product or process with a newer
version of the same product.
 Cont....
⚫ Upgrading activities take four different forms:
1. Process upgrading: it 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.
2. Product upgrading: farmers can improve their products 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.
127
3. Functional or intra-chain upgrading: Farmers can take on new
activities in the chain, and 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.
4. 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.

128
 Value Chain Development (VCD)

 Value Chain Development- refers to the concerted effort to

improve conditions in the value chain.

 It implies enhancing rewards and/or reducing exposure to risks.

 Enable entire value chain/firms to produce or deliver products

and services that meet the quality standards of the local and/or
world markets at prices that are competitive

 Value chain development can be considered equivalent to the

concept of value chain upgrading.
 Value Chain Development...
 Value chain development means a 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 the 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

130
 Five triggers of value chain development

1. System efficiency

2. Product quality and specifications

3. Product differentiation (competition)

4. Social and environmental standards

5. Enabling business environment

131
Value chain development generally
Empowerment of producers
Improve quality
Improve logistics (= planning)
Cost price reduction (improvement margins)
Scaling Up  Increase of Volume
 Common Objectives of Value Chain Development
Reduce barriers of entry and facilitate the participation of those
who are not included in value chain
Increase profit from value chains and enable chain actors to
benefit from value addition.
Develop value chains where a significant number of small and
medium-sized firms and poor workers participate .
Develop technological, organizational and marketing solutions
to extend production and sales of firms in a value chain.
 Identify and support key players and the provision of key
services in order to foster development of actors in the entire value
chain.
Foster collaboration and vertical integration between different
actors in the value chain and improve chain governance and
management.
 Value chain Upgrading
Upgrading is the process to respond to new market opportunities by
innovating and increasing added value to a product.
It involves in improvement in the process, product, functions or
improving the channel.
It can be
1. Process upgrading
2. Product Upgrading
3. Functional upgrading
4. Channel upgrading

134
 Types of Upgrading

1. Product upgrading: improved product quality, increasing

value to consumers.
2. Process upgrading: increased production efficiency,
reducing unit costs.
3. Functional upgrading: firm entry into a new level of the
value chain
4. Channel upgrading: firm entry into a pathway leading to a
new end market

135
 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.
I. 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; 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. 136
⚫ 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.
⚫ 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. 137
ii. 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
critical.
⚫ It is therefore necessary to make identification of leverage points (critical
constraints and opportunities) as a regular activity. 138
 iii. 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.
iv. 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.
⚫ Though each stakeholder is important in the value chain some of
them would have to be classified as active, innovative and leading
change agents.
⚫ 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 139
 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.
⚫ There are three strategies for chain development:
1. Low-cost strategy or Chain optimization
⚫ 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.
⚫ Efficiency:-relates to how much of a product/service is
produced in a given time frame with a possible least
amount of resource
⚫ Effectiveness:-is a measurement of quality. 140
2. 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.
⚫ Here quality assurance is the key .
⚫ Issues that should get attention in this strategy are consumers‘
concerns, quality, sustainability, safety & health and animal
welfare.
3. Market segmentation or Chain differentiation
⚫ 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
141
value creation and product differentiation.
 Challenges in Value Chain Development
 Much as there are numerous opportunities for the value
chain there are challenges that one encounters in the
development of a value chain.
 The challenges have been categorized under the following
headings
1. Input: This refers to the basic items required for production by various
actors along the value chain. The challenges at the input level include:
⚫ Low performance genetic materials: e.g. seed, planting material, breeding
stock, etc. When these are of inferior quality they do not give the optimum
yield.
⚫ Inconsistency in quality and supply of raw materials: lack of consistency in
the quality and supply of raw materials like agro-chemicals can lead to low
quality output. It can also hamper the regular supply of products to the market.
⚫ Variability in raw material quality: variations in the quality of raw materials
for production and processing result in inferior goods on the market, high
down time (under capacity utilization), high cost of production and loss of
market share.
142
2. Production: Challenges at this level
⚫ Limited protocols on good agricultural practices for commodity
chains: limited availability of manuals that provide information on steps
for Good Agricultural Practices (GAP).
⚫ Producers not fully integrated into the market economy: many
producers are not business oriented and are not producing in a
business-like manner to satisfy the demands of the market.
⚫ Misuse of agrochemicals: This can lead to the production of inferior
quality goods with serious health hazards for the producer, the consumer
and the general public, loss of market share, increase in cost of
production, lower competitiveness, etc.
⚫ Seasonal fluctuations in production: this can lead to low utilization of
the factors of production, inadequate supply of goods to the market and
price and income instability.
⚫ Lack of good agricultural practices: can lead to the production of
inferior quality goods, increase cost of production and lower productivity
⚫ Excessive dependence on climate: it can sometimes lead to complete
crop failure and livestock death, increases the uncertainty of production
and unreliable supply of raw materials and final products to the market.
⚫ Poor caliber/ability and quality of labor: this leads to low productivity,
high wastage, inefficient utilization of information and technology, etc.
143
 3. Processing
⚫ Challenges at processing levels are:
⚫ Lack of value addition to farm produce: caused by inadequate
research and development. This affects innovativeness thus
leading to lower incomes, increase in wastage and environmental
problems.
⚫ Lack of adequate processing systems: there is no adequate
processing capacity, obsolete processing equipment. These lead
to high cost of production, competitiveness, loss of profit
margins and discourage basic production.
⚫ Inappropriate packaging material: unattractive final products,
shorter product shelf life and low value capturing.

144
 4. Marketing :Challenges at this level
⚫ Stringent market requirements by supermarkets: refers to ever increasing safety and
quality requirements by supermarkets and consumers leading to difficulties in market
access.
⚫ Cost of certification: the high cost of certification of products tends to discourage
producers from accessing international markets.
⚫ Misuse of Sanitary Phyto-Sanitary (SPS) and Technical Barrier to Trade (TBT)
agreement: possible abuse of phyto-sanitary and technical requirements can lead to denial
of market access.
⚫ High import tariffs in the external market:
⚫ Inefficient distribution system:
⚫ Price fluctuations: seasonal and cyclical movement of price due to bottlenecks in the
supply of goods and instability in incomes.
⚫ Flooding of domestic market with imported equivalents: high importation and
availability of subsidized foreign goods on the local market. This crowds out local products.
⚫ Inelastic demand for exported commodities: low response of primary product
consumption to lowering of prices. Thus, people do not consume more of the product even
at lower prices.
⚫ Low level of market information: market information is not organized in a useful form for
value chain actors and limited access to available market information where organized.
These lead to high transaction costs, high prices of products, and high wastage at various
segments of the value chain.
145
5. Consumption : challenges at this level
⚫ Lack of appreciation of consumer culture and behavior: consumers
generally have low appreciation for health and safety consciousness. This
results in ineffective demand for safe and quality goods.
⚫ Weak and inactive consumer associations: consumer associations are
poorly organized making them weak and inactive. This does not drive the
production and processing segments of the value chain to be competitive.
⚫ Lack of effective demand for quality products: Low disposable incomes
of most households leading to low effective demand for quality products.
⚫ Most consumers are not health or safety conscious and may not insist on
buying quality products.
6. Physical Infrastructure : challenges at this level
⚫ Physical infrastructure includes irrigation, roads, storage facilities (dry and
cold), utilities (water, electricity, telephone, etc.) and port facilities: these
are inadequate and unreliable thus affecting production, processing,
distribution and storage of primary and final products.

146
7. Social Infrastructure: challenges at this level
⚫ Social infrastructure comprises networking for Value Chain
development, (strategic partnership), group formation and
development, and trust among others.
⚫ Their effect increases transaction costs, cheating, lack of
transparency, moral hazard, and unhealthy competition among
the various actors in the value chain.
8. Policy and Administration Issues
⚫ Policy, administration and institutions relating to certification,
patenting, business establishment, standards and standardization,
negotiation and enforcement of contracts, slow change in
national policy in response to global trends, consistency in
public policy, taxes and levies, sustainable institutions capable
of supporting VC development, lack of clearly specified roles of
supervising institutions.
⚫ These increase transaction costs, business risk, lower business
confidence as well as competitiveness. 147
9. Environmental Concerns
⚫ Environmental concerns relate to waste management and the
potential unintended impact of value chain activities on the
environment.
⚫ This can lead to environmental degradation and loss of
market opportunities.
10. Technical/Technological Inadequacies
⚫ Technical/technological inadequacies: these include
inadequate requisite technical and technological know-
how, inadequate research and development, inadequate
staff/personnel, equipment and knowledge and limited
opportunities for value addition to by-products.
⚫ These do not encourage innovativeness in products and
processes.

148
11. Financial
⚫Financial challenges: these relate to inadequate and
inappropriate financial products and lack of access
to financial services (credit).

12. Services
⚫Services: there is usually a mismatch of service
need and service provision.
⚫Inaddition critical information is untimely and there
is lack of specialization of service providers.

149
Sources of The Value Chain Development Challenges

⚫ Operators
⚫ Service providers
⚫ Government
⚫ Trading partners (local and external)
⚫ Development partners
⚫ Institutions (banks)
⚫ Consumers

150
 Opportunities for Value Chain Development
⚫ Several opportunities exist for developing avalue chain.These include the following:
1. Globalization of trade: The way modern technology and transportation
have integrated the world economic systems. Globalization enables us to get
information about sources of inputs, market opportunities, technology, etc.
that can help us to produce to meet the demands of the market.
2. World Trade Organization (WTO) agreement on agriculture: It is
an organization established to break the barriers to trade and regulate
international trade by ensuring the enforcement of international standards.
WTO creates wider market opportunities and ensures transparency in the
market at the national and international levels.
3. International standards: These are standards set at the international level
to ensure that quality goods are supplied to the market. They also prevent
discrimination against weaker countries.
4. Changing consumer preferences and behavior: People‘s taste and
preferences change because of availability of alternative products on the
market.This creates opportunities for new products to be introduced. 151
5. Factor endowment:This has to do with comparative advantage.
The producers might have certain resources that enables them to
produce certain goods better that others. These resources thus
become opportunities for the producers to produce more of these
goods for the market.
6. Advances in technology: advances in, communication,
transportation, information, production and processing
technologies have created opportunities to create and add value thus
ensuring the efficient production of goods.
7. Proximity to the European market: This leads to reduction
in cost in terms of freight and ensures the supply of fresh
products to the European market.
8. Liberalization of agricultural trade: This has led to the removal
of some trade barriers and ensures the free movement of goods.

152
9. Expanding domestic market: Increases in population and
income levels as well as changes in consumer preferences and
taste have combined to expand the domestic market thus
creating opportunities for producers to introduce more products
onto the market.
10. Trade agreements: Agreements between regional and
international economic groupings like the Economic
Community of West African States (ECOWAS) and African,
Caribbean and Pacific (ACP) and the European Union (EU) as
well as bi-lateral agreement between trade partners have
created opportunities for the production of diverse goods to
satisfy the demands of the market. They have also created
opportunities for accessing inputs, capital, technical assistance
and technology.

153
 4.4. Supporting Factors for Value Chain Development
⚫ 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 inValue Chain
⚫ Agri-food logistics is the art of moving agricultural and food
products from farm to fork.
⚫ As such logistics management is embedded in close cooperation
and communication functions between companies/ chain actors.
⚫ Logistics is concerned with having goods and services of the right
amount at the right place, at the right time and at the right quality.
⚫ Clustering based on collaboration and integration of product
flows, storage and information is one such change.
⚫ This collaboration will lead to the next jump in reaching higher
efficiency. 154
⚫ The essence of logistics in value chain development relies on how
to organize the collaboration and combine different products with
different requirements for storage conditions.
4.4.2. Value Chain Finance
⚫ Value chain finance is considered as financial products and
services flowing to and/or through a value chain to address the
needs of those involved in that chain, be it a need for finance, a
need to secure sales, procure products, reduce risk and/or
improve efficiency within the chain
⚫ The term value chain finance may also refer to an approach in
which the specific features of trading within a value chain are
exploited to reduce finance risks and to facilitate services by
financial institutions. During the early stages of the value chain
life cycle finance is a critical bottleneck.
⚫ Value chain finance can facilitate smooth information flow and
fair allocation of incentives and it is the key to convert agriculture
to agribusiness by promoting entrepreneurship. 155
 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 programmes
is in response to this need.
⚫ Key to the success in most value chains has been communication
and information sharing between chain partners.

156
Monitoring and Evaluation of value chain development
⚫ Success or failure of any program will be known through
conducting effective monitoring and evaluation at all levels of
operation.
⚫ Mechanisms for monitoring therefore need to be put in place.
These include:
⚫ Drawing clearly stated action plan and setting targets for
implementation of projects indicating clear indicators of success
⚫ Putting measures in place to ensure timely execution of
activities
⚫ Enforcing regular reporting on activities
⚫ Keeping reliable record on all activities. Records need to be
regularly audited
⚫ Having regular stakeholders forum during which supervisors at
the various stages of the chain report on their activities
157
 Chapter Five
Value Chain Approaches

158
 Value Chain Approaches
 Value chain analysis examine the structure and the dynamics of
the value chain.

 Uses value chain approach

 The structure 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).

159
 Value chain approach...
 Value chain approach may alert us to inequities in power
relationships based on the governance of the supply chain and
highlights potential points of entry.

 The value chain approach provides a framework to analyze the

nature and determinants of competitiveness in value chains in
which small farmers can participate.

160
 Value chain approach cont’d...
 It also provides the basic understanding needed for designing
and implementing appropriate development programs and
policies to support their market participation.

 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.

161
 Value chain approach cont’d...
 Value chain approach can be applied to sector, subsector, product
or products.

 Basically the value chain approach has objectives.

 Improve the growth potential of value chains with large

numbers of small firms

 Enhance small firm contributions to value chain growth

 Ensure small firms benefits

162
 Functions to achieve the objectives
 Links theoretical understanding with practical approaches

 Informs donor-funded economic growth activities and

private sector investment

 Allows stakeholders to drive the process

163
 Illustrative uses of the Value Chain approach
 Economic growth
 Through the mobilization of industry participants
 Increase the competitiveness of industries and the sustainability of
donor interventions in support of economic growth.
 Financial services
 Identify mechanisms for financial service delivery and assist lending
institutions.
 Natural resources management
 Strengthen the competitiveness of natural resource-based industries
 Beneficial both to the environment and to local business development.

164
 Uses of the Value Chain approach...
 Health
 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
 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.

165
 Approaches to value chain

Four different approaches to value chain are:-

1. The Netherlands Development organization (SNV’s) Approach
2. German Technical Cooperation (GTZ’s) Approach
3. NIMPF approach to value chain
4. The ICEBERG approach to value chain
5.1. The Netherlands Development organization (SNV’s)
Approach

SNV Business Organizations and their Access to Markets (BOAM)

programme considers that enhancing the inclusion 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.
 SNV Approach…

Sector development provides for 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,
equitability of margins, efficiency and overall competitiveness of
individual businesses and the value chain(s).
 SNV Approach…

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 an increased service
provider capacity building.
 SNV Approach …
Key interventions areas for this demand driven value chain
approach are therefore:
1. Sector development
2. Business development
3. Knowledge development and learning and
4. Service capacity development
 1. Sector development

 Seen as providing opportunities for business development to

turn these opportunities into concrete results.

 Private sector actors in trade and processing are important to

make use of business opportunities.

 Associations and stakeholder events are important in defining

critical and implementable sector development interventions.

171
Sector development Cont’d...
• The enabling environment can be supportive.
• 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.

172
 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.
(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 173
(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 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.

174
5) Value Chain Financing (VCF)

 Facilitate sustainable business linkages between service providers

and their clients along the segments of the value chain.

6) Appropriate Technology Promotion (ATP)

 Disseminating and propagating locally developed and successfully

tested appropriate technology innovations.

175
 2. 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).

176
Business development...
 Linking of businesses to new or existing markets in, for
example new processors to farmer organizations.

 Different arrangements can be used like the usage of a joint

venture, setting up trade relations (contract), development of a
linkage (e.g. with processing company).

177
 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.

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.
178
3) Private Sector actor Strengthening (PSS)
 Develop the capacities of private sector actors 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.

179
 3. Knowledge development and learning
 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 development experiences and

 overall program level documentation will have to assure that

critical knowledge is generated.

180
4. 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.
 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.
 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.
181
To support service capacity development SNV provides
the following services:

1) Service Providers Strengthening (SPS)

 Developing the capacities of services providers.

(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.

182
Practical example of SNV’s value chain development approach

 SNV, in collaboration with the Honey Exporters Organisation

(EHBPEA), organised national honey promotion events,
connecting the Ethiopian Honey Sector with partners worldwide.
 Ethiopia was listed for EU accreditation 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. 183
 5.2. German Technical Cooperation (GTZ’s)
Approach
 A non-governmental organization engaged in rural development
activities through funding mainly from German government.

 GTZ interventions are targeted to strengthening the relationship

between actors at different level of value chain (production,
processing, trading).
 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 has intervene to upgrade critical skills, 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.

185
 GTZ Approach...
GTZ used the following value chain integration map to explain its
experience in value chain development in SiriLanka.
 5.3. NIMPF Approach to value chain

NIMPF approach follows eleven steps in four phases for value

chain development.
 GTZ Approach...
 As we can see from Figure 11, 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.
 GTZ Approach...
 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 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.
 GTZ Approach...
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.

 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%.
The ICEBERG approach...

 The following figure implies that each phase is dependent on

the process and results of its previous phase.
 For example, inventing improvements in the second phase is
nearly impossible or would be misleading without a careful
identification of stakeholders, their roles and networks as
well as careful analysis of bottlenecks and opportunities in
the first phase.

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ICEBERG Approach…
 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 value and share value; and

 It is a complex network of actors.

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