Value Chain Analysis and

Development (ABVM 222)

BY
Bizuayehu A.
Ta rget gro u p s:AgEc 4th year s t udents

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 Chapter 1
The Value Chain Approach: Concepts,
Importance, and Principles

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Value Chain Aproach:Concepts, Importance and Principles

1. What do you understand by the term

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

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 Are markets producer or customer driven?

Relate your answer to the above diagram and focus it on

agricultural produce

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 1.1. Basic Concepts of Value Chain
⚫ What is value? defined as:
⚫ Afair return or equivalent in goods, services, or money for something exchanged.
⚫ The monetary worth of something: market price.
⚫ Relative worth, utility, or importance.
⚫ Anumerical quantity that is assigned or is determined by calculation or
measurement.
⚫ Value is what makes something desirable!
MeasuringValue
What makes Something desirable?
⚫ Things that make something desirable could be
⚫ Price (cheap or high value);Appearance (looks); Experience (taste); Ease
of use (fresh-cut and washed);Availability (year round like Coca Cola).
⚫ In all the attributes which make things desirable, consumer i s the basis.
⚫ In other words consumers are the basis to determine value. 5
⚫ The term value Chain‘ was used by Michael Porter in
his book "Competitive Advantage: Creating and
Sustaining superior Performance" (1985).
⚫ Value chain refers to all the activities and services that
bring a product (or a service) from conception to end
use in a particular industry—from input supply to
production, processing, wholesale, retail and finally ,
consumption.
⚫ It is so called because value is being added to the
product or service at each step.
⚫ A value chain is a connected string of companies,
groups and other players working together to satisfy
market demands for a particular product or group of
products.
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⚫ A value chain links the steps a product takes from the farmer to
the consumer.
⚫ It includes research and development, input suppliers and finance.
⚫ The farmer combines these resources with land, labor and capital
to produce commodities.
⚫ A value chain is a network of strategic alliances between
independent companies that together manage the flow of goods
and services along the entire value-added chain.
⚫ A value chain encompasses the flow of products, knowledge and
information, finance, payments, and the social capital needed to
organize producers and communities.

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

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

If a chain is a value chain:

There are certain chain relations
There is a coordination of the chain
There is a (fair) addition of value
 “Each of the actors in the chain is prepared to invest in the chain, and to support the
other actors, to make sure that it functions smoothly”. 9
⚫ So, supply chains focus primarily on reducing costs and
attaining operational excellence, while value chains focus
more on innovation in product development and marketing.

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 An agricultural value chain might include:
⚫ Development and dissemination of plant and animal
genetic material,
⚫ Input supply, farmer organization, farm production,
post-harvest handling, processing,
⚫ Provision of technologies of production and handling,
grading criteria and facilities, cooling and packing
technologies,
⚫ Post-harvest local processing, industrial processing,
storage, transport, finance, and feedback from markets.

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 The Value Chain Approach
⚫ A value chain approach in agricultural development helps
to identify weak points in the chain and actions to add
more value.
⚫ The Value Chain Approach is a means for examining
the development of competitive advantage which is
achieved when an organization links its activities in its
value chain more cheaply or more expertly than its
competitors.

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

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 Importance of Value Chain Approach
The importance of the Value Chain Approach lies in seeing
agriculture as a comprehensive system of agro-based business
activities comprising input provision, primary production,
processing, marketing/trade and consumption.
 In this approach, market and consumer demands determine
the nature, conduct and performance of modern agri-business
at any point of the value chain.
The Value Chain Approach therefore aims at making
agricultural production and marketing more efficient by
increasing value addition as well as improve incomes for all
operators along the agricultural production system.

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 Importance cont….
 The importance of the value chain to the various actors are:
 Enables the Producer to do the following:
 Bring about product differentiation
 Retain his/her customers
 Improve the quality of his/her produce
 Increase quantity of his/her produce
 Produce at minimum cost
 Stay competitive in the market
 Increase his/her income
 Remain sustainable (employed)
 Develop customer and consumer confidence
 Ability to project market supply

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

 Enables the Consumer to enjoy the following:

 Quality products assured
 All year availability of products
 Quality products at reasonable prices
 Wider range of goods to choose from
 Healthier life 16
 The Principles of the Value Chain Approach in Agriculture
⚫ The basic principles underlying the Value Chain Approach
in agriculture are that agricultural markets and consumers
demands determine the nature, structure and conduct of
modern agri- businesses.
⚫ The principles mentioned earlier are listed below:
 The breakdown of the course of production (input supply to
consumption) into chain links;
 Chain links are activities;
 Value is added to each activity;
 Overall output will be with improved quality, improved
quantities and reduced cost; and
 Be able to stay in the competitive world.

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 Characteristics of Value Chain Approach
⚫ A value chain is characterized by:
 Production line consists of series of chains
 Each chain consists of activities
 Value added to an activity affects all other activities (links)
 Works when there is free and timely flow of information among
the operators/actors
 Each of the operators of the activities monitors and evaluates
along the chain
 All the operator/actors benefit when value is added
 A sequence of production processes (also known as linkages)
from the provision of specific inputs for production,
transformation, marketing and to the final consumption.
 The quality of linkages and coordination between producers,
processors, traders and distributors of a particular product
development determine the success of the value chain.
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 Value chain operators understand that they can access markets
if they succeed to supply competitive products in a joint effort.
 Value chain is competitive and its competitiveness depends
on trust, cooperation and communication among actors.
 The performance of every single partner in the chain
determines the strength of the entire value chain.
 The weakest link in the value chain also determines the
competitiveness of the final product.
 Certain actors or change agents are willing and able to
motivate others to follow.
 Operators act in their individual and collective interestand
assume responsibility from the start.
 All actors benefit from upgrading.
 Both positive and negative experiences are taken as a basis for
progress.
 Timely availability of critical information 19
 Feature of an Effective Value Chain
Differentiate products
Continuously innovate (products, technologies, management,
marketing, distribution).
 Create higher value
Use a variety of organizational mechanisms to achieve efficiency.
Form alliances and achieve coordination
Go beyond spot market transactions and include contracts,
vertical integration, networks, supply chains.
Introduce practices to meet environmental and social
responsibility concerns.

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 Dimensions of Value Chain
⚫ The value chain concept has several dimensions.
⚫ The first is its flow, also called its input-output
structure.
 In this sense, a chain is a set of products and
services linked together in a sequence of value-
adding economic activities.
 A value chain has another, less visible structure.
 This is made up of the flow of knowledge and
expertise necessary for the physical input-output
structure to function.

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

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

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 2. Value Chain Marketing Systems
⚫ Farmers are linked to the needs of consumers,
⚫ Farmers are working closely with suppliers and processors to
produce the specific goods required by consumers.
⚫ Consumers are linked to the needs of farmers.
⚫ The farmer's market power and profitability can be enhanced.
⚫ The system is market ―Pull. This is based on integrated
transactions and information.
⚫ Consumers purchase products that are produced according to
their preferences.

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 Value Chain Marketing Systems Cont…

⚫ The farmer becomes the core link in producing the

products that the consumers desire.
⚫ Research and development, whilst including techniques
targeted at increased production,
⚫ Attempts take account of all of the links, and dependencies
in the value chain, e.g. processing, environmental and
social costs or considerations, as well factors such as
health impacts, education and learning.
⚫ Communication is in both directions.

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

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 Actors…
 Actor is a corporate person, a natural person or other
entity, that is able to influence its direct surroundings.
 Actors are usually defined trough their input-output
transformations and inter-actor transactions.
 The concept can be nested, i.e. a chain or network can
also be considered as an actor within a larger network.

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 Actors…
 The various actors in the value chain can be grouped
under three levels or stages based on the roles they play.
1. Value chain main actors
2. Value chain supporter
3. Value chain influencer

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 Actors…
1. Value chain Main actor
 The chain of actors who directly deal with the products.
 Activities of value chain main actors regarding a specific
product or group of products involves producing, processing,
trade and owning the produces.
 They are known as direct actors.
 Direct actors are those directly involved in productive
processes, postharvest handling, processing and
commercialization.
 These actors take direct possession of and are owners of the
product in one or more links in the chain; they therefore run
direct risks.

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 Actors…
 Actors in a value chain may include input suppliers,
producers, collectors (small and mobile traders who visit
villages and rural markets), assembly traders (also called
primary wholesalers who normally buy from farmers and other
itinerant collectors and sell to wholesalers), wholesalers (who
deal with larger volumes than collectors and assemblers and
often perform important storage functions), retailers (who
distribute products to consumers), and processors (firms and
individuals involved in the transformation of a product).

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 Actors…
2. Value chain supporters:
 They are indirect actors who offer operational services and/or
support services to the direct actors at various points in the
chain.
 Indirect actors include suppliers, operational service
providers, support service providers and regulatory bodies
 The services provided by various actors who never directly
deal with the product, but whose services add value to the
product.
 Closely related to the concept of value chains is the concept of
business development services or value chain supporters
 These are services that play supporting role to enhance the
operation of the different stages of the value chain and the
chain as a whole.
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 Actors…
 In order for farmers to engage effectively in markets,
they need to develop marketing skills and receive
support from service providers who have better
understanding of the markets, whether domestic or
international.
 Local business support services are, therefore,
essential for the development and efficient performance
of value chains.

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 Actors…
3. Value chain influencers
 These include the regulatory framework, policies, etc.
 Specific policy and regulatory service elements influencing
value chain performance include land tenure security, market
and trade regulations, investment incentives, legal services,
and taxation.
 External influences refer to the fact that value chains do not
exist in a vacuum; rather, they are part of a larger
socioeconomic and institutional system within a country.
 There are therefore numerous external forces (economic,
legal/political, environmental, cultural) which can produce
effects on value chains and are beyond the control of the
direct actors.

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

80.30 Qt 3140.39 Qt

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

Government (Arba Minch) Cooperative and marketing office

retailers
3489.46 Qt
Wholesaling,

Government (Arba Minch) Agriculture Office

storage, supplying
to retailers Wholesalers

Banana Marketing cooperatives

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

Arba Minch University

Buying from member Farmers marketing
farmers, price, quality

Arba Minch Research Center

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

Governmnet
Marketing
Supplying inputs
cooperatives
agriculture Farmers
office

Functions Actors Supporters Influencers

Information flow
Source: Author, 2016
Product flow

Money flow
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Chapter Two: Value Chain Analysis

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 2.1. Basic Concepts in Agricultural Value Chain
Analysis
 There are four major basic concepts in agricultural value
chain analysis:

 Understanding the value chain and context

 Development of interventions and innovations

 Testing and implementation

 Evaluation and recommendations for improvement

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 Cont...
 Since value chains are composed of hierarchy of
chain stages, the concept of stages of production is
basic in value chain analysis.
 Closely related to the stages of production is the
concept of vertical coordination.
 A value chain needs business support services to
function.
 Hence, the fourth basic concept is the concept of
business development services.

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 Value chain analysis (VCA)
⚫ VCA is a process where a firm identifies its primary and
support activities that add value to its final product and
then analyze these activities to reduce costs or increase
differentiation.
⚫ VCA is an attempt to assess or estimate how competitive a
selected commodity or product is likely to be in a target
market, even before it gets there.
⚫ VCA describes the activities within and around an
organization, and relates to the analysis of the competitive
strength of the organization.
⚫ Therefore, it evaluates the value each particular activity
adds to the organizations products or services.

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 Value chain analysis...

⚫ The Value chain analysis is the base for value chain

improvement, development or the set up of complete new
value chains.
⚫ Value chain analysis is a way to visually analyze a company's
business activities to see how the company can create a
competitive advantage for itself.
⚫ Therefore, Value chain analysis helps a company understands
how it adds value to something and subsequently how it can
sell its product or service for more than the cost of adding the
value, thereby generating a profit margin.

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 Value chain analysis...
 Value chain analysis facilitates an improved understanding
of competitive challenges, helps in the identification of
relationships and coordination mechanisms, and assists in
understanding how chain actors deal with powers and who
governs or influences the chain.
 Developing value chains is often about improving access to
markets and ensuring a more efficient product flow while
ensuring that all actors in that chain benefit out of it.
 Changing agricultural contexts, rural to urban migration,
and resulting changes for rural employment, the need for
pro-poor development, as well as a changing international
prospect (not least the increase in oil prices) all indicate the
importance of value-chain analysis.

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 Value chain analysis...

 Value chain analysis plays a key role in understanding the

need and scope for systemic competitiveness.
 The analysis and identification of core competences will lead
the firm to outsource those functions where it has no
distinctive competences.
 Value chain analysis is useful for identifying constraints
and opportunities for the provision of financial services.

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key issues that can be addressed through the value
chain analysis
⚫ Share of benefits and costs from value chains and
market development.
⚫ Distribution of added value along the chain.
⚫ Market share of the different actors and corresponding
size of sub- sector.
⚫ Institutional and legal framework, such as regional
production and processing zones, trade protocols,
regulations on movement of people, agriculture
marketing policies and financial institutions.
⚫ Growth potentials (nodes with market potential).
⚫ Infrastructure development.
⚫ Potential for poverty reduction and rural income
generation.
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 …
⚫ Potential for sustained food supply at affordable
competitive prices for consumers.
⚫ Potential for maximization of returns on capital investment
at different levels of the value chain strategy.
⚫ Potential for strengthening sector and regional
complementarities and interdependence through
implementation of horizontal and vertical integration
approaches in the commodity production value chains
strategy.

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 2.2. Purposes of value chain analysis
⚫ Value chain analysis is conducted for a variety of purposes.

⚫ The primary purpose of value chain analysis, however, is to

understand the reasons for inefficiencies in the chain, and identify
potential leverage points for improving the performance of the
chain.
⚫ Value chain analysis involves breaking a chain into its constituent
parts in order to better understand its structure and functioning.
⚫ Thus, the VCA consists of
⚫ Identifying chain actors at each stage and discerning their
functions and relationships;
⚫ Determining the chain governance, or leadership, to facilitate
chain formation and strengthening; and
⚫ Identifying value adding activities in the chain and assigning costs
and added value to each of those activities. 44
 Purposes...
 Value chain analysis also reveals the dynamic flow of
economic, organizational and coercive activities involving
actors within different sectors.
 It shows that power relations are crucial to understanding
how entry barriers are created, and how gain and risks are
distributed.
 It analyses competitiveness in a global perspective.
 Value chain analysis helps participating actors to develop a
shared vision of how the chain should perform and to
identify collaborative relationships which will allow them
to keep improving chain performance.

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 Agricultural value chain analysis can be conducted for
the purposes:
⚫ Understand how an agricultural value chain is organized
(structure), operates (conduct) and performs (performance).
⚫ Identify leverage interventions to improve the performance of
the value chain
⚫ Analyze agriculture–industry linkages
⚫ Analyze income distribution
⚫ Analyze employment issues
⚫ Assess economic and social impacts of interventions
⚫ Analyze environmental impacts of interventions
⚫ Guide collective action for marketing
⚫ Guide research priority setting
⚫ Conduct policy inventory and analysis

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 2.3. Steps in Value Chain Analysis
⚫ As noted above VCA is a useful tool for working out
how you can create the greatest possible value for
your customers.
⚫ VCA is a process that requires four interconnected
actions:
1. Data collection and research,
2. Value chain mapping,
3. Analysis of opportunities and constraints, and
4. Vetting of findings with stakeholders and
recommendations for future actions.
⚫ These four actions are not necessarily sequential and
can be carried out simultaneously.

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

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 The steps in VCA...
Step One: Data Collection
⚫ Good VCA begins with good data collection, from the initial desk
research to the targeted interviews.
⚫ The desk research consists of a rapid examination of readily
available material.
⚫ The aim is to familiarize the team with the industry, its market and
the business environment in which it operates, as well as to
identify sources for additional information.
⚫ Interviews are conducted with 1) firms and individuals from all
functional levels of the chain, and 2) individuals outside the value
chain such as writers, journalists or economists.
⚫ In addition to providing information about the movement of
product and the distribution of benefits, the interviews should
inform on value chain actors‘ current capacity to learn; how
information is exchanged among participants; from where they
learn about new production techniques, new markets and market
trends; and the extent of trust that exists among actors. 49
Step Two:Value Chain Mapping
⚫ Value chain mapping is the process of developing a visual
depiction of the basic structure of the value chain.
⚫ A value chain map illustrates the way the product flows from raw
material to end markets and presents how the industry functions.
⚫ It is a compressed visual diagram of the data collected at different
stages of the value chain analysis and supports the narrative
description of the chain.

Figure 2. A comprehensive value chain map 50

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

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Step Three: Analysis of Opportunities and Constraints
Using theValue Chain Framework
⚫ Step three uses the value chain framework as a lens through which the
gathered data is analyzed.
⚫ The framework is a useful tool to identify systemic chain-level issues
rather than focus on firm-level problems.
⚫ While interviews give the value chain team the chance to gather
information from individual firms,
⚫ The value chain framework helps to organize this information in such a
way that the analysis moves from a firm-level to a chain-level
perspective.

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53
Step Four: Vetting Findings of Chain Analysis through
StakeholderWorkshops
 Value chain analysis helps to develop a private-sector vision to
reflect stakeholders’ interest in improving the efficiency and
competitiveness of the chain.
 The fourth step, vetting findings, uses value chain analysis through a
structured event (or series of events) like a workshop or reporting-
out day to facilitate discussion with and among selected participants.
 The objective of these events is to bring participants together who
are responsible for critical market functions, service provision, and
the legal, regulatory and policy environment.
 The goal is to have these participants—who have an incentive to
drive investments in upgrading—to develop and assist in
implementing a private sector-led competitiveness strategy.
 To develop this strategy, the stakeholders will need to prioritize the
opportunities and constraints identified during the value chain
analysis. 54
 Horizontal and Vertical Linkage in Value Chain
⚫ Linkages are defined as a business relationship between two parties
of the value chain/network.
⚫ Trust is social capital formed between two parties enabling a more
efficient linkage through the reduction of transaction costs.
⚫ Analysis of linkages involves not only identifying which organization
and actors are linked with one another, but also identifying the reasons
for those linkages and whether the linkages are beneficial or not.
⚫ Actors in the value chain link with one another because they obtain
benefit from those linkages.
⚫ An identification of the benefits (or lack of them) goes a long way to
identifying the constraints in increasing linkages and trust amongst
value chain participants.
⚫ Linkages within a value chain are mostly business linkages, and could
be formal but are often informal.
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⚫ The informal linkage refers to the domain of social capital , in
which trust can play a central role.
⚫ Many studies have shown that in a dynamic traditional
community the degree of social capital in business activitieis
high with numerous linkages based on trust .
⚫ The linkages in value chain can be classified into vertical
linkages and horizontal linkages.
1.The vertical linkages are the relationship between actors along
the chain.
⚫ Examples of interactions of farmers with other actors in the
chain can take diverse forms:
⚫ Sales contract directly with state agro-processing enterprises
⚫ Production contract with foreign companies
⚫ Sale to private merchants by oral engagement
⚫ Sale through service co-operatives
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⚫ Effective vertical linkages between firms at different levels
of the value chain play a key role in supporting the
upgrading capacity of the chain.
⚫ When vertically linked firms are willing and able to share
information on new products and technologies,then the value
chain as a whole is more competitive because it can
adapt more rapidly to changing market conditions.
⚫ Such win-win interactions between firms benefit the entire
value chain by improving productivity, product quality
and reliability of supply.
⚫ On the other hand, if vertical relationships are characterized
by mistrust, misinformation and opportunistic behavior,
the entire value chain may struggle to remain competitive.

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2. Horizontal linkages on the other hand are linkages
between actors at the same level of the value chain,
⚫ Through horizontal linkages, firms at the same level of the value
chain interact to accomplish what a single firm working
independently could not do so well.
⚫ Effective horizontal relationships can promote efficiencies,
reduce costs, open markets and spur beneficial competition
⚫ e.g. farmers working together with other farmers, or
companies in the same sector liaising with each other on a
regular basis.

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 Quiz 1
1. What is value chain analysis? (1points)
2. Write and discuss the steps in value chain analysis?
3. What is the difference between horizontal and vertical
linkage? (2 points)

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Chapter Three: Value Chain Governance

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 3.1. Concepts of governance

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

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 What is value chain governance?

 Governance refers to the inter-firm relationships and

institutional mechanisms through which non-market
coordination of activities in the chain is achieved.
 Inter-firm relationships : This refers to the nature and quality
of the interactions between stakeholders in a value chain.
 Within global value chains, for example, leading supermarkets
in European country may exercise control over their fresh
vegetable supply chains.
 Clearly, governance in value chains has something to do with
the exercise of control along the chain.
 At any point in the chain, the production process (in its widest
sense, including quality, logistics design, etc.) is defined by a
set of parameters.
62
 Governance ...

 Governance can be exercised in different ways, and different

parts of the same chain can be governed in different ways.
 Governance, in the sense of arrangements that make possible
the non-market coordination of activities, is not a necessary
feature of value chains.

63
 Value Chain Governance
⚫ A value chain has to be regulated to enhance performance.
⚫ Governance refers to the basic rules of the game that determine
behavioral conduct and action for vertical coordination and
cooperation.
⚫ Governance refers to the role of coordination and associated
roles of identifying dynamic profitable opportunities and
apportioning roles to key players (Kaplinsky and Morris 2001).
⚫ Governance implies that interactions between firms along a
value chain reflect organization, rather than randomness.
⚫ The various activities in the chain, within firms and between
firms, are influenced by chain governance.
⚫ Value chains are characterized by repetitiveness of linkage
interactions.
⚫ The governance of value chains emanate from the requirement to
set product, process, and logistic standards, which then influence
upstream or downstream chain actors and results in activities,
actors, roles and functions. 64
⚫ Therefore, power asymmetry is central in value chain
governance.
⚫ In other words, some key actors in the chain shoulder the
responsibility to allocate roles (inter-firm division of labour)
and improve functions.
⚫ Power in value chain governance can be categorized into
three major areas of responsibilities:
1. Setting basic rules for participation in the chain,
2. Monitoring the performance of chain actors in complying
with the basic rules, and
3. Assistance to help chain actors adhere to the basic rules
(Kaplinsky and Morris 2001).

65
⚫ Clearly, governance in value chains has something to do
with the exercise of control along the chain.
⚫ Governance is about power and the ability to exert control
along the chain — at any point in the chain, some firm (or
organization or institution) sets and/or enforces parameters
under which others in the chain operate.
⚫ The key parameters are:
 What is to be produced? This includes product design and
specifications.
 How it is to be produced. This involves the definition of
production processes, which can include elements such as
the technology to be used, quality systems, labour standards
and environmental standards.
 How much is to be produced, and when. This refers to
production scheduling and logistics.
66
⚫ Chain governance exists when some firms work to the
parameters set by other powerful firms in the chain.
⚫ The firm that sets the parameters with which other firms in
the chain must comply is referred to as the lead firm in the
chain.

67
 Value Chain Governance
 Value chain Governance is refers to the relationships among the
buyers, sellers, service providers and regulatory institutions
that operate within or influence the range of activities required to
bring a product or service from inception to its end use.
 Governance is about power and the ability to exert control
along the chain at any point in the chain, some firm sets and/or
enforces parameters under which others in the chain operate.
 Governance is particularly important for the generation, transfer
and diffusion of knowledge leading to innovation, which enables
firms to improve their performance and sustain competitive
advantage.

68
 Value Chain Governance...
 Value chain governance is a concept that is fundamental to the
value chain approach.
 Governance describes which firms within a value chain set and
enforce the parameters under which others in the chain operate.
 Embedded in governance are inter-firm relationships, power
dynamics both symmetrical and asymmetrical and the distribution
of benefits.
 While the form of value chain governance is influenced by the
 The characteristics of the product and
 The degree of specification in the end-market,
 Governance patterns evolve over time with changes in markets,
 Products and inter-firm relationships.
69
 Value Chain Governance...
 Increasing the competitiveness of a value chain typically requires
an emphasis on consistent product quality, traceability and on-
time delivery.
 These changes, in turn, often require a different relationship
between buyers and sellers to exert the control needed to meet
the demands of higher value markets.
 Importantly, governance patterns also affect the ability of in-
country supply chains to integrate into global markets.
 Where there are no systems for introducing global standards,
national value chains are excluded from global opportunities.

70
 Value Chain Governance...
 Without knowledgeable and resourced lead firms providing
information on end market demand and services to facilitate
upgrading, in some cases, it is impossible for a value chain to
become or remain competitive.
 Thus, value chain governance is a level of organization that
facilitates or hinders upgrading and the ability to respond to
market changes, especially in global markets.
 Governance is particularly important for the generation,
transfer, and diffusion of knowledge leading to innovation,
which enables firms to improve their performance and sustain
competitive advantage.

71
 3.2 Importance of Governance in Value Chain
 The issue of governance in value chains is important for the
following reasons:
a) Provide market access to small growers or producers in
developing countries.
b) Fast track to acquisition of production capabilities: Lead
firms provide knowledge and support to supplier or producer.
Lead firms transmit best practices and provide hands-on advice
on how to improve layout, production flows and raise skills.
c) Distribution of gains: Understanding the governance of a
chain helps to understand the distribution of gains along the
chain.

72
 Importance of governance in value chain...
d) Leverage points for policy initiatives:
• The fact that some chains are governed by lead firms from
developed countries provides leverage for influencing what
happens in supplier firms in developing countries.
• This leverage point has been recognized by government and
nongovernmental agencies concerned with raising labour and
environmental standards.
e) Funnel for technical assistance:
 The central idea is to combine technical assistance with
connectivity.
 The lead firms of chains become the entry point for reaching
out to a multitude of distant small and medium sized suppliers.

73
 Why chain governance needed?

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

investments in relationships with particular suppliers.
 Such investment also increases the rigidity of supply chains
by raising the costs of switching suppliers.
 Nevertheless, many instances of parameter setting and
enforcement along the chain are evident.

74
 3.3. Types of Value Chain Governance
The connections between industry activities can
be described in five types of chain governance.
These are:
i. Market
ii. Modular
iii. Relational
iv. Captive
v. Hierarchy
 Modular, relational, and captive have network-style of
governance

75
 Cont...
 There are five generic ways that firms coordinate, or ‘govern’
the linkages between value chain activities:
1) Simple market linkages, governed by price
2) Modular linkages, where complex information regarding
the transaction is codified and often digitized before being
passed to highly competent suppliers.
3) Relational linkages, where tacit information is exchanged
between buyers and highly competent suppliers;
4) Captive linkages, where less competent suppliers are
provided with detailed instructions;
5) Linkages within the same firm, governed by management
hierarchy.

76
77
 Types of Value Chain Governance...
 Each governance type provides a different trade-off
between the benefits and risks of outsourcing.
 As shown in the last column of the above Table, the
governance types comprise a range running from low
levels of explicit coordination and power asymmetry
between buyers and suppliers, in the case of markets,
to high levels of explicit coordination and power
asymmetry between buyers and suppliers, in the case
of hierarchy.

78
 Types of Value Chain Governance...
1. Markets: When transactions are easily codified, product
specifications are relatively simple, and suppliers have the
capability to make the products in question with little input
from buyers, asset specificity will fail to accumulate and
market governance can be expected.
• In market exchange buyers respond to specifications and prices
set by sellers. Because the complexity of information
exchanged is relatively low, transactions can be governed
with little explicit coordination.
• Producers/suppliers can make products with minimal input
(skill) from buyers.
• Producers are capable to make product in question with little
input from buyers.
• It requires little or no formal cooperation between buyers and
suppliers participants.
79
 Market...
 The cost of switching to new partners is low for both parties.
 The buyers have no controlling interest in the production, they
set few if any standards, and provides producers with little to
no information on what the market wants and how to produce.
 The parameters are defined solely by each firm at its point in
the chain.
 The central governance mechanism is price rather than a
powerful lead firm.
 Price and standards are mostly set buy suppliers.

80
 Types of Value Chain Governance...
2. Modular: In this type of network system, switching
customers and suppliers is relatively easy.
 Power asymmetries remain relatively low because both
suppliers and buyers work with multiple partners.
 In general, the modular type of governance occurs when:
 Turnkey suppliers exist: they use different production
technology to satisfy buyers.
 Very complex buyer-seller interaction/transactions
 Complex transactions are easily to codify.
 Supplier make products / services to customer specifications
 Suppliers take full responsibility for process technology.
 Supplier often uses generic machinery to produce
81
3. Relational value chains
 The power balance between the firms is more symmetrical or
balanced, given that both contribute key competences.
 There is a great deal of explicit coordination in relational
global value chains, but it is achieved through a close dialogue
between more or less equal partners, as opposed to the more
unidirectional flow of information and control between unequal
partners as in captive global value chains and within hierarchies.
 In general, the relational type of value chain governance occurs:
 Buyers and sellers rely on complex information that is not easily
learned or codified
 Lead firm specify what is needed and ability to exert some level of
control over suppliers.
 Producers supply more differentiated products based on quality,
place. 82
 Cont...
4. Captive value chain
 power is exerted directly by lead firms on suppliers, which is
similar to the direct administrative control that top management
at headquarters might exert over subordinates in an off- shore
subsidiary or affiliate of a vertically integrated firm.
 Such direct control suggests a high degree of explicit
coordination and a large measure of power asymmetry with
the lead firm (or top management) being the dominant party.
 Small suppliers are dependent on one or a few/larger buyer that
often exercise a great deal of power.
 High degree of monitoring and control by lead firm.
 High switching cost for new parties.
 Lead firms most likely to invest in the product and process
upgrading of their suppliers. 83
5. Hierarchy (vertically integrated value chain governance):
Hierarchy type of governance occurs when:
Chains are characterized by vertical integration and managerial
control within a set of lead firms that develops and manufactures
products in-house.
This is due to in hierarchy governance product specifications
cannot be codified, products are complex, and highly competent
suppliers cannot be found.
This leads high degree of explicit coordination and power
asymmetry between parties and direct ownerships of
production processes by lead firm.

84
 Determinants of Governance Structure
 The form of governance can change as an industry evolves and
matures, and governance patterns within an industry can vary
from one stage of the chain to another.
 The dynamic nature of governance can be largely accounted for
with three variables:
1. The complexity of information that the manufacture of a
product entails (design and process);
2. The ability to codify or systematize the transfer of knowledge
to suppliers; and
3. The capabilities of existing suppliers to efficiently and
reliably produce the product.

85
 Cont...
 These linkage patterns could be associated with predictable
combinations of three distinct variables:
 The complexity of information the production of a good or

service entails (design and process)

 The ability to codify or systematize the transfer of knowledge

along the chain

 The capabilities of existing suppliers to produce efficiently

and reliably, for which the dynamic nature of governance can

be largely accounted.

86
 Determinants...
 Information Complexity refers to the intricacy/complexity of
information and knowledge that must be transferred to ensure a
particular transaction can occur.
 Information Codification is the extent to which lead firms can
convert tacit, implied information and knowledge into explicit,
concrete and situation-specific information and transmit it to
producers effectively, efficiently and at minimal cost.
 Supplier Capability refers to the ability of suppliers to meet
all transaction requirements. These may include quantity and
quality specifications; on-time delivery; and environmental,
labor and safety standards.

87
88
Table 2. dynamics of value chain governance

89
Chapter Four: Value chain development and
improvement

90
 4.1. Building a Value Chain
 Value chain building is a deliberate initiative to promote
potential.
 Value chain development in a sustainable manner.
 It involves working for inclusion of target groups, improving
participation and benefits of the target group, incorporating
other developmental concerns.
 Building a chain begins with chain formation.
 Chain Formation includes all activities and conditions
necessary to design as well as implement collaborative relations
between chain links/actors with the purpose of supporting a
productive functioning of the chain efficiently.

91
 4.1.2. Stages in Building A Value Chain
 Three stages in building a value chain have been identified. The
following sections deal with the stages and how you might apply
them to specific situation.
Stage 1:Identifying the Opportunity
 In this first stage, you will identify some opportunities for a value
chain by mapping and evaluating the existing supply chain.
 In this stage we learn how to gain the support of some members of
the chain and perhaps identify someone who will champion the
value chain.
 As a next process to identify opportunities for value chain
development, the following points need attention.
A. Map and evaluate the supply chain
B. Outline the opportunity by developing a project summary and
evaluating the market
C. Assess resources, risks and capabilities of a value chain project.
92
A. Map and evaluate the Supply Chain
 Mapping the existing supply chain is the first step in identifying
opportunities.
 By mapping the major companies who are suppliers and customers,
you will better understand how the product moves through the market
channel and identify who you need to involve in the value chain
project.
 After mapping the next step is to evaluate the Supply Chain. What are
being done well? What we need to improve?
 This process can be helpful in determining where the greatest
opportunities are for value chain development such as product quality,
systems efficiencies or differentiated or specialized products.

93
B. Outlining the opportunity and evaluating the Market
 Now that we have completed the evaluation stage, we need to determine
the most important opportunity or problem to be addressed using a value
chain approach.
 Evaluate the Market: If we are considering taking a new product to market
or expanding into a new market, we need to do a market review.

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

 After having a good sense of the opportunities, it is time to
prepare a summary of group‘s (chain actors) resources and
capabilities that is accessible for a value chain pilot project.

94
 Stage 2: Developing a Pilot Project Plan
⚫ At this stage we look at developing a pilot project plan with clear
goals, plans and measures.
⚫ A pilot is a small, trial-size version of a commercial-scale value
chain.
⚫ This is the stage where you identify suitable partners for the value
chain, select a manager and achieve commitment from all
partners perhaps in the form of a written agreement.
⚫ Steps in developing the pilot plan are:
A. Identify Value Chain Partners:-
• You should now have a clear project goal and a list of resources
needed. These resources will become list of criteria for searching
and selection of additional value chain partners.
• Carefully selecting the right partners is the most important
factor in establishing a successful value chain. The best alliance
strategy or market opportunity may still not be successful
without the right partners. 95
 B. Initial Contact
⚫ Once we have short-listed the companies (stakeholders) that
might fulfill the requirements, the initial contact with them
should be tentative.
⚫ This requires outlining the basic value chain idea, what the
partners hope to achieve and how they think it will benefit them.
⚫ While providing them with some information, we will also want
to leave the options open
⚫ Once a successful alliance with other companies or farmers
established, you can probably proceed with greater confidence to
forge a stronger value chain.

96
C. Steering or Working Committee
⚫ Once potential partners have expressed an interest, it‘s time to
pull all interested parties together.
⚫ A steering committee, with representatives from each of the
partner organizations, is an effective way to begin.
⚫ In the initial planning stages, senior people who can make
decisions on behalf of their organization to attend a meeting are
to be invited.
⚫ After bringing a steering committee together, the next step is to
build strong relationships among members.

97
 D. Build Relationships
⚫ Building a collaborative business relationship when relationships
havetraditionally been competitive takes effort and attention.
⚫ Value chains need a foundation of cooperation, trust and
mutual respect to thrive.
⚫ As in other relationships, value chain relationships are built by
both working together and getting to know each other in an
informal setting.
E.Manage Key Discussions
 During value chain formation and pilot project
implementation,
 There will be key discussions that require a collaborative
attitude, excellent communication skills and possibly the
help of a facilitator.
98
Stage 3: Monitoring and Evaluating the Pilot Project
⚫ This is the stage where you will implement and monitor your pilot project.
⚫ You will adapt and build in order to determine whether a full scale value chain
is a possibility.
⚫ Monitoring the Pilot Project
⚫ As you move along in the pilot project, make sure you schedule regular
steering committee meetings to report on the status, or communicate the
progress, of the project to date.
⚫ At these meetings check for any challenges or problems with the pilot‘s
progress, conflicts that may have arisen and any new opportunities.
⚫ Define and plan your next steps to address these issues.
⚫ At a meeting with partners, try to answer the following questions.
⚫ Are objectives being met?
⚫ Have the objectives changed?
⚫ Are all partners satisfied with progress?
⚫ What needs to change to increase satisfaction or ensure continuing support?
99
 4.1.3. Requirements for Successful Value Chain Development
⚫ There are a number of key organizational considerations for a successful
value chain development.
⚫ The major requirements for value chain development are:
⚫ Establishing common objectives;
⚫ building trust and establishing co-operative working relationships;
⚫ managing information flows; and
⚫ upgrading in value chains. Up grading processes and activities results
in value add products and services.
⚫ Upgrading activities takes four different forms:
⚫ Process upgrading: it means producing the same product more efficiently
– perhaps by using new technologies or management methods.
⚫ For example, farmers may grow more by switching varieties or applying
fertilizer; they may reduce pest attacks and save costs through integrated
pest management rather than spraying; they may husk maize more quickly
using a machine rather than by hand. 100
⚫ Product upgrading: farmers can improve their product in various
ways.
⚫ For example, they may plant a new variety that has more desirable
characteristics; or they may stop using agrochemicals and apply for
certification so they can sell their produce as ―organic.
⚫ Functional or intra-chain upgrading: farmers can take on new
activities in the chain, change the mix of activities they undertake.
For example, they may start grading and sorting their produce; they
may bulk it to make pick-up more convenient for buyers; or they
may process it (drying, milling, etc.) to improve its value or
increase its storage life.
⚫ Chain or inter-chain upgrading: farmers can also set out on a new
value chain: they can start growing a new crop, keep a new species
of livestock, or start a new enterprise such as dairying or agro-
tourism. They may be completely new to these activities, or they
may transfer their skills and experience from their existing
enterprises.
101
 Value Chain Development (VCD)

 Value Chain Development-refers to the concerted effort to

improve conditions in the value chain.
 It implies enhancing rewards and/or reducing exposure to risks.
 Enable entire value chain/firms produce or deliver products and
services that meet the quality standards of the local and/or
world markets at prices that are competitive
 Value chain development can be considered equivalent to the
concept of value chain upgrading.
 Common Objectives of Value Chain Development
Reduce barriers of entry and facilitate the participation of those
who are not included in value chain
Increase profit from value chains and enable chain actors to
benefit from value addition.
Develop value chains where a significant number of small and
medium-sized firms and poor workers participate .
Develop technological, organizational and marketing solutions
to extend production and sales of firms in a value chain.
 Identify and support key players and the provision of key
services in order to foster development of actors in the entire value
chain.
Foster collaboration and vertical integration between different
actors in the value chain and improve chain governance and
management.
 Value chain Upgrading
Upgrading is the process to respond to new market opportunities by
innovating and increasing added value to a product.
It involves in improvement in the process, product, functions or
improving the channel.
It can be
- Process upgrading
- Product upgrading
- Functional upgrading
- Channel upgrading

104
 Types of Upgrading

1. Process upgrading : increased production efficiency,

reducing unit costs.
2. Product upgrading: improved product quality,
increasing value to consumers
3. Functional upgrading : firm entry into a new level of
the value chain
4. Channel upgrading : firm entry into a pathway leading
to a new end market

105
 4.2.1. Stages in Value Chain Improvement
⚫ The ultimate goal of developing and improving value chain is to increase the
competitiveness of the sector on the (international) market.
⚫ Such development can be indicated by empowerment of producers, improved
quality, improved logistics, cost price reduction (improvement of margins), and
scaling up (increase of volume) on a continuous basis.
⚫ Stages in value chain improvement are detailed as follows.
I. Identification of Constraints and Opportunities
⚫ Effectiveness of value chain in ensuring value for money, minimizing operational
cost and ultimately enhancing competitiveness, depends to a large extent on the
elimination/overcoming of constraints and seizing opportunities associated with the
value chain (and its components).
⚫ Constraints may be defined broadly as any factor that prevents a unit or system
from being effective or achieving its objectives.
⚫ Constraints may differ from one component of the value chain to the other; But
generally, they may come in the form of lack of timely information, poorly
developed human resource, mistrust, inadequate material resource, inadequate
technology and low commitment. 106
⚫ Opportunities, on the other hand, may be defined as avenues/openings
within a unit or system which have the potential to enable the unit/system
achieve its objectives or enhance its effectiveness, if utilized.
⚫ A combination of the main constraints and opportunities provides the
leverage points for the value chain.
⚫ Improving the effectiveness of a value chain requires some intervention to
address the leverage point i.e. overcoming constraints and utilizing
opportunities.
⚫ There are several tools and techniques that can be used to ensure active
participation of all stakeholders during identification and assessment of
constraints and opportunities.
⚫ Prominent among these are focus group discussions, key informant
interviews and semi-structured interviews.
⚫ The identification and assessment of constraints and opportunities (using
the participatory approach method) should be done both within and across
the components of the value chain (linkages), using the relevant
stakeholders. 107
ii. Identifying Leverage Points from Constraints and Opportunities
⚫ Prioritizing constraints and opportunities
⚫ A priority constraint is one which when not attended to could impede
the whole value chain.
⚫ A priority opportunity is one which when utilized has the potential to
bring large returns to all the players along the value chain.
⚫ Nevertheless constraints and opportunities may be numerous; some of them
are critical to the sustenance of the value chain while others are not.
⚫ There is therefore the need to prioritize in order to identify the key
constraints and opportunities so as to determine which of them require
immediate attention.
⚫ This has to be done with the involvement of all stakeholders along the
chain
as constraints and opportunities differ at each level of the value chain.
⚫ As the value chain continues to operate, some new constraints and
opportunities will emerge while some of the non-critical ones may become
critical.
⚫ It is therefore necessary to make identification of leverage points (critical
constraints and opportunities) as a regular activity. 108
 iii. Selecting priority constraints and opportunities to address
⚫ After identifying the priority constraints and opportunities, it may
be necessary to select those which can be addressed.
⚫ This is because even though they may all are of priority; resources
available may not be adequate and even sufficient to address all
of them may not be practical owing to different factors.
iv. Identifying Changes Required in Leading Change Agents
⚫ Every value chain has a vision and the stakeholders must play
roles that will ensure the attainment of this vision.
⚫ Though each stakeholder is important in the value chain some of
them would have to be classified as active, innovative and leading
change agents.
⚫ Having identified the prevailing constraints and opportunities, it is
possible to identify which roles of the operators need to be
modified to ensure sustenance and effectiveness.
⚫ Role modification may call for skill upgrading.
⚫ New knowledge must be given through training which may 109
 4.3. Strategies for chain development and Improvement
⚫ Value chain strategy is a set of statements and guidelines at chain level
with the purpose to guide the future development of the chain and its
links, and based on the shared ultimate goal of the chain.
⚫ Chain strategies cover domains like market coverage, coordinated
investments, and extension of the chain with new participants, innovation.
⚫ There are three strategies for chain development:
1. Low cost strategy or Chain optimization
⚫ The successive links must together minimize costs. This can
happen by employing ICT facilities, logistics and elimination
linkages.
⚫ Key issues in this strategy are efficiency and effectiveness.
⚫ Efficiency:-relates to how much of a product/service is
produced in a given time frame with a possible least
amount of resource
⚫ Effectiveness :-is a measurement of quality. 110
2. Integral chain care
⚫ Consumer choices are increasingly being determined by
requirements in the area of health and safety.
⚫ Care for the environment and animal-friendly production
methods are becoming more important.
⚫ Here quality assurance is the key .
⚫ Issues that should get attention in this strategy are consumers‘
concerns, quality, sustainability, safety & health and animal
welfare.
3. Market segmentation or Chain differentiation
⚫ The other chain strategy option is market segmentation or
differentiation.
⚫ Market segmentation or differentiation refers to providing
product or service to the users by the elasticity that a user has for
the service or product.
⚫ This enables producers to meet their customer needs by different
111
value creation and product differentiation.
 Challenges in Value Chain Development
 Much as there are numerous opportunities for the value
chain there are challenges that one encounters in the
development of a value chain.
 The challenges have been categorized under the following
headings
1. Input: This refers to the basic items required for production by various
actors along the value chain. The challenges at the input level include:
⚫ Low performance genetic materials: e.g. seed, planting material, breeding
stock, etc. When these are of inferior quality they do not give the optimum
yield.
⚫ Inconsistency in quality and supply of raw materials: lack of consistency in
the quality and supply of raw materials like agro-chemicals can lead to low
quality output. It can also hamper the regular supply of products to the market.
⚫ Variability in raw material quality: variations in the quality of raw materials
for production and processing result in inferior goods on the market, high
down time (under capacity utilization), high cost of production and loss of
market share.
112
2. Production: Challenges at this level
⚫ Limited protocols on good agricultural practices for commodity
chains: limited availability of manuals that provide information on steps
for Good Agricultural Practices (GAP).
⚫ Producers not fully integrated into the market economy: many
producers are not business oriented and are not producing in a
business-like manner to satisfy the demands of the market.
⚫ Misuse of agrochemicals: This can lead to the production of inferior
quality goods with serious health hazards for the producer, the consumer
and the general public, loss of market share, increase in cost of
production, lower competitiveness, etc.
⚫ Seasonal fluctuations in production: this can lead to low utilization of
the factors of production, inadequate supply of goods to the market and
price and income instability.
⚫ Lack of good agricultural practices: can lead to the production of
inferior quality goods, increase cost of production and lower productivity
⚫ Excessive dependence on climate: it can sometimes lead to complete
crop failure and livestock death, increases the uncertainty of production
and unreliable supply of raw materials and final products to the market.
⚫ Poor caliber/ability and quality of labor: this leads to low productivity,
high wastage, inefficient utilization of information and technology, etc.
113
 3. Processing
⚫ Challenges at processing levels are:
⚫ Lack of value addition to farm produce: caused by inadequate
research and development. This affects innovativeness thus
leading to lower incomes, increase in wastage and environmental
problems.
⚫ Lack of adequate processing systems: there is no adequate
processing capacity, obsolete processing equipment. These lead
to high cost of production, competitiveness, loss of profit
margins and discourage basic production.
⚫ Inappropriate packaging material: unattractive final products,
shorter product shelf life and low value capturing.

114
 4. Marketing :Challenges at this level
⚫ Stringent market requirements by supermarkets: refers to ever increasing safety and
quality requirements by supermarkets and consumers leading to difficulties in market
access.
⚫ Cost of certification: the high cost of certification of products tends to discourage
producers from accessing international markets.
⚫ Misuse of Sanitary Phyto-Sanitary (SPS) and Technical Barrier to Trade (TBT)
agreement: possible abuse of phyto-sanitary and technical requirements can lead to denial
of market access.
⚫ High import tariffs in the external market:
⚫ Inefficient distribution system:
⚫ Price fluctuations: seasonal and cyclical movement of price due to bottlenecks in the
supply of goods and instability in incomes.
⚫ Flooding of domestic market with imported equivalents: high importation and
availability of subsidized foreign goods on the local market. This crowds out local products.
⚫ Inelastic demand for exported commodities: low response of primary product
consumption to lowering of prices. Thus, people do not consume more of the product even
at lower prices.
⚫ Low level of market information: market information is not organized in a useful form for
value chain actors and limited access to available market information where organized.
These lead to high transaction costs, high prices of products, and high wastage at various
segments of the value chain.
115
5. Consumption : challenges at this level
⚫ Lack of appreciation of consumer culture and behavior: consumers
generally have low appreciation for health and safety consciousness. This
results in ineffective demand for safe and quality goods.
⚫ Weak and inactive consumer associations: consumer associations are
poorly organized making them weak and inactive. This does not drive the
production and processing segments of the value chain to be competitive.
⚫ Lack of effective demand for quality products: Low disposable incomes
of most households leading to low effective demand for quality products.
⚫ Most consumers are not health or safety conscious and may not insist on
buying quality products.
6. Physical Infrastructure : challenges at this level
⚫ Physical infrastructure includes irrigation, roads, storage facilities (dry and
cold), utilities (water, electricity, telephone, etc.) and port facilities: these
are inadequate and unreliable thus affecting production, processing,
distribution and storage of primary and final products.

116
7. Social Infrastructure: challenges at this level
⚫ Social infrastructure comprises networking for Value Chain
development, (strategic partnership), group formation and
development, and trust among others.
⚫ Their effect increases transaction costs, cheating, lack of
transparency, moral hazard, and unhealthy competition among
the various actors in the value chain.
8. Policy and Administration Issues
⚫ Policy, administration and institutions relating to certification,
patenting, business establishment, standards and standardization,
negotiation and enforcement of contracts, slow change in
national policy in response to global trends, consistency in
public policy, taxes and levies, sustainable institutions capable
of supporting VC development, lack of clearly specified roles of
supervising institutions.
⚫ These increase transaction costs, business risk, lower business
confidence as well as competitiveness. 117
9. Environmental Concerns
⚫ Environmental concerns relate to waste management and the
potential unintended impact of value chain activities on the
environment.
⚫ This can lead to environmental degradation and loss of
market opportunities.
10. Technical/Technological Inadequacies
⚫ Technical/technological inadequacies: these include
inadequate requisite technical and technological know-
how, inadequate research and development, inadequate
staff/personnel, equipment and knowledge and limited
opportunities for value addition to by-products.
⚫ These do not encourage innovativeness in products and
processes.

118
11. Financial
⚫Financial challenges: these relate to inadequate and
inappropriate financial products and lack of access
to financial services (credit).

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

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Sources of The Value Chain Development Challenges

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

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 Opportunities for Value Chain Development
⚫ Several opportunities exist for developing avalue chain.These include the following:
1. Globalization of trade: The way modern technology and transportation
have integrated the world economic systems. Globalization enables us to get
information about sources of inputs, market opportunities, technology, etc.
that can help us to produce to meet the demands of the market.
2. World Trade Organization (WTO) agreement on agriculture: It is
an organization established to break the barriers to trade and regulate
international trade by ensuring the enforcement of international standards.
WTO creates wider market opportunities and ensures transparency in the
market at the national and international levels.
3. International standards: These are standards set at the international level
to ensure that quality goods are supplied to the market. They also prevent
discrimination against weaker countries.
4. Changing consumer preferences and behavior: People‘s taste and
preferences change because of availability of alternative products on the
market.This creates opportunities for new products to be introduced. 121
5. Factor endowment:This has to do with comparative advantage.
The producers might have certain resources that enables them to
produce certain goods better that others. These resources thus
become opportunities for the producers to produce more of these
goods for the market.
6. Advances in technology: advances in, communication,
transportation, information, production and processing
technologies have created opportunities to create and add value thus
ensuring the efficient production of goods.
7. Proximity to the European market: This leads to reduction
in cost in terms of freight and ensures the supply of fresh
products to the European market.
8. Liberalization of agricultural trade: This has led to the removal
of some trade barriers and ensures the free movement of goods.

122
9. Expanding domestic market: Increases in population and
income levels as well as changes in consumer preferences and
taste have combined to expand the domestic market thus
creating opportunities for producers to introduce more products
onto the market.
10. Trade agreements: Agreements between regional and
international economic groupings like the Economic
Community of West African States (ECOWAS) and African,
Caribbean and Pacific (ACP) and the European Union (EU) as
well as bi-lateral agreement between trade partners have
created opportunities for the production of diverse goods to
satisfy the demands of the market. They have also created
opportunities for accessing inputs, capital, technical assistance
and technology.

123
 4.4. Supporting Factors for Value Chain Development
⚫ The general environment in which the value chain operates
influences their performances directly and indirectly.
⚫ The various factors and policy requirements as deemed necessary
for a value chain development are explained as follows.
4.4.1. Logistics inValue Chain
⚫ Agri-food logistics is the art of moving agricultural and food
products from farm to fork.
⚫ As such logistics management is embedded in close cooperation
and communication functions between companies/ chain actors.
⚫ Logistics is concerned with having goods and services of the right
amount at the right place, at the right time and at the right quality.
⚫ Clustering based on collaboration and integration of product
flows, storage and information is one such change.
⚫ This collaboration will lead to the next jump in reaching higher
efficiency. 124
⚫ The essence of logistics in value chain development relies on how
to organize the collaboration and combine different products with
different requirements for storage conditions.
4.4.2. Value Chain Finance
⚫ Value chain finance is considered as financial products and
services flowing to and/or through a value chain to address the
needs of those involved in that chain, be it a need for finance, a
need to secure sales, procure products, reduce risk and/or
improve efficiency within the chain
⚫ The term value chain finance may also refer to an approach in
which the specific features of trading within a value chain are
exploited to reduce finance risks and to facilitate services by
financial institutions. During the early stages of the value chain
life cycle finance is a critical bottleneck.
⚫ Value chain finance can facilitate smooth information flow and
fair allocation of incentives and it is the key to convert agriculture
to agribusiness by promoting entrepreneurship. 125
 4.4.3. Value Chain Information Management
⚫ To manage the flow of goods and services in a value chain, there
has to be an effective management of information exchange
between all members, including managing feedback from
customers and/or end consumers.
⚫ Open communication and information sharing are essential to a
successful and market-responsive value chain.
⚫ The development of market intelligence capacity and market
information systems in most value chain supported programmes
is in response to this need.
⚫ Key to the success in most value chains has been communication
and information sharing between chain partners.

126
Monitoring and Evaluation of value chain development
⚫ Success or failure of any program will be known through
conducting effective monitoring and evaluation at all levels of
operation.
⚫ Mechanisms for monitoring therefore need to be put in place.
These include:
⚫ Drawing clearly stated action plan and setting targets for
implementation of projects indicating clear indicators of success
⚫ Putting measures in place to ensure timely execution of
activities
⚫ Enforcing regular reporting on activities
⚫ Keeping reliable record on all activities. Records need to be
regularly audited
⚫ Having regular stakeholders forum during which supervisors at
the various stages of the chain report on their activities
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Chapter Five: Value Chain Approaches

128
 Approaches to value chain

Four different approaches to value chain

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

SNV Business Organizations and their Access to Markets (BOAM)

programme considers that enhancing the inclusion of small
farmers in local, national and global value chains, is a good
strategy to increase production, income and employment
opportunities for these small farmers.

It follows a demand driven value chain development approach

which is characterized by the combination of strengthening whole
sectors as well as supporting individual businesses as
traders/exporters, processors and farmer organizations and their
business to business value chain relationships.
 SNV Approach…

Sector development provides for new opportunities to the actors

in the sector, business-to-business development assures that the
opportunities are turned into concrete results.
These results are related to the increased number of business to
business value chains, increased volumes, value added,
equitability of margins, efficiency and overall competitiveness of
individual businesses and the value chain(s).
 SNV Approach…

SNV and other service providers are providing services,

which will be increasingly market based and with
increased volumes to match the up-scaling requirements
of the value chains.

To achieve a sustainable up-scaling of the approach to

new sectors and value chain(s), SNV works on
knowledge development and an increased service
provider capacity building.
 SNV Approach …

Key interventions areas for this demand driven value chain

approach are therefore:
 Sector development
 Business development
 Knowledge development and learning and
 Service capacity development
 5.2. German Technical Cooperation (GTZ’s)
Approach
 GTZ interventions are targeted to strengthening the relationship
between actors at different level of value chain (production,
processing, trading).
 GTZ promoted value chain of honey in Nepal focusing on two
areas:
1. Market orientation meaning the greater volume sold and/or
better end price gained,
2. Income distribution- the poor benefit at least equally or
above average from the income generated (poor get their
“share of the cake”).
 GTZ Approach...
GTZ used the following value chain integration map to explain its
experience in value chain development in SiriLanka.
 5.3. NIMPF Approach to value chain

NIMPF approach follows eleven steps in four phases for value

chain development.
 GTZ Approach...
 As we can see from Figure 11, the first step at the diagnosis
phase is to decide on the scope of the value chain, in terms of
what level to consider (sector or business to business), what
objectives (transitional or innovation objectives) and which
linkages to consider, etc.
 Then, as a second step, we carry out stakeholder analysis to
identify key actors, their roles, driving forces, internal and
external relations, visions, values, power relations, dependencies,
and effect or role in the project.
 The third step is to undertake network analysis and identify
possible relationships such as dynamics in the network,
transactions, transformations, value flow or added value,
transactions and coordination costs, risks and incentives.
 The fourth step in this phase is very important step as it helps us
to identify and prioritize bottlenecks and opportunities in the
value chain.
 GTZ Approach...
 We can use a multilevel SWOT analysis; identify incentive
structures, assess infrastructure, socio-cultural, natural, economic
and political conditions. These processes will lead us to the
second phase.
 The second phase is known as device change phase. In this
phase there are three steps.
 The first is to invent improvement possibilities which to be
followed by valuing and effecting analysis of each improvement
activity.
 In this step we can also identify decoupling points (the points
where we can make changes for improvement).
 In this phase, the last step is to develop different scenarios from
which we select to implement.
 GTZ Approach...

The third phase is to carry through change which involves steps

of trying out as a first step and thereby entering into full
implementation.
The third step in this phase is consolidation.
Phase four is all about evaluation (process and results
evaluation).
In most conventional project evaluations, the focus is on the
results/outputs.
The value chain approach gives emphasis to the process (who,
how, etc.) equal to that of results.
 5.4. The ICEBERG approach to value chain
 The Iceberg approach is similar to the NIMPF approach that
we discussed above.
 The following figure implies that each phase is dependent on
the process and results of its previous phase.
 For example, inventing improvements in the second phase is
nearly impossible or would be misleading without a careful
identification of stakeholders, their roles and networks as well
as careful analysis of bottlenecks and opportunities in the first
phase.
ICEBERG Approach…
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