BACHELOR OF SCIENCE DEGREE IN AGRIBUSINESS MANAGEMENT

Module Name: Value Chain Analysis

VERSION ONE

MODULE WRITER:

JOSEPH L. DZANJA, PHD

LILONGWE UNIVERSITY OF AGRICULTURE AND NATURAL RESOURCES

i
 (TITLE PAGE)

LILONGWE UNIVERSITY OF AGRICULTURE AND NATURAL RESOURCES

DEGREE NAME & MODULE NUMBER

COURSE CODE: ABM 316

MODULE WRITER(S)

……

……

……

OWNERSHIP

(COPYRIGHTS)

LILONGWE UNIVERSITY OF AGRICULTURE AND NATURAL RESOURCES

ii
 June, 2017

NOTICE

ACKNOWLEDGEMENTS

To Government of Malawi, World Bank for funding ODL

To key stakeholders for technical and material support

iii
To facilitators for capacity building, facilitation of module development, production, review and editing
of modules

To LUANAR staff for commitment

iv
 TABLE OF CONTENTS

Contents
MODULE OVERVIEW ............................................................................................................................... 1
Module Learning Outcomes ......................................................................................................................... 4
Unit One: What is a Value Chain? ......................................................................................................... 6
1.1 Introduction ................................................................................................................................... 6
1.2 Objectives ..................................................................................................................................... 6
1.3.1 Agricultural Value Chains .................................................................................................... 8
1.3.2 Supply Chain Management Vs Value Chain Management ................................................. 10
1.3.3 Value Chain Management ................................................................................................... 10
1.3.4 Value Chain Development .................................................................................................. 11
1.3.5 Value Addition .................................................................................................................... 11
1.3.6 Historical Perspective of the Value Chain Approach.......................................................... 12
1.3.7 Characteristics of Value Chains .......................................................................................... 14
1.3.8 Benefits of the Value Chain Approach ............................................................................... 14
1.3.9 Weaknesses of Value Chain Analysis ................................................................................. 17
1.3.10 Relevance of the Value Chain Approach to Malawi ........................................................... 17
Unit Two: Value Chain Business Models .......................................................................................... 20
2.1 Introduction ................................................................................................................................. 20
2.2 Objectives ................................................................................................................................... 20
2.3 Linkages of Interaction between Buyers and Sellers .................................................................. 21
Source: Miller and Jones, 2010 ............................................................................................................... 22
2.4 Value Chain Business Models .................................................................................................... 22
2.4.1 Producer-driven Value Chain Models ................................................................................. 22
2.4.2 Buyer-driven Value Chain Models ..................................................................................... 23
2.4.3 Facilitated Value Chain Models .......................................................................................... 24
2.4.4 Integrated Value Chain Models .......................................................................................... 26
Unit Three: Value Chain Analysis Process ............................................................................................ 28
3.1 Introduction ................................................................................................................................. 28

v
 3.2 Unit Objectives ........................................................................................................................... 28
3.3 Value Chain Mapping and Analysis ........................................................................................... 28
3.3.1 Value chain map main components .................................................................................... 30
3.4 Value Chain Analysis Process .................................................................................................... 31
3.4.1 Linking value chain and poverty/livelihood analysis.......................................................... 32
3.4.2 Community Level Analysis ................................................................................................ 33
3.4.3 Gender Issues ...................................................................................................................... 34
3.4.4 Value Chains and Labour .................................................................................................... 35
3.4.5 Environmental Issues .......................................................................................................... 35
3.4.6 Identifying Global Environmental Issues............................................................................ 38
3.4.7 Additional Issues in Value Chain Analysis ......................................................................... 39
3.4.8 Quantification of Key Elements of the Value Chain in each Relevant Node ..................... 39
3.5 Sources of Data for Value Chain Analysis ................................................................................. 40
Unit Four: Governance of Value Chains .............................................................................................. 42
4.1 Introduction ................................................................................................................................. 42
4.2 Unit Objectives ........................................................................................................................... 42
4.3 Value Chain Governance ............................................................................................................ 43
4.4 Importance of Value Chain Governance in Value Chain Development ..................................... 44
4.5 Types of Value Chain Governance ............................................................................................. 44
4.5.1 Market ................................................................................................................................. 45
4.5.2 Modular ............................................................................................................................... 45
4.5.3 Relational ............................................................................................................................ 46
4.5.4 Captive ................................................................................................................................ 46
4.5.5 Hierarchical ......................................................................................................................... 47
4.6 Determinants & Dynamics of Inter-firm Governance Structures ............................................... 47
References ............................................................................................................................................... 49
Unit Five: Role of traders in the Chain ................................................................................................ 50
5.1 Introduction ................................................................................................................................. 50
5.2 Unit Objectives ........................................................................................................................... 50
5.3 Role of Traders ........................................................................................................................... 51
5.4 Costs Incurred by Traders ........................................................................................................... 51
5.5 Types of Traders ......................................................................................................................... 52

vi
Unit Six: Critical Success Factors for a Value Chain ............................................................................. 54
6.1 Introduction ................................................................................................................................. 54
6.2 Unit Objectives ........................................................................................................................... 54
6.3 Factors for the Efficiency of a Value Chain................................................................................ 54
6.3.1 Research and Development ................................................................................................. 55
6.3.2 Product Design .................................................................................................................... 55
6.3.3 Production Process .............................................................................................................. 55
6.3.4 Marketing and Sales ............................................................................................................ 55
6.3.5 Distribution Management ................................................................................................... 55
6.3.6 Customer Service ................................................................................................................ 55
6.3.7 Formation of effective alliances is therefore a key issue. ................................................... 56
6.4 Results of an Effective Value Chain ........................................................................................... 56
6.4.1 Value Chain Basics ............................................................................................................. 56
6.4.2 Optimized Margins.............................................................................................................. 57
6.4.3 Cost Advantages ................................................................................................................. 57
6.4.4 Long-Term Viability ............................................................................................................ 57
6.5 Principles of Effective Value Chain Management ...................................................................... 57
6.5.1 Focus on customers and consumers .................................................................................... 57
6.5.2 Create, share, realize and protect value ............................................................................... 58
6.5.3 Get the product right – every time ...................................................................................... 58
6.5.4 Ensure effective & efficient logistics / distribution ............................................................ 59
6.5.5 An effective information and communication strategy is in place...................................... 59
6.5.6 Build and maintain effective relationships .......................................................................... 60
6.6 Key challenges for the inclusion of small-scale farmers and SMEs in regional agricultural value
chains in East and Southern Africa ......................................................................................................... 60
6.7 Possible Areas for Support and Intervention in Value Chains .................................................... 62
7.0 Module Summary............................................................................................................................ 63
Answers to all Unit Activities in the Module ............................................................................................. 64

vii
viii
 MODULE OVERVIEW

This module provides key insights about the Value Chain Approach as one way of enhancing
economic development. It is important to recognise that developing countries, particularly those
that depend heavily on a small number of agricultural export commodities are highly vulnerable
to domestic and international terms of trade shocks, and often have difficulties achieving sustained
long-term economic growth. This is further worsened if primary agricultural commodities account
for large shares of the total merchandise exports. Malawi is a typical country case facing such
challenges since application of value addition technologies is rather minimal.
Research has shown that the most effective way of addressing poverty is to develop the smallholder
sector which comprises the majority of the rural poor. Without addressing rural poverty, through
improving the market orientation of the smallholder farmers, any attempts aimed at poverty
reduction are bound to be unsustainable. That is why the Malawi Growth and Development
Strategy also places high priority on agriculture as a basis for sustained economic growth.
As the world becomes more globalized countries need to respond by producing commodities and
products that maximize the benefits of economic integration. One way to effectively respond to
this economic reality is to increase both domestic and international competiveness of commodities
and products that a country can offer. Assisting small-scale and low-income farmers to compete
in globalized markets (either export-oriented or affected by imports) where they have a
comparative advantage requires an integrated approach to addressing the constraints and
opportunities along the value chain and within the enabling environment in which the value chains
operate. This is why the Value Chain Approach is considered to be a key overall strategy in
achieving competitiveness for the developing countries.
In the traditional selling system farmers produce commodities that are "pushed" into the
market place. Farmers in developing countries are usually isolated from the end-consumer and
have little control over input costs or of the funds received for their goods. In a value chain
marketing system, farmers are linked to consumers' needs, working closely with suppliers and
processors to produce the specific goods consumers demand. Similarly, through flows of
information and products, consumers are linked to the needs of farmers. Under this approach, and
through continuous innovation, the returns to farmers can be increased and livelihoods enhanced.
Rather than focusing on profits on one or two links, players at all levels of the value chain benefit
or profit.

The concept of Value Chains has been gaining significant attention in both the developed and
developing world due to the growing integration of the global economy - a phenomenon that is
known as globalisation. Globalization is the process of increased interconnectedness among countries
most notably in the areas of economics, politics, and culture. Globalization has provided the opportunity
for substantial economic and income growth. The fact that globalisation in this new era has also
come to include the production of manufactured components linked and coordinated on a global
scale has opened significant opportunities for developing countries and regions. As more money

1
is poured into developing countries, there is a greater chance for the people in those countries to
economically succeed and increase their standard of living. Globalization has many advantages:
(i) Global competition encourages creativity and innovation and keeps prices for
commodities/services in check, (ii) Developing countries are able to reap the benefits of current
technology without undergoing many of the growing pains associated with the development of
these technologies, (iii) Governments are able to better work together towards common goals now
that there is an advantage in cooperation, an improved ability to interact and coordinate, and a
global awareness of issues, (iv) There is a greater access to foreign culture in the form of movies,
music, food, clothing, and more. In short, the world has more choices.

Globalisation has had its dark side too. There has been an increasing tendency towards growing
unequalisation within and between countries and a growing incidence in the absolute levels of
poverty, not just in poor countries. For example, while it provides jobs to a population in one
country, takes away those jobs from another country, leaving many without opportunities.
Secondly, although different cultures from around the world are able to interact, they begin to mix,
and the contours and individuality of each begin to fade. Thirdly, there may be a greater chance of
disease spreading worldwide, as well as invasive species that could prove devastating in non-native
ecosystems. Fourthly, there is little international regulation, an unfortunate fact that could have
dire consequences for the safety of people and the environment. Fifthly, large Western-driven
organizations such as the International Monetary Fund and the World Bank make it easy for a
developing country to obtain a loan. However, a Western focus is often applied to a non-Western
situation, resulting in failed progress.

These positive and negative attributes of globalisation have been experienced at a number of
different levels – the individual, the household, the firm, the town, the region, the sector and the
nation. The distributional pattern emerging in recent decades of globalisation is thus
simultaneously heterogeneous and complex. If those who had lost from globalisation had been
confined to the non-participants, the policy implications would be clear – take every step to be an
active participant in global production and trade. However, the challenge is much more daunting
than this, since the losers include many of those who have participated actively in the process of
global integration. Hence, there is a need to manage the mode of insertion into the global economy,
to ensure that incomes are not reduced or further polarised. The value chain approach is one
strategy that could help achieve this.

Four central questions arise from these observations:

1) Why has the participation in global product markets and the geographical dispersal of
economic activity not led to a concomitant spread in social and economic benefits for those
newly integrated populations? Or, to put it another way, why is there a disjuncture between
high levels of economic integration into global product markets and the extent to which
countries and people actually gain from globalisation?
2) To what extent is it possible to identify a causal link between globalisation and inequality?
3) What can be done to arrest the unequalising tendencies of globalisation?
4) How can the factors and processes facilitating the upgrading of globally dispersed
manufacturing activities so as to provide for raised living standards be analysed?

2
These related questions have important methodological implications – what is the best way to
generate the information required to document these developments in production and
appropriation, and how can we identify policy instruments which might arrest, and perhaps
partially reverse these developments?

Value chain analysis provides important insights into the four issues above. Though not a solution
to all the global challenges, the analysis focuses on the dynamics of inter-linkages within the
productive sector, especially the way in which firms and countries are globally integrated. This
takes us a great deal further than traditional modes of economic and social analysis. In addition,
Value chain analysis overcomes a number of important weaknesses of traditional sectoral analysis
which tends to be static and suffers from the weakness of its own bounded parameters. For in
restricting itself to sectoral analysis, it struggles to deal with dynamic linkages between productive
activities that go beyond that particular sector, whether they are of an inter-sectoral nature or
between formal and informal sector activities. Value chain also goes beyond the firm-specific
analysis of much of the innovation literature. By its concentration on inter linkages it allows for
an easy uncovering of the dynamic flow of economic, organisational and coercive activities
between producers within different sectors even on a global scale. For example informal sector
scrap metal collectors in South Africa are inextricably linked to a global export trade. They bring
scrap metal in old trolleys directly to shipping agents who pay them London spot prices and
transfer the scrap immediately to ships for export to iron and steel furnaces across the globe.
Furthermore the notion of organisational inter-linkages underpinning value chain analysis makes
it easy to analyse the inter-relationship between formal and informal work (with workers,
particularly in developing countries, moving often seamlessly from one to the other) and not to
view them as disconnected spheres of activity.

Furthermore value chain analysis is particularly useful for new producers – including poor
producers and poor countries – who are trying to enter global markets in a manner which would
provide for sustainable income growth. Finally value chain analysis is also useful as an analytical
tool in understanding the policy environment which provides for the efficient allocation of
resources within the domestic economy, notwithstanding its primary use thus far as an analytic
tool for understanding the way in which firms and countries participate in the global economy.
The objective of this module is therefore to assist students and researchers in formulating and
executing value chain research, particularly with a view to framing a policy environment which
will assist poor producers and poor countries to participate effectively in the global economy.

3
Module Learning Outcomes
By the end of this module, learners are expected:

1. To define the concept of Value Chains.

2. To explain the importance of value chain development.
3. To examine different Value Chain Business Models
4. To explain the value chain mapping process
5. To undertake a value chain analysis of any commodity
6. To discuss the concept of and importance of Value Chain Governance
7. To explain the critical role of traders in the agricultural commodity value chain
8. Examine the critical success factors for the success of any commodity Value Chain

The module is divided into six units as follows:

Unit 1: What is a Value Chain?

This unit provides a broad overview, defining value chains, introducing key concepts and
discussing the contribution of value chain analysis as an analytical and policy tool. The unit further
describes the characteristics of value chains, their benefits and weaknesses, plus the relevance of
the value chain approach to Malawi.

Unit 2: Value Chain Models

This unit discusses the various value chain business models and allows the learners to
appreciate the characteristics of each business model.

Unit 3: Value Chain Analysis Process

This unit equips the learners with the quantitative and qualitative skills and processes of
undertaking a value chain analysis of any commodity or product. It further outlines the data
requirements of a value chain analytical process.

Unit 4: Governance of Value Chains

This unit explains the concept of Value Chain Governance. It discusses the importance of value
chain governance and it explains the various types of value chain governance, including the
determinants of value chain governance.

Unit 5: Role of Traders in the Commodity Value Chain

4
This unit describes the special role of traders along an agricultural value chain. The traders
are usually the bridge between the production areas and the end markets. With that role,
they face a number of challenges that need to be understood by all players along the
commodity chains.

Unit 6: Critical Success Factors for a Value Chain

This unit describes the critical success factors for the efficiency of a value chain

5
 Unit One: What is a Value Chain?
1.1 Introduction

1.2 Objectives
By the end of this unit, you should be able to:

1. Define the term ‘Value Chain’ and other related concepts

2. To explain the historical background of the Value Chain Approach

3. To explain the characteristics of value chains

4. To discuss the strengths and weaknesses of value chain analysis

You will find the following key words or phrases in this unit. Watch for these and make sure that
you understand what they mean and how they are used in the unit.

Key Words

• Value Chains
• Value Chain Analysis
• Supply Chains
• Agricultural value chains
• Value Chain Development
• Supply Chain Development

1.3 What is a Value Chain?

The value chain describes the full range of activities which are required to bring a product or
service from conception, through the different phases of production (involving a combination of
physical transformation and the input of various producer services), delivery to final consumers,
and final disposal after use (Kaplinsky, 2000). As such, value chains include all of the vertically
linked, interdependent processes that generate value for the consumer, as well as horizontal

6
linkages to other value chains that provide intermediate goods and services. Value chains focus on
value creation—typically via innovation in products or processes, as well as marketing — and
also on the allocation of the incremental value. How “value benefits” are allocated and reallocated
is the subject of much of the development support to value chains.

The use of the term a value chain, suggests a focus on ‘vertical’ relationships between buyers and
suppliers and the movement of a good or service from producer to consumer. This entails an
analysis centred on flows of material resources, finance, knowledge and information between
buyers and suppliers (where ‘upstream’ signals flows towards production, and ‘downstream’
towards consumption). Processes of co-ordination and competition among actors operating in the
same function or segment of a particular chain are traditionally given less attention. A node is the
point in a value chain where a product is exchanged or goes through a major transformation or
processing. A segment is a ‘vertical chunk’ of a value chain for example from production to export,
or from import to retail. A value chain can have different strands, due to different product
characteristics (for example specialty coffee); a different institutional configuration (for example
the presence of an auction); or a different end-market or origin of production.

Value is added to preliminary products through combination with other resources for example
tools, manpower, knowledge and skills, other raw materials or preliminary products. As the
product passes through several stages of the value chain, the value of the product increases.

‘Horizontal’ services can refer to the range of goods and services that support or provide inputs to
the ‘vertical’ chain – these may include for example financial or technical advisory services
transport and communications, seeds, packaging ‘Horizontal relationships’ on the other hand may
refer to the relationship between value chains and how they operate in a given space on creating
economies of scale that help to increase production, ensure quality, improve access inputs, and
achieve more market power.

Figure 1 below shows the general picture of the value chain.

7
Figure 1: An Overview of the Value Chain System
Adapted from World Report Fall 2006: The Value Chain Approach; Strengthening Value Chains to Promote
Economic Opportunities

In order to generate improvements in the supply or quality of any commodity or product, one needs
to analyse all aspects of the range of steps in the chain of events from production to consumption.
This analysis is what is known as Value Chain Analysis. Value Chain Analysis includes an
examination of both opportunities and constraints, and the demand and supply of necessary
products and services. 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 (Dzanja
and Tchale, 2011). Changing agricultural contexts, rural to urban migration, and resulting changes
for rural employment, the need for pro-poor development, as well as a changing international scene
(not least the increase in oil prices) all indicate the importance of value-chain analysis.

1.3.1 Agricultural Value Chains

Agricultural value chains consist of agricultural research, input logistics, primary production,
processing/packing/transport (transformation), marketing (trade) and sales to the final consumer.

8
It is also a tool for identifying and prioritizing project interventions or investments aimed at
improving the efficiency of marketing of a particular product and helps identify if it is feasible to
expand the market and what will be needed to do so.

A supply chain is a system of organizations, people, activities, information, and resources involved
in moving a product or service from supplier to customer. The difference between a value chain
and a supply chain is that a supply chain is the process of all parties involved in fulfilling a
customer request, while a value chain is a set of interrelated activities a company uses to create a
competitive advantage.

There are similarities and differences between Supply Chain and Value Chain. A supply chain and
a value chain are complementary views of an extended enterprise with integrated business
processes enabling the flow of products or services in one direction, and of value represented by
demand and cash flow in the other. Both chains overlay the same network of companies. Both are
made up of companies that interact to provide goods and services

The primary difference between a supply chain and a value chain is a fundamental shift of focus
from the supply base to the customers. Supply chain focuses on integrating supplier and producer
processes, improving efficiency and reducing costs. Value chain focuses on creating value in the
eyes of the customer, innovation in product development and marketing.

In layman’s terms, a supply chain is what ensures that the products you value so much actually get
to you. Some of the things we use are manufactured half way across the world from your local
convenience store. A supply chain therefore involves bulk storage and transportation. The major
difference between a supply chain and a value chain is the simple fact that within a supply chain,
there is no value added. In a supply chain, all that is being done is conveyance. One product or
material is taken from one company or from one end and transported to the other. Of course there
are procedures involved such as proper storage and careful transportation but that is about it. In
value chains, as much as there is transportation and some storage involved, the main purpose of a
value chain is to add value to the product so as to make it presentable to the client. This is often
achieved via packaging, marketing and sales.

Value refers to the amount buyers are willing to pay for a product or service a firm provides.

There are three forms of value that occur in back to back commercial transactions:
● Technical (Resource Value)
● Organizational (Business Context)
● Personal (Career)

i. Technical value: intrinsic to the resource being provided and occurs in virtually all
exchanges.

ii. Organizational value: built upon the context of the exchange, and may vary from a range
of factors such as ethical standards, prestige, reliability and association.

9
 iii. Personal value: derived from the personal experience and relationships involved in the
exchange of resources and the benefits provided

At the consumer level of exchange value is layered as follows:

i. Product value: the technical value derived from providing a source of supply
ii. Service value: the services that surround the product (personal care, warranty
iii. service)
iv. "Wow" value: providing enhanced services

1.3.2 Supply Chain Management Vs Value Chain Management

Value chain Management is often confused with supply chain management. The objective of
supply chain management is to manage the flow of products from suppliers to consumers. A whole
series of related processes take place along the supply chain; they must be properly controlled in
order for the company to deliver goods to end users while remaining competitive.

Supply chain management consists of five main elements:

• Planning and designing a product to meet consumer demand

• Sourcing the materials or components needed to produce the goods
• Manufacturing the product
• Delivering the product to the buyer
• Accepting returns of defective products

In supply chains, the primary focus is on costs of materials and efficient delivery. Effective supply
chain management reduces costs to the consumer and increases profits for the manufacturer.

Successful supply chain managers bring great value to their employers. They contribute to the
organization’s success by fulfilling roles such as:

• Choosing and managing suppliers of components or raw materials.

• Strategic planning for production and delivery to support marketing efforts, special offers
and seasonal demand.
• Monitoring inventory and product flow to avoid supply shortages.

The Main focus of Supply Management is on the cost and efficiencies of supply, and the flow
of materials from their various sources to their final destinations. Efficient supply chains reduce
costs.

1.3.3 Value Chain Management

Value chain management on the other hand is also concerned with the flow of goods to consumers,
but takes a different approach. You might say it’s the complementary view of the process. The

10
difference between the two is that in supply chain management, the flow is down – from the source
to the consumer. In value chain management, the flow is up – from the consumer to the source.

In value chain management, the consumer is seen as the source of value. Consumers create value
for manufacturers when they demand products. The focus is not on the cost of goods, as in supply
chain management, but in creating value in the consumer’s eyes.

To properly manage the value chain, companies often split operations into primary activities, such
as logistics and production, and support activities, such as human resources, marketing and
information technology. Creating a profitable value chain requires a connection between what
customer’s value, or want, and what the company produces.

Value chains are strategic, placing heavy focus on:

• Innovation
• Research and Development
• Product Testing
• Marketing
• Social Trend Analysis
• Economic Conditions

Value chain managers are typically responsible for analyzing issues and opportunities, and
providing insight in order to maximize value created for a business. They may use supply
modelling to explore options and mitigate shortages. Other duties might include preparing product
plans, or collaborating with customer service and marketing departments on activities that add
value to the consumer.

1.3.4 Value Chain Development

Value Chain Development on the other hand can be defined as applying the value chain approach
to development interventions including interventions aiming at: (i) forging or strengthening new
links within a value chain (ii) increasing the capabilities of target groups to improve the terms of
value chain participation (iii) minimising the possible negative impacts of value chain operations
on non-participants and/or adjacent communities and (iv) (in a few cases) creating new value
chains.

1.3.5 Value Addition

Value Addition includes simple tasks such as bulking, cleaning, grading, and bagging or other
forms of packaging. Value addition can also include moving a product nearer to a larger demand

11
or town Centre; including types of processing, packaging, promotional and marketing additions
that change the value of the product and attract customers.

1.3.6 Historical Perspective of the Value Chain Approach

The value chain approach is always associated with value chain analysis, a concept that was first
described and popularized by Porter in a classic work in management science (Tschinkel, 2011;
Porter, 1985).

Porter’s concept is concerned with inter-firm matters and describes the stages that are necessary
for the production, marketing and distribution of a product or service as a linear sequence.

The value chain disaggregates a firm into strategically relevant activities in order to understand
the behavior of costs and the existing potential sources of differentiation. A firm gains competitive
advantage by performing these strategically important activities more cheaply or better than its
competitors.

Porter’s concept of value chain emphasizes the interconnected and sequential nature of economic
activity in which each link adds value in the process (Ponte, 2005). Studies in his tradition focus
on “primary activities” such as inbound logistics, production, outbound logistics, marketing,
sales and services and “support activities” such as administrative infrastructure management,
human resource management, technology and procurement within a value chain.

12
 Figure 2: Porters Value Chain Model

Primary activities:

• Inbound Logistics – the production and storing of the products (honey and pigeon peas)
• Operations – the processes of handling the products, that includes costing and pricing
• Outbound Logistics – the warehousing and distribution of products.
• Marketing & Sales – Analysis of customer needs, market positioning, packaging,
promotions etc
• Service – the support rendered to agents/vendors and any business development services
being done to ensure adequate supply and quality of the products

Support activities consist of:

• Organizational infrastructure – Analysis of support systems and functions, such as
financing, planning and quality control
• Human resource management – Labour and technical adequacy to handle the products
• Technology development – managing information processing and the utilization of
“knowledge” for effective performance.
• Procurement – how farm inputs are acquired (e.g., sourcing and negotiating with suppliers,
timeliness}

13
1.3.7 Characteristics of Value Chains

The following are the characteristics of value chains:

• The chain is private sector-driven, not a project, but built on private interests and
initiatives
• The chain is demand-driven, focused on satisfaction of consumer needs through a process
of value-adding (market at the end comes first)
• Value chains consist of an interrelated network of people
• Value chains provide profitability to all chain actors but not necessary equity…
• Value chain is between preferred business partners so exclusion of others
• Chain actors perform specialized functions in recognition of mutual interdependence -
synergy from specialization
• Chain actors cooperate to achieve the shared interest: consumer satisfaction at the lowest
cost
• Chain actors may undertake joint activities (innovation, policy dialogue) and maintain a
chain governance system

1.3.8 Benefits of the Value Chain Approach

The value chain approach to commodity development has significant benefits. Rather than
focusing profits on one or two links, players at all levels of the value chain can benefit in the
following ways:

1. The value chain approach takes a different view on international trade. While orthodox
trade theory puts the endowments of production factors at the centre of its analysis and
assumes trade relations to be based on arms-length market-based transactions, the value
chain approach focuses its attention on the organization of international trade and shows
how production and trade are, to a varying degree, coordinated and shaped by lead firms.
This gives rise to different patterns of industrial organization.

2. The value chain concept helps to understand competitive challenges. As buyer-supplier

relations are increasingly arranged through quasi-hierarchical relationships and product
flows systematized by all kinds of standards and agreements, the performance of industries

14
 becomes more dependent on the quality of value chain relationships. Breaking down value
chains in different stages and analyzing their performance enables entrepreneurs and
policymakers alike to systematically identify competitive disadvantages and define points
of leverage for action. In the automotive industry, for example, manufacturers realized
quite early that, once a first round of factory automation had increased the efficiency of
assembly plants, additional gains could mainly be achieved by restructuring their supply
chains. Competitiveness of car manufacturers hence increasingly depended on
improvements outside their own firms, and they consequently focused their attention on
reducing costs and delivery times and raising quality standards of their suppliers and
distributors. In the same vein, policymakers can dissect commodity value chains and
benchmark each of its components in order to identify bottlenecks where improvements
are most effective.

3. Reflecting the experience that government and donor-driven interventions have often had
little impact, a new generation of private sector development programs emphasizes the
need to work through private change agents. Value chain analysis enables policymakers to
recognize the most powerful change agents and their likely – positive or negative – impact
on the competitiveness and inclusiveness of value chains. The concept shows how some
firms define and enforce standards, thereby raising or lowering entry barriers for small and
weak economic actors, and how their position of power influences the distribution of
profits and risks among participating firms. Development agencies may now seek to
influence these private change agents in the pursuit of inclusive and sustainable value chain
strategies.

4. The approach shows that power relations are crucial. Power relations are epitomized in the
concept of Value Chain Governance. The power relations between different actors
determine how economic gains and risks are distributed among chain actors and to what
extent dominant firms are able to set and enforce standards with the aim of raising entry
barriers for competitors and to achieve market foreclosure. The concept of “governance of
value chains” implies that “there are key actors in the chain who take responsibility for the

15
 inter-firm division of labour, and for the capacities of particular participants to upgrade
their activities.”

5. The value chain approach helps to understand the dynamics of value creation at different
stages of the value chain, including the role of entry barriers and innovation rents.
Identifying where the bulk of the value accrues and the highest profitability can be
achieved, and understanding how firms deliberately erect entry barriers to escape from
price competition are necessary to find appropriate upgrading strategies.

6. The approach draws attention to issues of knowledge creation, transfer, and appropriation.
It points to critical questions of how knowledge flows along value chains, e.g. how
information on market trends is passed back from retailers to primary producers, how firms
learn and upgrade in chains, how they “unlearn” certain capabilities as they specialize,
what kind of knowledge technology proprietors transfer and how they disclose their core
competencies. Moreover it has developed a typology of upgrading strategies which firms
can adopt. However, this is a field where substantial further research is required.

7. The value chain concept adopts a global perspective, recognizing that trade, the
coordination of productive activities, and technology transfer are increasingly organized
across borders. This implies that researchers and policymakers need to take key
stakeholders into account that may be located far away from the country or region they are
interested in. This constitutes a major advancement of academic cluster studies and related
aid projects of local economic development which had in the past often adopted a rather
inward-looking perspective, neglecting the important role of global buyers, international
trade relations, foreign investment, and the rules and regulations shaping their behaviour.

8. It identifies actors in the chain that need support in order to become better and efficient
players in the chain. In this way, actors that are stuck in a value chain and that need support
to explore new opportunities are identified and strengthened by stimulating innovation and
creating competitive advantage.

9. It increases efficiency and total generated value of the commodity in question and improves
competence of actors to increase their share of the total generated value.

16
1.3.9 Weaknesses of Value Chain Analysis
• Kula et al. (2006) point out that a common weakness of value chain analyses is the failure
to systematically consider all the factors that influence industry performance and
competitiveness. They mention that end markets that are outside of the country from where
value chain studies are being conducted are not adequately investigated or often ignored.

• Webber and Austin Associates (2007) point out that value chain analysis focuses on
improvements within the given value chain, rather than on how value chains can be shifted
to target different, more attractive markets and business strategies.

• Value Chain Analysts fail to properly consider the business environment in which the value
chain operates as a result the analysis fails to identify potential interventions for improved
business and value chain performance.

• Value Chain Analysis only focuses on shifting value from one link of the chain to another
and that perspective obscures opportunities to upgrade the whole system to the benefit of
all value chain participants.

• The format of the value chain laid out in Porter’s book Competitive Advantage, is heavily
oriented to a manufacturing business and the language can be off-putting for other types
of business.
.

• The scale and scope of a value chain analysis can be intimidating. It can take a lot of work
to finish a full value chain analysis for your company and for your main competitors so
that you can identify and understand the key differences and strategy drivers.
.

• Many people are familiar with the value chain but few are experts in its use.
.
• Business information systems are often not structured in a way to make it easy to get
information for value chain analysis.

1.3.10 Relevance of the Value Chain Approach to Malawi

The importance of the Agriculture Sector in Malawi cannot be overemphasised. The sector in
Malawi largely contributes to the component of sustainable economic growth and development of
the Malawi Growth and Development Strategy (MGDS). In order to effectively achieve the the
MGDS targets in the agricultural sector, The Ministry of Agriculture, Irrigation and Water

17
Development designed a novel priority investment framework known as ASWAp (Agricultural
Sector Wide Approach Support Project), whose goal is to improve food security and nutrition,
increase agricultural incomes and ensure sustainable use of natural resources. One of the notable
objectives of ASWAp has been to promote commercial production and agro-processing for
market development.

To achieve commercial production, agro-processing and access to viable agricultural markets there
is need to have a clear understanding of agricultural value chains consisting of agricultural research
to develop agricultural exports of different high value commodities, input logistics, primary
production, agro-processing for value addition and import substitution marketing (trade)
development for input and outputs through Public/private sector partnerships.

This understanding inevitably requires the adoption and indeed the application of tools needed for
identifying and prioritizing the needs of all the actors in the production and supply chain so that
strategic interventions or investments can be designed to improve production and marketing
efficiency. The Value Chain Approach is one of such tools and could if properly applied serve
to achieve the MGDS targets in the agricultural sector.

Unit Summary

In this Unit, you have learnt that a value chain constitutes the full range of activities which are
required to bring a product or service from conception, through the different phases of production
(involving a combination of physical transformation and the input of various producer services),
delivery to final consumers, and final disposal after use. A number of related aspects of the concept
of value chain were discussed, including value chain analysis, supply chain, value addition,
agricultural value chains and many more. The benefits, weaknesses and relevance of the value
chain approach have also been discussed.

Unit Activity

Activity 1-a

Self -Evaluation-Activity

18
Compare and contrast the following two terms: Value Chain and Supply Chain.

Note that answers to this activity are at the end of this unit.

19
Unit Two: Value Chain Business Models
2.1 Introduction
For an enterprise, the term business model refers to the way it creates and captures value within a
market network of producers, suppliers and consumers, or, in short, ‘what a company does and
how it makes money from doing it’ (Vorley, 2008). The business model concept is linked to
business strategy (the process of business model design) and business operations. For a value
chain, the use of the phrase business model refers to the drivers, processes and resources for the
entire system, even if the system is comprised of multiple enterprises. This unit describes the
various value chain business models that underlie the relationships between various stakeholders
along a value chain.

2.2 Objectives
By the end of this unit, you should be able to:

1. Define the term ‘Value Chain Business Model and other related concepts
2. To explain the linkages between Buyers and Sellers
3. To discuss different value chain business models
4. To discuss the benefits and risks of Contract Farming as a Buyer-Driven Business Model
5. To discuss critical success factors for contract farming

You will find the following key words or phrases in this unit. Watch for these and make sure that
you understand what they mean and how they are used in the unit.

Key Words

• Value Chain Business Model

• Producer-driven value chain model
• Buyer-driven value chain model
• Contract Farming

20
2.3 Linkages of Interaction between Buyers and Sellers
The relationship between these two stakeholders, buyer and seller, can be described through five
types of linkages:

1) The instant or spot market, where producers come to sell their commodities, and
prices fluctuate; this is the most risky in terms of setting market price;
2) A contract to produce and buy, known more generally as contract farming;
3) A long term often informal relationship characterized by trust or interdependency;
4) A capital investment by one of the buyers for the benefit of the producer,
characterized by high levels of producer credibility and dependence; and
5) A company that has achieved full vertical integration. When production and
marketing is dependent upon a spot market with fluctuating prices and demands,
financiers are uneasy; they prefer a contractual or partnership structure in a value
chain where the market risks can be more controlled. This is their comfort zone.

Figure 3: Different ways to coordinate and structure the value chain

Source: Wenner, (2006)

The following table, adapted from Vorley (2008), illustrates the typical organization of
smallholder production and marketing – that is, the relation of farmers to the market and/ or the
larger system. This analysis offers a basis for value chain business models, and the accompanying
finance, which is expanded upon in the following sections. The following sections elaborate on
this categorization, providing descriptions and illustrations of each model. The models are
characterized by the main driver of the value chain, and its rationale or objective. For example, it

21
was noted earlier in Table 1 that millers are often the drivers of the rice chain in order to assure
supply and increase volume, typical characteristics of a buyer-driven model.

Table 1: Typical organizational models of smallholder production

Source: Miller and Jones, 2010

2.4 Value Chain Business Models

2.4.1 Producer-driven Value Chain Models

Producer-driven models are driven from the bottom end of the chain. They can be successful but
face two major difficulties. First, producers may not understand the market needs as well as those
in the chain who are closer to the end user. Secondly, producers often struggle for financing unless
they can find strong partners and/or can get assistance for financing and fore-linking to reliable
and competitive markets and partners. While the start-up years are particularly difficult for these
and other reasons – e.g., lack of capacity and economies of scale – with time and support, producer
models can become strong and begin to access financing based upon the strength of their
transaction flows and market partners.

Producer associations are a critical component of many value chains. In certain cases, the
association becomes the driver for value chain development – providing technical assistance,
marketing, inputs and linkages to finance. In other cases, the association may have a financial base,

22
such as NASFAM, whereby a savings and loan association could sign a contract with farmers to
guarantee sale of their commodities.

2.4.2 Buyer-driven Value Chain Models

Buyer-driven models form the foundation for many of the applications of value chain financing. It
is often in the buyer’s interest to procure a flow of products and use finance as a way of facilitating
and/or committing producers, processors and others in the chain to sell to them under specified
conditions. Most often, when financing is involved, the conditions are binding through contracts.
Whether these are formally registered or not, the agreements can
still form the basis for loan recovery.

Contract farming is the most common buyer-driven value chain model. As the name suggests, it
involves farm-level or farmer association-level contracts but these contracts usually originate from
one or more levels further along the value chain. The contracts can be formalized in the legal
system or can be informal, but binding agreements. Agro-food chain coordination can be exercised
in a number of ways, ranging from tight vertically integrated operations, with full ownership and
control by a single firm, to more fragmented coordination arrangements, where there are no formal
but rather ad hoc transactions between producers and their buyers. Contract farming is a modality
of chain coordination whereby transactions between producers and other chain stakeholders are
governed by pre-established agreements that can be more or less formal. Indeed, some forms of
contract farming can even be seen as outsourced production, often called out-grower schemes,
typically by an estate, processor, exporter or other chain agent, to a pool of producers. The contract
(formal or informal farming agreement) may involve advancing inputs, funds and/or technical
support, or it might be limited to product sales conditions, such as prices, quantities and delivery
dates (Winn et al., 2009).

2.4.2.1 Benefits and Weaknesses of Contract Farming

Contract farming, whether formalized or informal, is a viable model to incorporate small-scale

farmers into value chains and through the contractual arrangements enable them to access credit
and other services. Key among the many benefits and the challenges and risks of this system are:

Benefits:
• Access to secure markets and prices for producers.
• Access to appropriate input supplies in timely fashion.
• Increased access and reliability in procurement of product of desired quality for
agribusiness buyers.
• Opportunity for lower input costs due to improved planning and economies of scale.
• Enhanced access to credit despite a lack of collateral.
• Support in the development and achievement of quality standards and certification.
• Provision of market-focused technical training and assistance that outlives contracts.
• Are often enforceable contracts which give buyer a level of comfort.
• Potential advancement of positive relationships and increase in trust.

23
Challenges and risks:
• Reliance on a single buyer that could fail or lose interest in the relationship (loss of their
buyer, market changes, bankruptcy).
• Side-selling by farmers, particularly if prices go up.
• Cost of management for buyer.
• Enforcement of contracts by either party.
• Regulatory environment for contracts and their enforcement.
• Tendency to favour larger farmers, at the expense of small farmers, due to lower transaction
costs and a stronger initial asset base.
• Lack of technical capacity to understand and intentionally develop viable value chains,
especially those involving small farmers.

2.4.2.2 Critical Success Factors for Contract Farming

Critical success factors for contract farming include the following:

• Mutual benefit for both parties – there must be a synergy, mutual trust and reciprocal
dependency among partners.
• Creation of an enabling environment.
• Transaction costs and bottlenecks of dealing with multiple contracting parties must be
minimized – this could be done by working with groups and BDS providers/facilitators.
• Appropriate consideration of production and marketing risks in the design of contracts.
• Careful selections of enterprise – high value, processing and exports-related enterprises
have shown most success.
• For micro- and small-scale producers to be financed efficiently, transparent partnerships
among stakeholders with a shared interest are important.
• Clear quality standards which must be understood at all levels – e.g. farmers need to
understand what is expected of them beforehand, and not after their crops are already
half-grown.
• Mechanisms for providing fast, direct or rapid financing to the micro- and small-scale
businesses in the chain when necessary.

Source: adapted from da Silva (2007)

2.4.3 Facilitated Value Chain Models

In many countries there is almost a dual agricultural system in which a developed agro-industry
coexists alongside marginalized producers who are living at subsistence levels. Facilitation by
development organizations, both NGOs and government agencies, has demonstrated that external
support can open up opportunities for smallholder value chain integration and financing.

Larger buyers and wholesale chains often seek out large-scale suppliers due to a number of factors
that are challenging when dealing with small-scale farmers who:

24
 • May not be well organized.
• Have not demonstrated commitment.
• Require higher transaction costs to be served.
• Often pose increased risks such as side-selling.
• Lack both technical capacity and the technologies to reliably produce the high quality and
quantity required in a consistent manner.
• Tend to lack organizational capacity and resources to deliver the required products in a
timely fashion.

Consequently, the costs of organizing and training small producers can be deemed too high to be
taken on by a large company. Development agencies and others with a social mission can provide
support to facilitate the integration of small famers and agro-enterprises into commercial
value chains. Successful facilitation models for value chain development have been developed
around the world. With proper organization and training, incomes can be improved, for example:

In Uganda, ARUDESI has been able to work with 8,000 farmers to organize 600 farmer
groups consisting of 30 farmers per group. These farmers were able to market a total of
1,200 metric tonnes of green coffee in the last 3 years, increasing income of an average of
40 per cent over equivalent green coffee at farm gate price. (Mrema, 2007)

TechnoServe utilizes various business models to enhance smallholder incomes through processing
business, supply business and out-grower models. In Malawi, TechnoServe is facilitating the seed
industry value chain in response to severe financing gaps in agribusiness in southern Africa which
is characterized by asset finance needs and working capital needs. The reasons for a lack of access
to finance, especially by start-up seed businesses and early stage expansions, have mainly been
shortage of risk capital and poor business management capacity. TechnoServe developed the
following three-pronged business model to address the needs in the seed chain:

• Processing businesses – facilitating enhanced value addition and farmer linkages.

• Input supply businesses – facilitating improved seed, access to fertilizer and production
technology.
• Farmer businesses – facilitating farmer integration into the seed production, processing
and marketing chain through farmer organization, training and out-grower contracts.

By addressing the whole chain, TechnoServe is able to secure a market for the fledgling seed
businesses and a more secure repayment of the financing, while stimulating income growth and
development of the small producers. This approach for assisting small farmers is summed up in
TechnoServe’s strategy to:

• Support a service provider to provide marketing and financial linkages to farmer groups.
• Identify and organize farmer groups with potential to produce quality.
• Assist groups to invest in improving quality and production.

25
2.4.4 Integrated Value Chain Models

The fourth business model is the integrated value chain model. It not only connects producers to
others in the chain – input suppliers, intermediaries, processors, retailers and service providers
including finance – but it integrates many of these through ownership and/or formal contractual
relationships.

The integrated model has many of the features of the other models presented such as strong links
with multi-party arrangements, technical guidance and strict compliance, and also incorporates an
amalgamated structure of value chain flows and services. The first and most common integrated
model involves vertical integration within the value chain. Integration is normally sought by a
large retailer or wholesaler/importer that is focused on consumer demand, and wishes to ensure
that inputs, production and post-harvest handling will result in products that are responsive to that
demand. The degree of overall vertical (and often horizontal) integration in the model depends
upon the degree to which the individual levels are tightly linked – from control of production
through to retail – often by means of contract farming or other contractual buyer models. Vertically
integrated supermarket value chains are a prime example of this model. A supermarket works
closely with importers or domestic wholesalers in order to convey information about acceptable
product specifications such as variety, quality, volume, and standards relating to hygiene,
traceability and residues. Information and services are passed down the chain to producers,
frequently accompanied by quality control, technical training, appropriate inputs, record keeping
and finance. Such vertical integration particularly applies to fresh fruits and vegetables.

Horticultural value chains can be excellent for the integration of smallholder farmers since, for
many of the products, intensive labour and manual cultivation and harvesting are necessary to
deliver the required output.

Unit Summary

In this Unit, you have learnt about the various value chain business models and their
characteristics.

26
Unit Activity

Activity 2-b

Self -Evaluation-Activity

How do you characterise the Tobacco Industry in Malawi? What value chain business model
does the tobacco industry take in Malawi?

Note that answers to this activity are at the end of this unit.

27
Unit Three: Value Chain Analysis Process

3.1 Introduction
This unit discusses the process of undertaking a Value Chain Analysis for any product or
commodity. To conduct a value chain analysis, the company or the researcher begins by
identifying each part of its production process and identifying where steps can be eliminated or
improvements can be made. These improvements can result in either cost savings or improved
productive capacity. The end result is that customers derive the most benefit from the product for
the cheapest cost, which improves the company's bottom line in the long run. The unit explains
both the quantitative and qualitative methods of conducting value chain analysis, including the key
issues that need to be investigated.

3.2 Unit Objectives

By the end of this unit, you should be able to:

1. Discuss Value Chain Mapping and Analysis

2. To explain the quantification of the key elements of Value Chain Analysis
3. To Equip the students with the practical skills of undertaking a value chain analysis of any
commodity or product

You will find the following key words or phrases in this unit. Watch for these and make sure that
you understand what they mean and how they are used in the unit.

Key Words

• Value Chain Mapping

• Value Chain Map

3.3 Value Chain Mapping and Analysis

28
Value chain mapping is a process that identifies the main activities associated with a firm’s
service or product line and is often used in corporate strategy in order to identify performance
improvement opportunities. Value Chain Mapping & Analysis has 5 Components:

• Analyse and map the value chain (and its relevant strands)
• Identify the position of the target group within the chain
• Identify the performance requirements, risks and rewards pertaining to the target group
• Quantify key elements of the value chain in each relevant node – prices, costs, revenues,
margins, weight losses, volumes traded, number producers/traders involved, workers
employed, etc.
• Relate the problems identified in Step to the detailed value chain analysis performed in the
present step. Then eliminate the problems that cannot be addressed through a value chain
approach and prioritize the problems to address in the action research

A value chain map visualizes:

- Functions: production, processing, marketing
- Actors involved in those function
- Chain support services
- Chain context / chain environment

A value chain map helps in the identification and understanding of:

- the physical flow of goods
- the price structure of these goods
- the (power) relations between chain actors
- existing markets
- available resources
- opportunities and constraints for chain development and actor empowerment

29
Figure 4: Example of a Value Chain Map
Source: KIT

3.3.1 Value chain map main components

The key question in value chain mapping is, ‘what should be mapped? The following are the
main components that should be mapped:

• Functions and operations: production, processing, transportation, storage

• Primary chain actors: producers, collectors, middlemen, wholesalers and retailers,
carriers
• Relations chain actors: loose relations, persistent relations or fully integrated relations
between actors in a value chain
• Chain supporters
• services providers, banks, research
• VCD facilitators, NGOs, government

Other Mapping dimensions

In addition to the above, the following dimensions could also be mapped:

• Mapping volumes of products, number of actors, number of employees, geography of

actors
• Mapping quality requirements

30
 • Mapping economics: sales prices, added value per actor, income
• Mapping support services

In the value chain mapping process, a researcher can also map the flow of commodity volumes
from the production areas to the consumption areas. Figure 5 below illustrates this flow.

Figure 5: Example of Value Chain Mapping of volumes

3.4 Value Chain Analysis Process

As explained earlier in the module, value chain analysis includes an examination of both
opportunities and constraints, and the demand and supply of necessary products and services.
Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to
recognize, which activities are the most valuable (i.e. are the source of cost or differentiation
advantage) to the firm and which ones could be improved to provide competitive advantage. Since
a value chain involves a number of players along the chain, the analysis is rather data demanding.
A number of issues need to be investigated and they include mapping of the players and their
activities, linkage between value chain and poverty, gender issues, environmental issues, labour

31
issues, distribution of economic benefits among the chain players and value chain governance.
1
This section will explain how each one of the issue are investigated.

3.4.1 Linking value chain and poverty/livelihood analysis

The integration of poverty considerations in value chain analysis significantly broaden out the
range of issues that need to be examined when exploring issues in value chain governance and
restructuring. In addition to a careful and detailed analysis of the various kinds of resources upon
which individuals and households draw on for their livelihoods, there is a need for theoretical
accounts and methodologies that can mediate between different arenas and levels of social pro-
cess - that can link, for example, household and intra household-level micro-analyses with
accounts of global, national, regional and sub-regional processes (Murray 2002). As du Toit
highlights (2004), this is a complex task. Attention has to be paid both to the vertical links – the
value chains that link local livelihoods ‘upstream’ and ‘downstream’ to distant and complex net-
works of economic production and exchange (Du Toit 2002; Kaplinsky 2000) – and to the
horizontal ones – the ways in which the impact and nature of integration into globalized systems
are locally mediated (Goodman and Watts 1994). Understanding the implications for poverty,
vulnerability and inequality of integration or repositioning within value chains thus requires us not
only to look at the power relations that exist within the value chain itself, but also at the local
systems and networks within which the individuals concerned and the groups that they are part of
are situated.

Questions for Research

Research aiming at integrating poverty concerns into value chain analyses would need to ask
overall questions such as:

• What is the race, gender, ‘ethnic’, language, or cast profile of the target group? Does this
relate to their position in the value chain? Or the terms of their incorporation?
• Which attributes (skills, assets, gender, ethnicity, location, age, etc.) are decisive for chain
participation and what is the implication for different social groups?
• What are the opportunities they may benefit from and risks they are exposed to? How
predictable or insecure is their income? What are the physical and health risks involved in
their work?
• Of particular interest are risks that increase the vulnerability of poor producers. How does
participation in the value chain affect the sensitivity and resilience of the systems that
underpin their livelihoods, and how does participation affect risk (the probability of shocks
or negative changes)?
• What are the alternatives open to the producers? Can they exit easily from participation in
this value chain, or are they thoroughly dependent on it?

1
Value Chain Governance is discussed in Unit Four of the Module

32
 • Will land use changes associated with chain participation result in displacement of local
people?
• What is the household structure and composition?
• What are the key livelihood activities that the household depend on? Households often
develop a broad portfolio of activities that insure them against risk and help them deal with
seasonality.
• What are the key resources (‘capitals’) on which they depend? These include financial
resources (landholdings, savings etc) but also access to natural resources, human capital
(health, skills, education, labour), physical infrastructure and the nature of social relations.
• What are the synergies between the activities? Livelihood activity portfolios are significant
not only because they mitigate risk and seasonality, but also because they combine and
complement one another in key ways (e.g. cash from one source can be used to subsidise
or smooth expenditure in another economic activity).
• What are the arrangements around care work and household reproductive labour? Pay
attention to the ways in which arrangements around care work allow people to be econ-
omically active, or prevent them.
• What are the intra-household synergies, transfers and exchanges? Who gets what in ex-
change for what? Who commands most of the resources within the household and who is
marginalised? How does age and gender play into these arrangements? (e.g. female house-
hold members’ status within the household is affected by changes in the nature or terms of
their employment).
• How do household (and individuals) plug into broader systems of social relationships (e.g.,
practices of reciprocal exchange, local institutions, kinship networks and care chains)?
Who benefits from these systems and who does not?

3.4.2 Community Level Analysis

• Who controls key productive resources e.g. land, water, access to employment? Do they
form a recognisable social group? What is their composition?
• Who controls local political power and patronage – and how? Does this link to institutions
that have an impact on value chain governance? Is local farmer organisation, for instance,
closely linked to membership of particular parties or powerful groups?
• Do relationships between social groups typically take the form of conflict, antagonism,
dependency or co-operation and alliance? How are conflicts handled? Are they handled
violently or through negotiations? Are there formal legal processes whereby conflicts can
be handled?
• What characterises local employer – employee relationships? Who work for whom? In
what activities or sectors are labour most commonly hired? What are the conditions of
employment? Who are excluded from employment opportunities?

33
3.4.3 Gender Issues

Incorporating gender awareness into all elements of the methodology entails working with a
conceptual understanding of poverty, vulnerability and inequality that can capture gender
differences as well as incorporating gender analysis into the methodology of the value chain
strategic framework and research tools for action research (see Riisgaard et al. 2008).

Conceptually, we take as a starting point the notion of the ‘gendered economy’ as developed by
Elson (1999). This notion contrasts with standard economic analysis that views the economy as
gender-neutral and is concerned only with economic activity that is linked to the market. A
gendered economy approach insists on the inseparability of the reproductive and the productive
spheres so that the understanding of the economy is extended to include not only market-oriented
activities but also the unpaid work (such as domestic work and childcare) that underpins productive
(paid) work (Barrientos 2003; Elson 1999).

Issues to Analyse

• What kinds of value chains and forms of incorporation are likely to exacerbate gender in-
equalities and which provide the best options for reducing gender inequalities and gender
related vulnerability?
• How might gender relations constrain access to, or rewards entailed by, value chain
participation?
• Ensure that data collected is sex-aggregated and use participatory methods while making
sure to identify and include female stakeholders.
• Systematically gather and examine information on gender differences and social relations
in order to identify, understand and redress inequities based on gender.
• What roles do men and women play in the sector and in the locality concerned relative to
value chain participation?
• What are the incentives and barriers for value chain participation for men and women
respectively?
• How does the Activity Profiles (the gender-based division of labour for productive and
reproductive activities, answering the question “what activities do women and men do”?)
relate to value chain participation (or non-participation) and the rewards and risks
associated?
• How does Resource Profiles (what resources do women and men have to work with? And
who needs what?) relate to value chain participation, rewards and risks
• Do mechanisms of power and inequality differ between men and women? If so does this
relate to value chain participation (or non-participation) and the rewards and risks
associated?

34
3.4.4 Value Chains and Labour

Incorporating awareness of labour issues into the value chain methodology entails a focus not just
on the desired development of producers, but a breakdown of consequences and potential benefits
for workers. This means analyzing how value chains and value chain restructuring affect job
creation and job loss (both within and outside of the chain) and the location of jobs as well as
analysing the link between labour availability and skills for the upgrading possibilities of pro-
ducers (Gereffi and Sturgeon 2004, Bair and Gereffi 2001). However, it also entails going beyond
seeing labour as productive asset and take into consideration the terms and conditions under which
workers participate in value chains and how they are affected by changes in these (Barrien-tos et
al. 2001, Hale and Opondo 2005, Riisgaard 2007, Riisgaard and Hammer 2008). For most workers
employed in global value chains (many of which are women) their income will comprise the major
source of household income. The risks faced by particularly women workers are thus compounded
by their family and childcare responsibilities, and the risks and benefits for workers from
employment in value chains therefore have wider poverty implications.

Studies incorporating a labour focus have recently revealed how organizational restructuring by
global firms has important consequences for labour and labour institutions in terms of encour-
aging flexibilization and feminization of labour at the production end of global value chains
(Barrientos 2003, Barrientos and Kritzinger 2004). While the latter have brought an increasing
number of workers (particularly women) into paid employment, much of it is temporary or sourced
through third party contractors. This type of work is commonly informal in nature without legal
rights or benefits. Ethical standards, particularly adopted by large retailers and branded marketers
seek to address some of these concerns, but often fail to reach more vulner-able workers like
casuals, migrants and/ or women.

Guiding questions for value chain research

In practice, including a labour focus in value chain research would entail asking questions such as:
• What are the poverty reduction implications of worker participation in a particular value
chain?
• What are the dynamics of a ‘restructured’ value chain (as opposed to a conventional strand)
characterized by fewer nodes, tighter coordination and higher standards, and what does this
mean for workers in terms of welfare outcomes such as income level, job security, personal
health and social security protection?

3.4.5 Environmental Issues

Value chains affect the environment and how it is managed through various dynamics. For ex-
ample, increases in producer prices may induce an intensified use of land, resulting in soil erosion
and the release of carbon stored in the soil. Higher quality standards imposed by retailers may lead
to an increased use of pesticides, causing water contamination and health problems among

35
workers. Conversely, the adoption of sustainability standards could lead to improved soil quality
and human health, or to the conservation of common pool resources. Tourism, by expanding
accommodation facilities, may increase use of water resources and the handling of waste, and may
have positive or negative impacts on wildlife.

The conceptual framework developed in this paper attempts to handle these complex relation-ships
by making two kinds of analytical distinctions. First, environmental aspects of value chains in this
study denote, on the one hand, the natural resource base and climate which are the basis for
producers participating in a value chain and, on the other, the impacts that production or processing
have on the resource base and its surroundings. Second, when researching environ-mental impacts
and management problems in the context of value chains it is useful to distinguish between two
types of processes, based on the scale at which they operate:

1. Local processes related to the management and use of local natural resources (land and water)
whose impact is mainly confined to the area of their origin. Important, specific environmental
impacts and management issues within this type are biodiversity degradation, soil erosion, soil
nutrient mining, soil and water contamination (e.g. from pesticides or mercury used in gold
mining) and unsustainable use of water resources (e.g. in irrigation schemes).

2. Global processes that transgress ecosystem and regional boundaries and therefore have impacts
and must be managed at a much larger scale (Halberg et al. 2005). Key environmental impacts and
management problems with a global extent are green house gas emissions (GHG), acidification,
eutrophication, human toxicity and eco-toxicity.

Issues for research and action: General Assessment

• What kinds of value chains and forms of participation are likely to exacerbate local
environmental management and health problems which provide the best options for
improved management? How do changes in natural resource use related to value chain
participation affect natural resource access and use for ‘non participants’?
• Which global environmental threats and management problems result from value chains
that incorporate or exclude poor people and areas?
• How might the incorporation of poor people and areas into value chains help mitigate
environmental problems of global concern, such as biodiversity conservation, green house
gas emissions, and acidification?
• What challenges and opportunities do the increasing focus on carbon/GHG footprint
assessments (and labelling) of products present for producers and traders in developing
countries?
• What are the environmental risks linked with farming in the area? If the farmed landscape
consists of hillsides, soil erosion may be an issue and this should be assessed visually and
discussed with local stakeholders. Is deforestation of natural vegetation happening due to
pressure for land or for firewood?

36
 • Is non-cultivated land (wetlands, forest, communal grazing) being converted into
agricultural land? Do some people depend on collection of natural products in the forest or
other non-cultivated biotopes in the area?
• Did land use or farming systems change significantly over the last 10 years? Are any major
crops given up by most farmers, new crops introduced and taken up to a large extent, are
there more or fewer livestock now compared with 10 years ago? Did grazing patterns
change (communal grazing increased or stopped, herding vs. tethering vs. zero grazing of
ruminants)?
• Are water bodies (small lakes, ponds, streams) being used for irrigation and/or to water
livestock? If so, do humans depend on the same water resource for drinking and cooking?

Crop & Livestock Farming

• What is the resource endowment of the farmers for the product (value chain) concerned, in
terms of land acreage and slope, soil fertility, land structures (terraces, infiltration ditches,
diversion channels etc), water reservoirs, farm trees, hedges and small biotopes?
• What are the farmers’ use of resources and external input for the product concerned:
fertiliser, feed concentrates, mulch material and manure? Which products leave the farm?
• Are the nutrient balances positive or negative (nutrient surplus vs. mining, depletion)?
• What percentage of the area is treated with chemical herbicides respectively insecticides?
Which frequency/ how many times per season? What type of equipment is used?
• What is the pattern of land use for the product concerned, in terms of the location of
fields/pastures on major landscape elements (lowlands, uplands, steep slopes, plains,
forests and other biodiversity, etc)? How is land use currently changing in relation to these
landscape elements (participatory land use/cover analysis)?
• Which agro-ecological techniques do farmers apply (for example: contour cropping,
intercropping, mulching, composting, agro-forestry, multipurpose trees, etc)?
• What is the nature and extent of planned diversity (the degree to which the farming systems
attempts to interact with biodiversity for preventive pest control and in this way indirectly
contributes to biodiversity)? In terms of indicators such as the number of cultivated species
grown per acre, the use of intercrops, trap crops, etc.

Fish Farming (Aquaculture)

• What is the resource endowment of the aquaculturalists for the product concerned, in terms
of water access, pond acreage, fish stock, etc?
• What are the aquaculturalists’ resource and external input use: fish stock, water sources,
fish feeds, antibiotics and other medicines, etc? Which products leave the fish farm (fish
harvest)? What is the extent and sources of pollution of downstream water or lands (from
discharged nutrients, feed residues, residues from antibiotic and other medicines, etc)?

37
 • What are the patterns of land and water use for the fish product concerned, in terms of the
location of fish ponds in the landscape, and in relation to the sourcing/discharge of water
from/to natural water ways? How are land use and water use currently changing in relation
to these elements?
• Which aquacultural techniques are applied (for example: feeding and breeding techniques,
medicine treatment, etc)?

Wild Harvesting of Common Pool Resources

• Property rights to common pool resources should be based on providing appropriate
incentives for users to promote conservation through rights, rules and responsibilities.
• What proportion of the product is being harvested from the wild and what proportion is
being cultivated, and how do these proportions change? (This will have social impacts as
harvesters tend to differ from cultivators.)
• Sustainability of harvesting techniques: is the individual plant being killed by harvesting?
Is the viability of the plant population being affected?
• Subtractability: this refers to a situation where each user’s exploitation of the resource
results in fewer resources being available to other users. This makes it difficult to jointly
regulate the harvesting or collection of these resources.

Definition of property rights around common pool resources implies two major management
issues: a need to regulate access to resources in order to handle exclusion problems, and; a need to
regulate the level of exploitation among authorized users to deal with the subtractability problem.

3.4.6 Identifying Global Environmental Issues

• Which resource demanding inputs are used in the different steps and how much?
• What are the farm processes, which require inputs and energy (farm level info from above)?
• What is the energy source for cultivation (diesel, petrol, livestock traction)? How much is
used per year and – if possible breakdown for the particular cash crop?
• What is the energy source for local processing of crops (fuel oil, diesel, petrol, gas,
electricity or other fossil fuels vs. solar power, livestock traction)?
• Are there any livestock keeping, manure use and composting practices which may lead to
emissions of methane and nitrous oxides (farm level info from above)?
• Does the production or farming practices involved lead to changes in land use, which
accelerate carbon emissions (deforestation, increased cultivation of grasslands or organic
soils) or increase carbon sequestration (reforestation, agro-forestry, increased grasslands
etc.). Use info from the land use analysis described above.
• Is there any industrial processing or packaging involved in the product chain? If so, which
chemicals are used to clean or treat products? What is the energy source for this (fuel oil,
diesel, petrol, gas, electricity or other fossil fuels vs. solar power, livestock traction etc.)?
38
 • What are the transport forms between farmer and processing or packaging facility (truck,
ship, airfreight)?
• What are the transport forms for long distance hauling (truck, ship, airfreight)?
• What packaging material is used and how much? (plastic, metal foil, several wrappings etc

3.4.7 Additional Issues in Value Chain Analysis

• Identification of the overall chain structure, including: different strands, key segments,
nodes and actors; flows of products, information and finance; and product transformations
and value added. Typical nodes in natural resource-based value chains are: primary
production (service provision), primary trading or processing (domestic agents for service
providers), exporting (wholesaling for domestic/regional chains), importing (foreign
agents for service providers), retailing, and consumption. Selected issues are graphically
illustrated.
• What is the role of private and public standards?
• What formal trade barriers exist? What major trade policies in importing countries (tariffs,
quotas, rules of origin) facilitate or constrain access and competitiveness for the product
and producing country in question?
• What is the structure of rewards along the chain?
• Which are the ‘sites’ and sources of risk along the chain? (What are the major risks and
who bears them?)
• What is the functional division of labour and their changing dynamics?
• Who are the most powerful actors in the chain (lead firms and other major actors) and
what is their functional position? Through what means do they ‘drive’ the chain (i.e., set
the conditions of participation and determine the functional division of labour along the
chain)?
• What is the function and position of the target group within the chain (in relation to the
above elements)? What is the nature of their business/trading relationship (‘contract’) with
their immediate buyers?
• How is the segment, within which the target group is located, coordinated (in respect of
major forms of coordination – market, vertical integration, ‘contracts’)?

3.4.8 Quantification of Key Elements of the Value Chain in each Relevant

Node

A quantitative assessment of key elements in the value chain should be performed as part of the
value chain analysis, at least for the node of the target group and for the next node downstream.

39
This information will be used to assess the attractiveness of alternative upgrading strategies, to
evaluate the competitiveness of the target group in the end market, and to generate qualitative and
quantitative indicators for monitoring and evaluating changes in the value chain occurring during
(and maybe as a result of) the research.
• Production: prices received, volume sold (by grade); cost of production (costing family
labour if possible); labour inputs (by major activity); gross and net margins; farm gate price
(and % of retail price); number of producers involved; number of workers employed;
gender division of labour (more/less time spent by men/women).
• Processing: costs; buying and selling prices (and % of retail price); weight loss; quality
after processing; capacity utilisation; gross and net margins; number of processors
involved; number of workers employed; wages earned; gender balance in ownership and
employment.
• Trading (several nodes may apply): purchase and selling prices (and % of retail price),
costs (storage, transportation, taxes and bribes, labour, losses), gross and net margins,
number of operators in the market and their market shares; number of workers employed;
wages earned; gender balance in ownership and employment.

3.5 Sources of Data for Value Chain Analysis

As said earlier in this module, value chain analysis is data demanding. There are several sources
of data that any researcher could use as follows:

• Individual and group interviews

• Literature
• Statistical overviews
• Policy documents
• Associations
• International and national market
• Information on the Internet

Unit Three Summary

In Unit three, you have learnt about the process of undertaking a qualitative and quantitative value
chain analysis. You have learnt about how you can incorporate poverty analysis, gender issues,

40
community level aspects, environmental aspects in the analysis. You have also learnt how to
quantify various aspects of the value chain in order to determine its efficiency.

Uni

Activity 3-c

Self -Evaluation-Activity: Practical

On your own, undertake a value chain analysis of any agricultural commodity of your choice.

41
Unit Four: Governance of Value Chains

4.1 Introduction
This unit discusses the concept of Value chain governance. Governance is a dynamic feature of
value chains that characterizes the relationships or linkages among stakeholders in the chain.
Governance is important as it relates to the ability of a stakeholder to determine, control and/or
coordinate the activities of other actors in the value added chain. At any point in the chain, a firm
(or organization or institution) can set parameters under which others in the chain operate. The
stakeholders responsible for establishing parameters can be one or more firms in the chain, actors
in the larger enabling environment, or a combination of the two. Different actors may exert more
or less influence in local or global markets, and the scope of an actor’s impact can be economy-
wide or industry-specific.

4.2 Unit Objectives

By the end of this unit, you should be able to:

1. Define ‘Value Chain Governance’

2. Explain the importance of Value Chain Governance in value chain development
3. Discuss the various types of Value Chain Governance

You will find the following key words or phrases in this unit. Watch for these and make sure that
you understand what they mean and how they are used in the unit.

Key Words

• Value Chain Governance

• Legislative governance
• Judicial Governance
• Executive Governance
• Information codification

42
4.3 Value Chain Governance
Value Chain Governance 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.

Various activities in the chain—within firms and in the division of labor between firms—are
subject to what scholar Gary Gereffi has usefully termed “governance.” Oliver Williamson has
characterized governance as the means by which to infuse order, thereby to mitigate conflict and
realize mutual gains. In value chains, governance ensures that repetitive linkage interactions
between firms exhibit some organization rather than being simply random. Value chains are
governed when parameters requiring product, process, and logistic qualifications are set that have
consequences up or down the value chain, encompassing bundles of activities, actors, roles, and
functions. Of course, some value chains exhibit little governance at all or, at best, very thin
forms of governance. Power asymmetry is central to value chain governance. Key actors in the
chain take responsibility for the inter-firm division of labor and for the capacities of particular
participants to upgrade their activities. The intricacy and complexity of trade in this era of
globalization require sophisticated forms of coordination, not merely with respect to positioning
(who is allocated what role in the value chain) and logistics (when and where intermediate inputs,
including services, are shipped along the chain), but also in relation to the integration of
components into the design of the final products and the quality standards for this integration.
However, coordination does not require that a single firm engage in these roles. Indeed, there may
well be a multiplicity of nodal points of governance and coordination functions that may change
as the prominence accorded to different firms and actors shifts within a value chain.

Value chain governance comprises three aspects:

❖ Legislative governance is concerned with the basic rules that define conditions for
participation in the chain. The standards may be set in legal codes and subject to fines if
transgressed. They also may be internationally recognized and widely used, even though
they have no legal basis. More recently, the “rules” of participation increasingly mean
conformance to international standards such as ISO 9000 (on quality), ISO 14000 (on
environment), and SA 8000 (on labor) applying across industries, as well as industry-
specific standards such as phytosanitary and hazard analysis and critical control point
(HACCP) in the food processing industry.

❖ Judicial governance comprises activities to audit performance and to check compliance

with the rules.

❖ Executive governance is a form of proactive governance that assists value chain

participants in meeting operating rules. It may be direct (helping a supplier achieve quality
standards, for example) or indirect (such as forcing a first-tier supplier to assist a second-
tier supplier). Governors may be producers in the chain or parties external to the chain. In
most value chains, there are multiple points of governance (in all areas of legislative,
judicial, and executive governance). At any point, different parties may be setting rules
(which may differ in nature), auditing per

43
4.4 Importance of Value Chain Governance in Value Chain Development

Governance is a dynamic feature of value chains that characterizes the relationships or linkages
among stakeholders in the chain. Governance is important as it relates to the ability of a stakeholder
to determine, control and/or coordinate the activities of other actors in the value added chain. At
any point in the chain, a firm (or organization or institution) can set parameters under which others
in the chain operate. The stakeholders responsible for establishing parameters can be one or more
firms in the chain, actors in the larger enabling environment, or a combination of the two. Different
actors may exert more or less influence in local or global markets, and the scope of an actor’s
impact can be economy-wide or industry-specific.

By setting the parameters for governance, powerful actors influence who acquires production
capabilities and market access and how gains are distributed throughout the chain:

Acquisition of production capability: Suppliers can learn by observing what their buyers do and
by adopting the best practices that lead firms transmit through embedded services or hands-on
advice. Knowing how a chain is governed enables donors and development practitioners to
determine the type and amount of upgrading assistance buyers are likely to provide to their
suppliers.

Market access: As developed countries dismantle trade barriers, developing country producers do
not necessarily gain access because chains are often governed by a limited number of powerful
buyers. In order to participate in export manufacturing to developed countries, producers need
access to lead firms to know their requirements and produce to their specifications.
•
Distribution of gains: It is important to know which activities in the chain generate the most profit
and who engages in these activities. Understanding how a chain is governed provides firms and
practitioners with valuable information on the value chain roles and relationships that allow local
firms to build new skills, undertake additional functions in the chain, and create a more balanced
distribution of gains.

4.5 Types of Value Chain Governance

The connections between industry activities within a chain can be described along a continuum
extending from the market, characterized by "arm’s-length" relationships, to hierarchical value
chains illustrated through direct ownership of production processes. Between these two extremes
are three network-style modes of governance: modular, relational, and captive. Network-style
governance represents a situation in which the lead firm exercises power through coordination of
production vis-à-vis suppliers (to varying degrees), without any direct ownership of the firms.[1]

44
4.5.1 Market

Market governance involves transactions that are relatively simple, information on product
specifications is easily transmitted, and producers can make products with minimal input from
buyers. These arms-length transactions require little or no formal cooperation between participants
and the cost of switching to new partners is low for both producers and buyers. In this case, the
buyer has no controlling interest in the production, sets few if any standards, and provides
producers with little to no information on what the market wants and how to produce it. Here, the
parameters are defined solely by each firm at its point in the chain, and the central governance
mechanism is price rather than a powerful lead firm. An example is when a trader buys produce at
the farm gate or in a wholesale market and either sells it in the local market or exports it.[2]

4.5.2 Modular

This is the most market-like of the chain network governance patterns. Typically, suppliers in
modular value chains make products or provide services to a customer's specifications. Suppliers
in modular value chains tend to take full responsibility for process technology and often use
generic machinery that spreads investments across a wide customer base. This keeps switching
costs low and limits transaction-specific investments, even though buyer-supplier interactions can
be very complex. Linkages (or relationships) are more substantial than in simple markets because
of the high volume of information flowing across the inter-firm link, but at the same time,
codification schemes can keep interactions between value chain partners from becoming highly
complicated and difficult to manage.

45
 The African-European cut flower value chain entails two distinctive strands. Cut flowers sold via
auctions to wholesalers and retailers have historically been the most important channel to
market. However in recent years, selling directly to retailers, such as large UK supermarket chains,
has gained popularity. These powerful lead firm buyers have been shifting unwanted activities
upstream towards exporters, and producers in Kenya have reacted by vertically integrating, and
functionally upgrading to acquire the downstream logistics functions. The auction system is
characterized by loose, market-based trading relationships, whereas supermarket buyers require
their producers to be accountable for complying with environmental and social requirements
specified by the UK supermarkets. The supermarket retailers in the direct strand demonstrate a
much higher degree of leverage than any other type of intermediary or buyer (i.e., auction strand)
in the value chain. Due to their market power, they have the ability to impose higher, more
stringent standards while pushing risk towards their suppliers rather than taking it on themselves
(Ponte, 2008).

4.5.3 Relational

In this network-style governance pattern, interactions between buyers and sellers are characterized
by the transfer of information and embedded services based on mutual reliance regulated through
reputation, social and spatial proximity, family and ethnic ties, and the like. Despite mutual
dependence, the lead firm still specifies what it needs, and controls the highest valued activity in
the chain, thus having the ability to exert more control over the supplier. Producers in relational
chains are more likely to supply products differentiated in the marketplace as a result of their
complexity, quality, origin or other desirable characteristics. As a result, dense interactions and
knowledge sharing occurs, but unlike modular networks, this knowledge cannot be codified, easily
transmitted or learned. Furthermore, relational linkages take time to build, so the costs and
difficulties involved in switching to new partners tend to be high.

The desire to establish relational versus more controlled linkages with suppliers can also be
attributed to cultural preferences. For example, in the automotive industry, Japanese firms prefer
to maintain relational business ties with their suppliers in contrast to U.S. carmakers who either
feel the need to exert more control through captive relationships or prefer to maintain distant,
“hands-off” market relationships. [4]

4.5.4 Captive

In these chains, small suppliers are dependent on a few buyers that often wield a great deal of
power and control. Such networks are frequently characterized by a high degree of monitoring and
control by the lead firm. The asymmetric power relationships in captive networks force suppliers
to link to their buyer under conditions that are set by, and often specific to, that particular buyer.
This leads to thick linkages and high switching costs all round. Yet, these lead firms are also the
most likely to invest in the product and process upgrading of their suppliers. Since the core
competence of these lead firms tends to be in areas outside of production, helping their suppliers

46
upgrade their production capabilities does not encroach on their core competency, but it will
benefit the lead firm by increasing the efficiency of their supply chain. Competent, ethical
leadership is important in such cases to ensure that suppliers receive fair treatment and an equitable
share of the market price.

In the Malawi tobacco value chains, small farmers produce tobacco under the Integrated
Production System (IPS) Framework for a handful of larger buyers and processors based on
outgrowing contracts. These farmers are generally in a captive position vis-à-vis the vertically
integrated processors. The processors frequently take advantage of the high level of competition
among captive farmers by exerting pressure to lower mortality, advance facilities and introduce
more efficient growing practices, causing the farmers to constantly face pressure to improve their
practices. Despite the economic benefits the farmers receive from raising chickens, many resent
the concentrated power held by large integrators, leaving the farmers with a narrow range of
tasks, significant switching costs, and dependence on the processors’ provision of resources and
market access.

4.5.5 Hierarchical

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

Hierarchical structures provide regular employment, guarantee quality and build producer
capacity. Less tangible social benefits may also be associated with hierarchical relationships:
influential business people may offer a measure of protection to local communities, for example,
or provide schools, health facilities or consumer credit. These benefits can be important to the
livelihood strategies of the vulnerable, but the prioritization of social considerations over industry
competitiveness represents a potential trade off between economic upgrading and social
upgrading.

4.6 Determinants & Dynamics of Inter-firm Governance Structures

The form of governance can change as an industry evolves and matures, and governance patterns
within an industry can vary from one stage or level of the chain to another. The dynamic nature of
governance can be largely accounted for with three 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; and the capabilities of existing suppliers to produce
efficiently and reliably. These variables are discussed below:

47
Information complexity refers to the intricacy of information and knowledge that must be
transferred to ensure a particular transaction can occur. This is important because suppliers
working with complicated product and process specifications are more difficult to control and
coordinate, which increases switching costs. This effort can be reduced through standardization
and codification.

Information codification is the extent to which complex knowledge is converted into

industry-wide standards or situation-specific information that can be efficiently transmitted along
the chain at a minimal cost. Developments in information technologies enabling better logistics
management (e.g., EDI or RFID or computer aided design (CAD) allow complex data to be easily
handed off between value chain partners.

Supplier capability refers to suppliers’ ability to meet all transaction requirements. These may
include quantity and quality specifications, on-time delivery, or environmental, labor and safety
standards. Suppliers need access to support services such as input supply, equipment maintenance
and upgrades, reliable transportation, and certification assistance to develop new capabilities. If
affordable and effective services are not available from supporting markets, suppliers will rely
more heavily on buyers to meet these needs and vice versa.

If one of these three variable s changes, then value chain governance patterns tend to shift in
predictable ways. For example, if a new technology renders an established codification scheme
obsolete, modular value chains are likely to become more relational; and if competent suppliers
cannot be found, captive networks and even vertical integration will become more prevalent.
Conversely, rising supplier competence might result in captive networks moving towards the
relational type, and better codification schemes set the stage for modular networks.

Business enabling environment and institutions: The business environment incorporates the
physical entities, including government agencies and non-governmental organizations (NGOs)—such as
multilateral agencies, industry trade groups, labor unions and advocacy groups—that set forth institutions
and create resources to facilitate compliance with them. Institutions refer to the rules that govern society,
including laws, policies, standards and societal and cultural norms that impact the structure and
competitiveness of an industry. They are derived, to a greater or lesser degree, from the beliefs and priorities
embedded in the environment that creates them. Institutions place legal or voluntary limits on actions, and
firms that surpass those limits run the risk of sanction, creating pressure for firms to comply.

Power: This is the ability of a firm or organization to drive the direction of the value chain, and thus
influence and control other firms in the chain. Power can come from any part of the value chain structure,
and in many different forms. Within the chain, power is exercised by firms and workers within firms.
Outside the chain, power comes from the state and other institutions created by the enabling environment
and consumers. Those in possession of industry power actively shape the distribution of profits and risk
through their activities.

48
References
1. Gereffi, G. (2005). Export-oriented growth and industrial upgrading: lessons from the
Mexican apparel case. World Bank case study for Uma Subramanian. January 31.
2. Humphrey, J., & Schmitz, H. (2002). Developing country firms in the world economy:
Governance and upgrading in global value chains (INEF Report No. 61). Duisburg:
University of Duisburg.
3. Ponte, S. (2008). Developing a 'vertical' dimension to chronic poverty research: Some
lessons from global value chain analysis. Working Paper, #111, Chronic Poverty Research
Center.
4. Sturgeon, T., Van Biesebroeck, J., & Gereffi, G. (2008) Value chains, networks and
clusters: Reframing the global automotive industry. Journal of Economic Geography 8(3),
297-321.
5. Gereffi, G., Lee, J. & Christian, M. (2008). The Governance Structures of U.S.-Based Food
and Agriculture Value Chains and their Relevance to Healthy Diets. Paper prepared for the
Healthy Eating Research Program, Robert Wood Johnson Foundation.

Unit Four Summary

In this unit you have learnt about the concept of value chain governance and its importance in
enhancing the efficiency of a value chain. You have also learnt about various types of value chain
governance and the determinants of value chain governance.

Unit

Activity 4-d

Self -Evaluation-Activity

Explain briefly why value chain governance is important in enhancing the efficiency of a
commodity value chain.

49
Unit Five: Role of traders in the Chain
5.1 Introduction
Smallholder farmers in Africa face serious difficulties selling their farm products. But the people
who specialize in marketing these products are treated with great suspicion. Popular opinion holds
that traders are redundant and manipulative, hence their needs are neglected. This results in
distrust, inefficient food chains, adverse policies, and disappointing outcomes for farmers, traders
and consumers alike. This unit therefore focuses on this group of chain actors – traders. The unit
discusses their role in the chain, the challenges they face and the challenges can be addressed.

5.2 Unit Objectives

By the end of this unit, you should be able to:

1. explain the role of traders in commodity value chains

2. discuss the challenges that traders face
3. explain how the role of traders can be improved

You will find the following key words or phrases in this unit. Watch for these and make sure that
you understand what they mean and how they are used in the unit.

Key Words

• Trader
• Itinerant Traders
• Brokers

50
5.3 Role of Traders
Despite the many challenges in agricultural marketing, consumers in the cities are somehow
provided each day with fresh fruits and vegetables, milk and meat, grains and tubers – all at
affordable prices and in the appropriate amounts. This remarkable job is done by a myriad of small
and medium-sized traders. The daily distribution of food, one of a country’s most important
concerns, is the principal function performed by agricultural traders.

Traders perform their distributive function in the food chain in return for a certain share of the
consumer price. People often think that this share is too much: that traders take too large a portion
from the value chain. It is true indeed that the value share of trading in Africa is relatively large,
as compared to developed countries. But it is almost impossible to compare these situations. In
developed countries traders can deal in large volumes, and the value chain is highly efficient in
terms of handling, distribution and communications. But African traders deal
only in small quantities, and they operate in chains that are far from efficient. The relatively large
marketing margins do not automatically imply that African traders are greedy and exploitative.

5.4 Costs Incurred by Traders

Agricultural trading in Africa is in general a high-risk business, because there is no support from
formal institutions such as quality standards, market information and mechanisms for contract
enforcement. Roads and rural infrastructure are inadequate, and widespread poverty raises the
likelihood of theft and swindling. Among the many risks of trading are: non-payment by clients,
lack of supply, large price fluctuations, theft, physical insecurity, wastage of produce, “informal
taxation” at road blockades, and cheating on quality grades, just to name a few. Traders can take
no insurance against these risks, so they need to compensate in the margin that they make on the
produce. Some of the major costs faced by traders are as follows (the figures are based on
research in Benin, Ethiopia, Malawi and Madagascar reported by Gabre-Madhin, 2001;
Fafchamps and Gabre-Madhin, 2002; and Fafchamps, 2004):

• Transport The overwhelming majority of traders have no motorized transport, so they

need to hire it from others. The physical transport of produce can account for 40–60% of
the marketing margin.
• Handling These are the costs of loading the produce at the time of purchase and off-loading
at the time of sale. They also include the costs of packing the produce, and of the packaging
material such as sacks or crates. Research shows that these costs can represent 20–30% of
the marketing margin.
• Search Normally there is no public market information, so traders may spend a long time
looking for crops or animals to buy. They also spend money on bus tickets, lodging, meals,
etc. These costs vary significantly from one situation to another, but they can represent up
to 15–20% of the marketing margin.
• Taxes, tolls, tips and fees These include taxes from the government, tolls for market stalls,
fees for brokers, membership fees, and tips at road blockades. Research shows that these
costs account for 10–15% of the marketing margin.

51
 • Product losses Traders inevitably lose some of the produce that they buy. Among the many
causes are delays in transport, theft, improper handling, lack of storage space and
refrigeration, post-harvest pest and disease attacks (for stored produce), selection and
grading, inadequate packaging, and unsold produce. Obviously the losses are likely to be
larger for perishable produce.

Research also shows the costs that African traders do not have. They have few finance costs, as
they make little use of loans from banks and have few capital assets such as vehicles or warehouses.
They also have low storage costs, which implies that they tend to sell the produce as quickly as
possible and thus achieve high capital turnover, rather than store it and speculate on price increases
(research shows that contrary to popular assumptions, storage is relatively unimportant, even for
grains). Finally, traders have few personnel costs; most are self-employed
entrepreneurs with nobody assisting them.

All in all, the marketing margins of traders should be interpreted in relation to the costs and risks
that they face. It is impossible to generalize about the profitability of trading in Africa. It depends
primarily on how competitive the market is. When there are only few traders and large numbers
of suppliers and consumers, you can expect high profit margins in trading. But in other situations
traders may compete so fiercely that their profit margins are low or even negative. Research has
found that profit margins in the same products were 8.4 times larger in Malawi than in Benin,
because the latter has a well-evolved, competitive market system (Fafchamps and Gabre-Madhin,
2002). The competition between traders varies from marketplace to marketplace, within the
marketplace from commodity to commodity, and within the commodity from season to season.
Traders may take advantage of situations where there are few market outlets, as much as farmers
may take advantage when supply is scarce. This book will look into the margins in the value chain,
and examine experiences where farmers and traders share information about their profit margins.

5.5 Types of Traders

Travelling or Itinerant traders meet the farmer at his or her farm to collect the produce.
They spend their time mainly on the road, bringing goods from farmers or small village markets
to an urban market. Travelling traders usually pay the transport costs. In many African countries,
travelling traders have a bad reputation, and they are often called “middlemen”.

Resident wholesalers stay in the larger markets to receive goods from travelling traders and
large farmers, which they resell to retailers and large, regular buyers such as schools, restaurants
and prisons. Each commodity is sold in complete wholesale units (such as 100 yams, or a crate of
tomatoes), so consumers planning a big family event may also buy here.

Retailers sell goods in whatever quantity a consumer wishes buy at one time. They also offer
goods at convenient times and in convenient locations, including small neighborhood markets and
roadside kiosks.

52
Hawkers carry goods for sale from house to house by foot, or sometimes on a bicycle.

Brokers match up buyers and sellers and help them negotiate a price. They do not buy the goods
themselves and often earn a commission, so they are not really traders but service providers.

Exporters/importers buy and sell goods across national borders.

Unit Four Summary

In this unit you have learnt about the critical role of traders in commodity value chains, the various
types of traders, their characteristics and the challenges they face.

Unit

Activity 5-e

Self -Evaluation-Activity

Explain the role of brokers in a commodity value chain

53
Unit Six: Critical Success Factors for a Value Chain
6.1 Introduction
For a business to have a competitive edge, certain fundamentals must be in place to succeed.
Successful value chain management should be part of your small business strategic planning
initiative, a powerful way to help your operation contain costs and succeed in today’s ultra-
competitive business environment. This unit describes the factors that would lead to a successful
value chain.

6.2 Unit Objectives

By the end of this unit, you should be able to:

1. Identify and explain the critical success factors for the efficiency of a value chain
2. Discuss the results of a successful value chain
3. Discuss the Principles of Value Chain Management

You will find the following key words or phrases in this unit. Watch for these and make sure that
you understand what they mean and how they are used in the unit.

Key Words

• Cost Advantages
• Optimised Margins
• Long-term Viability

6.3 Factors for the Efficiency of a Value Chain

Identifying the critical success factors for developing value chains will ensure adequate benefit
sharing by all players along the chain. The following are some of the key critical success factors
for the efficiency of a value chain:

54
 6.3.1 Research and Development

The first step in value chain management is researching the products your customers want.
Through careful market analysis, including the measurement of consumer trends, companies can
anticipate what people want and have those products available. On the small business level, this
could mean working directly with suppliers to produce a new product.

6.3.2 Product Design

Once a new product has been identified or an existing product upgraded to meet anticipated
demand that item is tested, refined and sent on for production. In companies where service is the
product, the same planning process is used.

6.3.3 Production Process

Where your product is manufactured can have a significant impact on quality, cost and value.
Global sourcing and supply has begun a long-term process of levelling the playing field for adding
value worldwide. More than likely your small business will look overseas to suppliers who can
build what your company needs at a competitive price.

6.3.4 Marketing and Sales

There are three components that every successful product must offer: product value, service value
and a customer care value. That latter component goes beyond personal care and warranty service
to provide an enhanced level of service not generally offered.

6.3.5 Distribution Management

Where you warehouse and how you distribute your product is a critical link in the value chain.
Transportation, material handling, packaging, communications and information systems need to
be in place to get the product to your customers. Distribution, or logistics management, remains
important in the digital age, as physical locations such as stores and warehouses are still needed.
How you employ each distribution point is subject to review and change.

6.3.6 Customer Service

Getting the product to your customers means training your employees to know everything about
it, advising customers how to use the product, diagnosing and troubleshooting, and providing
friendly service. This final link in the supply chain is refined as needed and is used by senior
management to gauge customer behaviour.

55
 6.3.7 Formation of effective alliances is therefore a key issue.
The value chain in an enterprise starts with the producer and ends with the consumer. Throughout
the chain, there are two types of actors: direct actors, who are the members of the market chain
through which the product moves (such as harvesters, traders, manufacturers and consumers); and
indirect actors, who can influence the marketing of the product (such as policy-makers, technical
researchers and environmental advocacy groups). These include both private- and public-sector
companies and agencies. Alliances are so important that if one of the parties in the chain is weak,
the whole venture can be affected and may even collapse.

In addition to the factors above, the facts in the box below are also critical for the efficiency of a
commodity value chain.

• How well the actors in the chain are organized.

• How information flows between the various levels.
• What values and principles apply to dealings between actors?
• Availability of capital to each category of actors.
• How well the chain is supported by a range of business development services (BDS).
• Value chains can often become more efficient by improving BDS or by facilitating greater
access to BDS

6.4 Results of an Effective Value Chain

Understanding the effects of the value chain and how to optimize results from operations is vital
to small business success and indeed to all actors in the value chain. As indicated above, the value
chain is a concept developed by recognized business management expert Michael Porter in his
1985 book "Competitive Advantage." It breaks up the various elements of producing and delivery
value to customers into key components.

6.4.1 Value Chain Basics

Before considering results of an effective value chain, you need to understand its elements. The
development of value for the customer begins with inbound logistics. Subsequent components
include operations, outbound logistics, marketing and sales and service. The culmination of
optimizing performance in each of these key elements is the establishment of product margin,
which is the difference between what the market will pay for a product and the cost basis for the
provider. Porter identified firm infrastructure, human resources management, technology
development and procurement as key support elements of the value chain.

56
 6.4.2 Optimized Margins

As noted, the net result of the value chain is the creation of margin potential. Optimized gross
margin is significant to a small business with natural limits on how much volume it can generate.
Higher gross margins mean you can generate substantial profits from fewer sales than you could
if any phase of the value chain was not optimized. The more value the customer sees and
experiences from the purchase, the more he is willing to pay.

6.4.3 Cost Advantages

Along with enhancing margins, an effective value chain enables small businesses to reduce costs
for production or resale. This is vital for smaller companies that do not always have the buying
power of larger corporations. Companies can lower costs by optimizing logistics to reduce
transportation expenses and to avoid wasted resources. They can also discover operational
inefficiencies to speed up business processes and to cut down unproductive expenditures.

6.4.4 Long-Term Viability

Optimizing the value chain also helps companies differentiate themselves from competitors in
terms of product features and benefits and branding. Product development means building
solutions that are distinct and better than those offered by competitors. Branding is use of the
marketing and sales component of the value chain to convey an image of quality, high service or
other pertinent messages of value to the marketplace. Strong differentiation is important to current
sales and long-term viability in a competitive market.

6.5 Principles of Effective Value Chain Management

Collins and Dunne (2002) package the above critical success factors into what they term the six
principles of value chain management. They are: Focus on Customers and Consumers; Create
Share, Realize and Protect Value; Get the Product Right – Every Time; Ensure Effective and
Efficient Logistics / Distribution; Ensure an Effective Information and Communications Strategy
Is In Place; Build and Maintain Effective Relationships. Developed from studying successful value
chain partnerships from the agri-food and other industries, they span the entire chain and guide
participants of both infant and mature partnerships through the process of identifying the specific
factors that are critical to the effective management of a chain alliance. Should any of the six
principle areas of VCM be neglected, the alliance will not perform to its full potential.

6.5.1 Focus on customers and consumers

• From where do you source your market research data?

o Customers, Retailers, Food service industry
o In store demos, interviews, farmer markets

57
• How do you encourage consumer & customer feedback?
o Promotion, packaging, surveys, internet, trade shows, seminars, focus groups

• How often do you research the end market?

o Competitors, Industry associations, Input suppliers
o Magazines, Journals, Conferences
o Information is compared, contrasted, placed in a usable format, and reported

6.5.2 Create, share, realize and protect value

• With your Suppliers & Customers and their Suppliers & Buyers:
o The perception of value that you work towards is your customers’
o & consumers’
o You and your business partners simultaneously digest market-related information
o The chain systematically identifies inefficiencies / value destruction activities
o Identify points of greatest value creation and costs
o Examine performance / value / cost ratio
o Systematic & collaborative search for improvements

• Identify the financial value your product can secure in the marketplace
o Identify ways to share financial returns amongst the alliance in relation to value
created
o Distribute returns according to value created & associated costs
o Calculate the financial incentives required to ensure alliance members remain
committed

• Identify methods to separate operations and returns from the commodity mindset
o Establish a governance system that covers the financial aspect of maintaining an
alliance
o Implement methods along the chain to identify & eradicate operations & processes
that add unnecessary costs to the end product

6.5.3 Get the product right – every time

• What problem are you solving for the consumer?

o what does the consumer want which is currently not provided / guaranteed

• Does your product meet customer & consumer needs & wants?
o customer / consumer feedback is used to identify and prioritize problems
o customer / consumer complaints are viewed as an opportunity to improve
operations

• Does the packaging embellish the product?

58
 o provide necessary information, promote the product, tell a ‘story’

• Does the packaging completely serve its purpose?

o protection, logistics, shelf-life, display, aesthetics, value expansion

• What additional information do consumers want?

o format, medium, style, target audience, description

• How does your product compare to competitors’?

o “value proposition”, budget item, quality, information, consistency, place

6.5.4 Ensure effective & efficient logistics / distribution

• How do you monitor the integrity of logistics?

o including: temperature, handling, inventory levels, gas / hormone levels

• Are unsuitable products shipped together?

o E.g. ethylene producing and sensitive products, or require different temperatures
• Do you correlate product outturn and input issues?
o effective use of resources, yield, process improvement,

• Do similar issues regularly arise with customers?

o do you track complaints, returns, rejections, “distressed sales”

• How timely / dependable are your logistic agents?

o collection, delivery, handling, damages,

6.5.5 An effective information and communication strategy is in

place

• What information is vital to your operations?

o Inc. Forecasts, POS, Shrinkage, Yield, Specifications
o How is this information used?

• What currently unavailable information would improve yours or others’ operations?

o Regularity, format & who the information shared with and when ....Why?
o Could benefits be achieved by sharing other information with alliance partners?
o How is this information used? Can it be used better?

• What is your information-sharing strategy?

o How is the information exchanged?
o What feedback and discussion opportunities does the strategy include?

59
 o Is all information shared through the most effective mediums? Yes, no, why?
o How do you ensure timely & accurate sharing of qualitative & quantitative info?

• How, when, where do the VC partners share info?

o Is role, responsibility, accountability, benefits, results adequately communicated?

6.5.6 Build and maintain effective relationships

• Are the partners’ / strategies complementary?

o How do you ensure they remain complementary and relative?

• How often do senior managers meet?

o Who, what, when, why, objective, format, proactive / reactive

• What are performance measures and incentives based on?

o Individual or partner focus, market share, profitability, yield

• Do alliance partners visit each other’s operations?

o Objective, format, who, why, where, when, how

• Do organizations share or second employees?

o Information exchange, empathy creation, cooperation-building

• Are inter-organization workshops arranged?

o Format, facilitator, objective, type and level of personnel, outcome

• What processes are in place for the alliance members to learn as a team?
o Does this process encompass the effective creation and sharing of knowledge?
o Is success celebrated as a team in order to encourage further learning?

6.6 Key challenges for the inclusion of small-scale farmers and SMEs in
regional agricultural value chains in East and Southern Africa

Small-scale farmers do face a number of challenges in the participation of regional agricultural

value chains. Unfortunately, small farmers also constitute the poorest of the players of these value
chains. This section therefore discusses some of these challenges that need to be addressed to
ensure effective inclusion of the poor into the value chains.

60
1) Farm level supply constraints: multiple and including poor linkages with other actors in
the value chain at both national and regional levels
2) Lack of information on market opportunities and prices in national and regional markets.
3) Quality standards and Sanitary and Phytosanitary (SPS) measures used as non-tariff
barriers
4) Inability to set up effective HACCP systems to address problems of food safety and quality
assurance
5) Limited access to technology to enable small-scale farmers and small and medium
entrepreneurs to apply economic efficiency
6) Organisational development including poor organisation and links among the various
actors along the value chain
7) Weak capacity of service providers along the value chain e.g. input suppliers
8) Trade policy and regulatory environment: trade and macroeconomic policies that have
biased the structure of incentives against agriculture and exports
9) Lack of infrastructure, high cost of transport and other costs of doing business at both
national and regional levels
10) Unfair competition from well-established transnational corporations with highly
concentrated market power and share along the entire value chain making entry of small
and medium regional entrepreneurs difficult
11) Absence of regional value chains and niche markets due to fragmented markets at both
national and regional levels with limited linkages
12) Limited role in knowledge-based innovations due poor access to modern technologies and
skills, including use of ICT in design and branding of their products to effectively compete
in regional markets
13) Costly technological standards relating to hygiene and food, including traceability
requirements, good agricultural practices and private standards
14) High dependence on a limited number of export commodities further worsened by erosion
of preferential market access in the developed countries
15) At the national and local levels, the withdrawal of governments from direct involvement
in marketing has left large gaps which the private sector is yet to create the requisite
capacities.
16) Non-Tariff Barriers to agricultural trade which seriously hinder participation of small-scale
producers and small and medium entrepreneurs from participating in regional markets.
17) Complexity of establishing links with small farmers in often remote locations
18) Lack of managerial capacity and bargaining power to deal with bureaucracy
19) Inadequate market information, design capability and technology
20) Problems matching supply with demand due to small sales volumes
21) Little collateral to attract investors or offset risks themselves. Global value chains (GVC)
are particularly challenging on account of distant Market preferences, export requirements,

61
 consumer social and environmental concerns and standards, and competition with those
offering tailored customer services.

6.7 Possible Areas for Support and Intervention in Value Chains

1) Strengthen the capacities of the actors in value chains with a special focus on producer
organisations and SMEs (production and processing): provide adapted information packs
on innovations and best practices; strengthen lobbying capacities of private actors for
policy reforms in favour of value chains development

2) Support standardisation of products and traceability: contribute to the dissemination of

regulations/legal provisions on regional standards

3) Value Chain financing. Appropriate value chain financing mechanisms should be

employed; such as warehouse receipt systems. The willingness of financial institutions to
examine value chain relationships and make financing decisions based on third-party
agreements rather than conventional collateral is one of the most significant innovations in
expanding agricultural finance to poorer farmers and agro-enterprises. Whether it is an
understood arrangement with a buyer like Shoprite Retail Shops, a formal contract with a
facilitator such as TechnoServe, or vertical integration with a global player as with
Starbucks, direct lending to farmers can be improved because of these linkages. Financiers
become more confident in the face of the secure markets offered by the lead firms that
drive the value chain and ensure an outlet for products. Furthermore, this has led to third-
party lending where banking institutions will provide loans to businesses higher in the
chain – such as processors – knowing that the firm will lend to trusted suppliers. This
reduces the due diligence and operational costs of lending on the part of the bank, while
also mitigating their own risk. The collateralization of agricultural outputs, and the
formalization of their value, is another significant innovation in value chain finance. With
the growth of managed warehouses – both low-tech field warehouses and sophisticated
supply chain management establishments – lenders gain confidence in the preservation of
goods, and their sustained or increased value over time.

4) Support regional networks of Market Information Systems (MIS): despite determined

efforts and significant resources deployed so far to develop effective MIS, producers have
to date difficult access to up-to-date market information. Small-scale producers still find it
difficult to have adequate and specific information. There is a need to build on existing
networks such as Esoko, the Network of Market Information Systems of West Africa
(RESIMAO), AGRIS (under construction), etc

5) Institutional support to small producers and small and medium-sized agricultural

enterprises: this is to provide young companies, the necessary framework for the
formalisation, professionalization and the structuring of the business

6) Network actors and encourage synergy in actions: this is essentially to create.

62
 Unit Six Summary

In this unit you have learnt about the critical success factors for the efficiency of a value chain.
You have also learnt about the results of an effective value chain and the principles underlying an
effective value chain. In addition, you have also learnt about the key challenges of including
smallholder farmers in regional value chains and the possible areas for support and interventions
in value chains.

7.0 Module Summary

In this module you have learnt the importance of the value chain approach in fostering economic
development. A number of issues have been discussed and they include the historical background
of the approach, various value chain business models, the value chain analysis process, value chain
governance and the critical success factors for the efficiency of any value chain. The objective of
the module has been to assist students and researchers in formulating and executing value chain
research, particularly with a view to framing a policy environment which will assist poor
producers and poor countries to participate effectively in the global economy.

63
 Answers to all Unit Activities in the Module

Answers to Self-Activity 1a

Self -Evaluation-Activity

Compare and contrast the following two terms: Value Chain and Supply Chain.

A supply chain and a value chain are complementary views of an extended enterprise with
integrated business processes enabling the flow of products or services in one direction, and of
value represented by demand and cash flow in the other. Both chains overlay the same network of
companies. Both are made up of companies that interact to provide goods and services

In layman’s terms, a supply chain is what ensures that the products you value so much actually get
to you. Some of the things we use are manufactured half way across the world from your local
convenience store. A supply chain therefore involves bulk storage and transportation. The major
difference between a supply chain and a value chain is the simple fact that within a supply chain,
there is no value added. In a supply chain, all that is being done is conveyance. One product or
material is taken from one company or from one end and transported to the other. Of course there
are procedures involved such as proper storage and careful transportation but that is about it. In
value chains, as much as there is transportation and some storage involved, the main purpose of a
value chain is to add value to the product so as to make it presentable to the client. This is often
achieved via packaging, marketing and sales.

Answers to Self--Activity 2-b

Self -Evaluation-Activity

How do you characterise the Tobacco Industry in Malawi? What value chain business model
does the tobacco industry take in Malawi?

The Tobacco Industry in Malawi follows a Buyer-Driven Value Chain Model. The buyers
command a significant influence on the quality, quantity and value of the tobacco leaf that is sold
to them through the Auction Floor and through the Integrated Production System (IPS). All there

64
are producer organisations such as Tobacco Association of Malawi (TAMA), their influence on
the pricing system is rather small.

Answers to Self-- Activity 3-c

Self -Evaluation-Activity: Practical

On your own, undertake a value chain analysis of any agricultural commodity of your choice.

Your response should include the following:

a. Clearly identify the commodity of your choice, e.g. soya beans

b. Clearly identify the study area (whether in the whole country or in a particular district)
c. Collect secondary data on varieties available and their attributes, production trends, land
allocated to soya in Malawi over the past ten years, pricing trends, export and import trends
over the same period. Analyse policy on the crop’s policy in the country.
d. Identify all the players involved in the commodity value chain and map the chain to
demonstrate the value flow from producer to the final consumer.
e. Collect data on the role of all the players along the chain from production to consumption and
identify their challenges, benefits, power relationships in order to suggest what needs to be
done to address those challenges.
f. Collect both qualitative and quantitative data from the players (such as socio-demographic
characteristics, production quantities, prices, value adding activities, value added products,
costs of production for all the activities by all players along the chain. This should help you
to analyse the profitability at each stage of the chain
g. It is also necessary to compute various indices that measure the efficiency of the marketing
system of the commodity under study.
h. Analyse the data and craft a comprehensive report that details key recommendations for the
enhancement of the commodity chain

Answers to Self-- Activity 4-d

Self -Evaluation-Activity

Explain briefly why value chain governance is important in enhancing the efficiency of a
commodity value chain.

65
Governance is a dynamic feature of value chains that characterizes the relationships or linkages
among stakeholders in the chain. Governance is important as it relates to the ability of a stakeholder
to determine, control and/or coordinate the activities of other actors in the value added chain. At
any point in the chain, a firm (or organization or institution) can set parameters under which others
in the chain operate. The stakeholders responsible for establishing parameters can be one or more
firms in the chain, actors in the larger enabling environment, or a combination of the two. Different
actors may exert more or less influence in local or global markets, and the scope of an actor’s
impact can be economy-wide or industry-specific. By setting the parameters for governance,
powerful actors influence who acquires production capabilities and market access and how gains
are distributed throughout the chain

Answers to Self-Activity 5-e:

Self -Evaluation-Activity

Explain the role of brokers in a commodity value chain

Brokers connect farmers/agrifood SMEs with relevant collaborators and service providers and also
with sources of funding and policy information. Sometimes farmers may not know the buyers of
their commodities, nor the suppliers of inputs. Brokers are usually equipped with information
which they use to connect various players of the commodity chain for a transaction to take place.

Answers to Self-Activity 6-f:

Discuss any two critical success factors for the efficiency of a commodity value chain

You can list and discuss any of the following factors:

• The organization of actors in the chain.

• How information flows between the various levels.
• Values and principles applied to dealings between actors?
• Availability of capital to each category of actors.
• How well the chain is supported by a range of business development services (BDS). Value
chains can often become more efficient by improving BDS or by facilitating greater access
to BDS

References
66
Gooch, M. (2005) Drivers, Benefits and Critical Success Factors of Developing Closely-Aligned
Agri-Food Value Chains.
http://www.georgemorris.org/publications/Value_Chain_Drivers_Benefits_CSFs.pdf

Kaplinsky R (2000), “Spreading the gains from globalisation: What can be learned from value
chain analysis?”, Journal of Development Studies, Vol. 37, No. 2., pp 117-146

KIT, Faida MaLi and IIRR (2006) Chain empowerment: Supporting African farmers to develop
markets. Royal Tropical Institute, Amsterdam; Faida Market Link, Arusha; and International
Institute of Rural Reconstruction, Nairobi.

KIT and IIRR (2008) Trading up: Building cooperation between farmers and traders in Africa.
Royal Tropical Institute, Amsterdam; and International Institute of Rural Reconstruction, Nairobi.

KIT and IIRR (2010) Value chain finance: Beyond microfinance tor rural entrepreneurs. Royal
Tropical Institute, Amsterdam; and International Institute of Rural Reconstruction, Nairobi.

Miller, C. and Jones, L. (2010) Agricultural Value Chain Financing. Tools and Lesson; FAO
Publications

Wood, A. (2001), "Value Chains: An Economist’s Perspective", in G. Gereffi and R. Kaplinsky

(eds.), IDS Bulletin Special Issue on The Value of Value Chains, Vol. 32, No. 3, pp. 41-6.

67