ARBA MINCH UNIVERSITY

COLLEGE OF AGRICULTURAL SCIENCES

DEPARTMENT OF AE
Value Chain Analysis and Development (ABVM 322)
By
Hilina G. (MSc.)
2022/23 AY
 Learning Objectives
After completion of this course, students will be able to:

• Explain concept of value chain and Value Chain Approach

• Examine the underlying assumptions, principles, characteristics and

importance of the Value Chain Approach

• Distinguish between the various approaches in identifying the

challenges and opportunities for Value Chain Development.

• Identify value-adding activities in the chain.

• Analyze and map commodity value chain

 …
 Apply different value chain approaches and principles for the improvement of
the chain
 Evaluate chain governance to facilitate chain formation
 Identify the critical/leverage points among the constraints in Value Chain
Development.
 Identify active, innovative and leading change agents in Value Chain
Development.
 Develop participatory approach for Value Chain Development.
 Develop intervention strategies for addressing identified constraints and utilize
prevailing opportunities,
 Assure quality and safety along the value chain
 CHAPTER ONE
INTRODUCTION
1.1.Basic Concept of the value chain
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 comprises of interlinked value-adding activities

that convert inputs into outputs

 A value chain is the full range of activities required to bring a

product from conception, through the different phases of

production and transformation.

 Flow of seed to farmers and grain or tubers to the market

occurs along the chains

 …
 These can be referred to as value chains because
as the product moves from chain actor to chain
actor e.g. from producer to intermediary to
consumer it gains value.

 The starting point of the value chains is market

intelligence and they are demand driven

 Such issues come to view by asking questions like
what are the needs in the market (consumer,
export market, major clients like retailer or food
industry)
 …
 Value chain players organize/align the work among

themselves based on market signals and capabilities

 They are always on the look-out to build new and

complimentary capabilities (e.g., aggregators and traders focus

to build primary processing, packaging and other value add

capabilities).

 This implies that value chains can be competitive only when

they innovate and not by maintaining the status-quo.

 …
 With innovation a larger pie is created which
provides greater incentives to share which in
turn fosters further innovation (as a result new and
higher value products would come out of the chain).
 This will result in innovatively processed
products such as fresh fruits juices, smoothies…
coming out of the fresh produce value chain.
 …
 In the value chain approach innovation drives the chain facilitates

 There is a need to deliver quality (as desired by the market), for

continuous improvement and setting and upgrading the standards

 The operational elements like forecasting, inventory, production

planning and everything else are still very important.

 However, they are designed based on market-demand and not on

capacities.
 1.2 Value Chain Actors
 Value chain approaches have been used to analyze the
dynamics of markets and to investigate the interactions
and relationships between the chain actors.
 A value chain is made up of a series of actors (or
stakeholders) from input (e.g. seed) suppliers, producers and
processors, to exporters and buyers engaged in the activities
required to bring product from its conception to its end use.
 Value chain stage defines the various chain actors and
their roles for the functioning of the entire chain.
 …
 Actor is a corporate person, a natural person or
other entity, that is able to influence its direct
surroundings
 Actors are usually defined 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
…
 …
 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

 …
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.

 …
 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).
 …
2 Value chain supporters:

 The services provided by various actors who never directly deal

with the product, but whose services add value to the product.

 Closely related to the concept of value chains is the concept of

business development services or value chain supporters

 These are services that play supporting role to enhance the

operation of the different stages of the value chain and the

chain as a whole
 …
 In order for farmers to engage effectively in
markets, they need to develop marketing
skills and receive support from service
providers who have better understanding of the
markets, whether domestic or international.
 Local business support services are,
therefore, essential for the development and
efficient performance of value chains.
 …
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.
 Importance of Value Chain
 The agricultural sector in Ethiopia has, to a large extent,
failed to utilize its huge potential to generate significant
levels of employment and income for the rural population
 Rural Ethiopia’s population lives in poverty in spite of the
potential of the agricultural sector to serve as the engine for
rapid economic growth and development.
 The situation is especially acute for food producers, who suffer
from lack of market access, high levels of wastage,
distorted market prices and inadequate infrastructural
support.
 …
 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 improves incomes for
all operators along the agricultural production system.
 …
The importance of the value chain to the
various actors are:
Enables the Producer to do the following:
i. Bring about product differentiation

ii. Retain his/her customers

iii. Improve the quality of his/her produce

iv. Increase quantity of his/her produce

 …
v. Produce at minimum cost

vi. Stay competitive in the market

vii. Increase his/her income

viii. Remain sustainable (employed)

ix. Develop customer and consumer confidence

x. Ability to project market supply

 …
 Enables the Processor to ensure the following:

i. Reliable supply of raw materials

ii. Quality supply of raw materials.

iii. Optimum supply of raw materials (Just-In-Time)

iv. Production of finished products

v. Reduced cost of raw materials

vi. Reliable employment opportunities

vii. Reliable supply of finished goods

 …
 Enables the Consumer to enjoy the
following:
i. Quality products assured

ii. All year availability of products

iii. Quality products at reasonable prices

iv. Wider range of goods to choose from

v. Healthier life
 1.4 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 (link)

• 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.

• Value chain operators understand that they can access

markets if they succeed to supply competitive products in a
joint effort.
 …
 Thus the actors, (input suppliers, farmers, brokers and
processors) have to apply appropriate production and handling
technologies, become business-oriented and understand each
other as partners in the value chain for success.
 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 interest and

assume responsibility from the start.

• All actors benefit from upgrading

 1.5.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.
 The flow of knowledge generally parallels the material
flows, but its intensity may differ.
 For example, the knowledge inputs at a product’s design
stage may be much greater than the material inputs;
production, on the other hand, needs large quantities of
materials, but in many cases requires only standard or
routine knowledge
 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.
 Others are more limited, involving only a few locations in different parts of
the world.
 A UK retailer may, for example, contract with an Ethiopia fabric supplier to
deliver cloth to a garment producer in Sri Lanka.
 The finished goods will then be shipped directly to the UK retailer.
 It is also possible to identify national, regional, or local value chains. These
operate in the same way as the global chains, but their geographic ‘reach’ is
more limited
 …
 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.
 A retailer, for example, controls the way he sells, but may be limited
(indirectly controlled) by the range of goods available from
wholesalers and producers.
 The pattern of direct and indirect control in a value chain is
called its governance.
 CH2
Value Chain Analysis
(VCA)
 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.
 Value chain analysis describes the activities within and
around an organization, and relates them to the analysis of
the competitive strength of the organization.
 Therefore, 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.
 Value chain analysis frame work

 When an organization applies the value chain concept to its own

activities, it is called a value chain analysis.
 The value chain framework is made up of five primary activities
 Inbound operations the internal handling and management of
resources coming from outside sources -- such as supply chain sources.
 These outside resources flowing in are called "inputs" and may include
raw materials.
 a long-term relationship with the customers who have purchased a
 Cont…
 Operations. Activities and processes that transform inputs into
"outputs" -- the product or service being sold by the business that
flow out to customers.
 These "outputs" are the core products that can be sold for a higher
price than the cost of materials and production to create a profit.
 Outbound logistics. The delivery of outputs to customers.
Processes involve systems for storage, collection and distribution to
customers.
 This includes managing a company's internal systems and external
systems from customer organizations.
 Marketing and sales. Activities such as advertising and brand-
building, which seek to increase visibility, reach a marketing
audience and communicate why a consumer should purchase a
product or service.
 Service. Activities such as customer service and product support,
which reinforce a long-term relationship with the customers who
 Secondary activities
 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

 Such as technology development.

 Human resource management
 Company infrastructure.
 Service providers
 …
 Value chain analysis facilitates
 Improved understanding of competitive challenges
 Helps in the identification of relationships and
coordination mechanisms
 Assists in understanding how chain actors deal with
powers and who governs or influences the chain
 …
 Value chain analysis plays a key role in understanding

the need and scope for systemic competitiveness

 The analysis and identification of core competences will lead

the firm to outsource those functions where it has no

distinctive competences.

 Value chain analysis is useful for identifying constraints

and opportunities for the provision of financial services.

 …
 The process of value chain analysis helps
 To identify demand for services within value chains
 Recognizes that optimal levels of investment requirement
of a range of services from a range of providers
 Including enabling institutions and value chain actors
 Prioritizes needs for donor intervention in financial services
 Limits of value chain finance are tied to the quality of
cooperation between actors.
 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

 …
 Since value chains are composed of hierarchy of chain stages, the

concept of stages of production is basic in value chain analysis

 Closely related to the stages of production is the concept of

vertical coordination

 A value chain needs business support services to function

 Hence, the fourth basic concept is the concept of business

development services
 …
 Value chain analysis describes the activities within and around

an organization, and relates them to the analysis of the

competitive strength of the organization.

 Therefore, it evaluates which value each particular activity adds

to the organization’s products or services

 Porter argues that the ability to perform particular activities and

to manage the linkages between these activities is a source

of competitive advantage.
 …
 Value chain analysis facilitates 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.
 …
 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.
 …
 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
 Potential for sustained food supply at affordable competitive prices for
consumers
 Potential for maximization of returns on capital investment at different
levels of the value chain strategy
 Potential for strengthening sector and regional complementarities and
interdependence through implementation of horizontal and vertical
integration approaches in the commodity production value chains
strategy.
 2.2.Purposes of value chain analysis

 The primary purpose of value chain analysis, is to understand the

reasons for inefficiencies in the chain, and identify potential leverage

points for improving the performance of the chain, using both

qualitative and quantitative approaches

 Value chain analysis is a useful analytical tool that helps

understand overall trends of industrial reorganization and

identify change agents and leverage points for policy and

technical interventions.
 …
 Value chain analysis involves breaking a chain into its constituent
parts in order to better understand its structure and functioning.
 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.
 The flows of goods, information and finance through the various
stages of the chain are evaluated in order to detect problems or
identify opportunities to improve the contribution of specific actors
and the overall performance of the chain.
 …
 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
 …
 Value chain analyses are conducted through a combination
of qualitative and quantitative methods, featuring a
further combination of:
 Primary survey
 Focus group work
 Informal interviews
 Secondary data sourcing
 The information is useful by itself to understand the linkages and
structure of the value chain and serves as the basis for identifying
many of the key constraints and policy issues that require further
exposition.
 …
 Agricultural value chain analysis can be conducted for
the purposes:
 Understand how an agricultural value chain is organized
(structure), operates (conduct) and performs (performance).
 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
 2.3. Steps in Value Chain
Analysis
 Value chain analysis is a process that requires four

interconnected actions:

 Data collection and research

 Value chain mapping

 Analysis of opportunities and constraints

 Vetting of findings with stakeholders and recommendations for

future actions
 …
Step One: Data Collection

 Good value chain analysis begins with good data collection, from the initial

desk research to the targeted interviews.

The value chain framework—that is, the structural and dynamic factors


affecting the chain—provides an effective way to organize the data, prioritize

opportunities and plan interventions.

The desk research consists of a rapid examination of readily available



material.
 …
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.
 …
 A certain commodity value chain can be mapped
as:
 …
 The purpose of a visual tool in the analysis process is to
develop a shared understanding among value chain
stakeholders of the current situation of the industry.
 The mapping exercise provides an opportunity for multi-
stakeholder discussions to reveal opportunities and
bottlenecks to be addressed in subsequent stages of the
chain development.
 Maps are also used to identify information gaps that require
further research.
 …
Step Three: Analysis of Opportunities and Constraints Using the
Value Chain Framework
 Step three uses the value chain framework as a lens through which
the gathered data is analyzed
 The framework is a useful tool to identify systemic chain-level issues
rather than 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.
 …
 The structure of the value chain
influences the dynamics of firm behavior
and these dynamics influence how well the
value chain performs in terms of two critical
outcomes:
 Value chain competitiveness
 MSE benefits.
 …
Step Four: Vetting Findings of Chain Analysis through
Stakeholder Workshops

Value chain analysis helps develop a private-sector vision



to reflect stakeholders’ interest in improving the

efficiency and competitiveness of the chain.

The fourth step, vetting findings, 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.
 Horizontal and vertical linkage in
Value Chain
 In many value chains there is a gap between what end markets
want and what MSEs produce due to a win-lose mentality or
lack of trust between vertically linked firms.
 As a result the flow of information between consumers and
producers is blocked.
 Such inefficient vertical relationships negatively affect the
competitiveness of the value chain and can prevent MSEs from
effectively meeting market demand.
 Mutually beneficial vertical linkages on the other hand
facilitate a smooth transmission of information from end
markets to small producers
 …
 Vertical linkages between firms at
different levels of the value chain—
these are critical for moving a
product or service to the end
market and for transferring benefits,
learning and embedded services
between firms up and down the chain.
 Effective vertical linkages are
generally characterized by

 Mutually beneficial relationships

 Knowledge transfer
 Quality standards
 Embedded services
 Financial flows
 What are Horizontal Linkages?
 Horizontal linkages between firms at the same level of the value
chain—these can reduce transaction costs, enable economies of
scale, increase bargaining power, and facilitate the creation of
industry standards and marketing campaigns. E.g. cooperatives.
 In a value chain, horizontal linkages are longer-term cooperative
arrangements among firms that involve interdependence, trust
and resource pooling in order to jointly accomplish common goals.
 Horizontal linkages can help
 Reduce transaction costs
 Create economies of scale
 Contribute to the increased efficiency and competitiveness of an industry.
 …
 In addition to lowering the cost of inputs and services
inter-firm horizontal linkages can contribute to shared
skills and resources and enhance product quality
through common production standards.
 Such linkages also facilitate collective learning and risk
sharing while increasing the potential for upgrading and
innovation.
 Small-scale producer groups have strong potential to
increase their bargaining power in the marketplace,
while processors, suppliers and traders may also form
their own groups to strengthen their position within
industries.
 Why Horizontal
Linkages?
 Through effective coordination, horizontal linkages can benefit firms in
many of the following ways:
 Facilitate bulk purchasing of inputs and services
 Reduce transaction costs for buyers
 Increase bargaining power of smallholders
 Promote collective learning
 Enable risk sharing
 Influence the creation of industry standards
 Catalyze the implementation of marketing strategies and provide access
to new markets (for smallholders who cannot sell individually, but can do
so as a group)
 Encourage firms to advocate for change
 Pool resources to purchase expensive shared equipment or services
 Supply large quantities demanded by buyers and importers
…
 GENDER ISSUE IN A VC
What is Gender?

Social meaning given to being a man or a woman,



characteristics used to define a man or woman that do not

stem from biological differences is what we mean gender.

While sex is the biological difference that man and



woman has.
 Gender as a social
relation
 Gender relations are specific to societies and time
 Gender relations change in response to wider changes -- they
are not fixed for all time
 There are differences among women (and men) - class, caste,
religious community, race etc.
 Gender influences division of tasks, access to information,
knowledge, networks etc and therefore upgrade opportunities
exist in this regard.
 Gender relations are social relations of power.
 …
 Meaning of being a woman or a man differs in
every society and changes over time.
 In a value chain all actors are related and these
relations are relations of power.
 Gender is a cross cutting power issue between
these actors (which is also related to education,
position in the chain, access to information etc).
 Power = for example access to information,
knowledge, education wise, networks etc.
 Women generally have less access to all these
issues, which can be revealed in a gender analysis
 CHAPTER THREE
Value Chain governance And Business
Ethics/የእሴት ሰንሰለት አስተዳደር እና የንግድ ሥነ
ምግባር

 What is governance?
 Do you think governance is a necessity in
value chains?
 3.1 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.
 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
 …
 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.
 2.1 Key parameters in value chain
governance

 Governance is about the ability to exert control along the chain

for a particular purpose.
 Firms, organizations or institutions set and/or enforce parameters

under which others in the chain operate.

The key parameters that are being enforced are:
1. What is to be produced? This includes product design and
specifications.
2. How it is to be produced? This involves the definition of the
production processes, which can include elements such as the
technology to be used, quality systems, product, labour and
environmental standards.
3. How much is to be produced, and when? This refers to production
scheduling and logistics
 Lead actors in the market system will set rules, and monitor and
also facilitate compliance with rules that pertain to each of the
parameters listed above.
 The actor can be a firm (buyer or producer) within the value
chain or public or private institutions located in the environment
of the chain.
 In general, a lead actor within a value chain takes responsibility
for setting, monitoring and facilitating compliance with the rules
in a value chain.
 Lead firms have the power to choose and replace suppliers.
 3.1 Importance of governance in value
chain
The issue of governance in value chains is important for the following reasons:

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

countries

b) Fast track to acquisition of production capabilities: lead firms

transmit best practices and provide hands-on advice on how to improve

layout, production flows and raise skills.

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

understand the distribution of gains along the chain

 …

d) Leverage points for policy initiatives:

The fact that some chains are governed by lead firms from


developed countries provides leverage for influencing what happens in

supplier firms in developing countries.

This leverage point has been 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.
 Types of value chain governance

1) Simple market linkages: governed by price

 Market governance involves transactions that require little or
no formal cooperation between participants, the cost of
switching to new partners is low for both producers and buyers.

2) Modular linkages: these type of governance is

used when lead firms or other value chain actors determine
voluntary standards for processes and products
 …
3) Relational linkages, In the relational type of value chain, suppliers
and their lead firm have closer collaboration than in the
modular type.

For example they have joint planning moments and

continuous information exchange
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.
 For example, as a result of continuously changing consumer
tastes, retailers face uncertainties in terms of both product
design and volume needs
 joint planning, joint problem solving, collaborative
communication and legal contract are the most
important elements of relational governance.
4) Captive linkages, In captive governance, lead firms do a
close monitoring of suppliers and have a high degree of control
over them.
In these chains, small suppliers are dependent on a few buyers who often
wield a great deal of
power and control.
can be found between sugar mills and sugar cane growers, but also tea
planters and tea factories.
Some form of contract farming can also be put in that type of value chain
governance
5) hierarchy. Linkages within the same firm,
governed by management

chains that are characterized by vertical integration

and managerial control within a set of lead firms that
develops and manufactures products in-house.
Highly competent suppliers cannot be found.
 3.2 SOCIAL AND
ENVIROMENTAL STANDARD
 A given value chain said to be sustainable when it meets the
needs of the present consumers without affecting the
needs of the future generation in terms of minimizing
environmental, improve social impact and animal welfare in the
value chain in order to guarantee the needs of future
consumers.
 Currently, sustainability issues include: climate change,
biodiversity, exploitation of land and/or water, social aspects,
animal welfare, product safety, waste- and packaging reduction.
 3.3. SAFTY AND QUALITY ASSURANCE
IN A VC

Food quality versus food safety

 Most of the time people understand food quality and safety as one
concept but it has different meaning.
 Food quality is related to what you (consumer or other chain
partner/s) expect; mostly observable by sensory elements(shape color
grade texture flavor etc.); more easily controlled by taking precautions
and less controlled by government agencies.
 Food safety could be measured objectively only after laboratory
investigation, which takes time and money.
 Realisation of food safety is a supply chain related issue and it is high
concern for government agencies.
 Business Ethics
 Business ethics reflects the philosophy of business, one of
whose aim is to determine the fundamental purpose of a
company.
 Ethics is related every aspect of our life
 In today’s world of scams, frauds, corruptions due to cut
throat competition, it is essential for new entrants to ensure
that one adheres to the basic ethical standards.
 Business ethics is not only applicable to any particular type
of businesses but is applicable to every type of business.
 Business ethics
 The study and examination of moral and social

responsibility in relation to business practices and decision

making in a business.

 Not limited to company alone but involves

 Supplier

 Manufacturer

 Marketing and distribution

 Customer care
 Features of Business
Ethics
 Business ethics is a code of conduct which business
men should follow while conducting their normal
activities
 Business ethics has universal application
 It is a relative norm
 It differs from business to business
 It is far-reaching concept and goes beyond the idea of
making money legally
 …
 It works a great deal in making long-term, long-lasting relationships

 Business ethics is based on well accepted moral and social values

 Practice of business ethics gives protection to customer and other

social groups related to a firm

 Business ethics provide the legal, social, moral, economical and

cultural limits with in which business has to be conducted

 …
 It cannot be enforced by law.
 It has to be accepted as self-discipline by
business-men
 It requires the formal education program,
training guidance in order to motivate the
business men to follow ethical practices
 Advantages of Business
Ethics
1.Attracting and retaining talent:
 Ethical organizations create an environment
that is
 Trustworthy
 Making employees willing to rely
 Take decisions and act on the decisions
 Actions of the co-employees
 …
2.Investor loyalty:

Investors are concerned about ethics, social



responsibility and reputation of the company in

which they invest.

Investors are becoming more and more aware



that an ethical climate provides a foundation

for efficiency, productivity and profits.
 …
3.Customer satisfaction:

Is a vital factor in a successful business strategy.



Repeated purchases/orders and enduring relationship of



mutual respect is essential for the success of the company.

An organization with a strong ethical environment places its



customer’s interest as foremost.

Ethical conduct towards customer builds a strong competitive



position.

It promotes a strong public image.


 CHAPTER FOUR
Value Chain Development and
Improvement
 4.1. Developing a value chain
 By definition: a value chain comprises of interlinked
value-adding activities that convert inputs into outputs
which,

in turn, add to add value and help create competitive
advantage.
 This means that businesses within the value chain are
involved in handling and adding direct value or consuming
the product and also the service network indirectly involved
in the production
 Value Chain Development means positive or desirable change
in a value chain to extend or improve productive operations
and generate social benefits:
 poverty reduction, income and employment generation,
economic growth, environmental performance, gender
equity and other development goals.
 It is improvement of cooperation between stakeholders of a
particular sector and the coordination of their activities along
different levels of a value chain .
 The ultimate goal of developing value chain is to
increase the competitiveness of the sector on the
(international) market.
 Value chain development generally

Empowerment of producers

Improve quality

Improve logistics (= planning)

Cost price reduction (improvement margins)

Scaling Up  Increase of Volume
 Stakeholders in value chain
development

 The term “stakeholders” is commonly used in

development but often means different things to different
people.
 Here stakeholders include all people interested in the
development of the value chain.
 These are, first of all, the private sector entities and
individuals directly concerned with creating and delivering
a product and engaged in the businesses of primary
agricultural production, processing, and marketing.
 A list of stakeholders in value chain development can include:
 Farmers, farmers’ organizations and their associations
 Processors (at different levels) and their associations
 Traders and exporters and their associations
 Transporters and middlemen
 Private advisory, business support and accounting service
providers
 Chambers of commerce, investment and export promotion
agencies and other bodies promoting value chain
development
 Regulatory agencies such as bureaus of standards, food
safety agencies and metrology institutes
 Private certification and quality control bodies
 Research institutions and universities
 Training and education institutions
 development Agencies
 4.1.2. Requirements for successful value
chain development

 There are a number of key organizational considerations in

building a successful value chain.

These include among others:
I) Establishing common objectives;
II) Building trust and establishing co-operative working
relationships.
III) Managing information flows;
IV) Upgrading in value chains.
 I). Establishing common objectives in value chain

 The objectives of the value chain will depend on the product,

market circumstances, and the participants, among other
factors.
 The aim might be to bring a new product to market,
 or to introduce an existing product to a new market;
 it might be to provide assurances of food safety, traceability
and/or quality to end consumers;
 it might be to maintain or expand market share in the face of
increased competition from imports or from domestic
competitors;
 it might be to respond to new government
regulations which affect product design,
processing, or traceability;
 or to strengthen and deepen existing
relationships with a view to increasing market
share
 It is crucial that the parties establish and share a
set of mutually agreed-to objectives.
 If individual objectives differ, information will not flow
freely between the partners.
 If we take a lesson from the collective experience of
companies involved in joint ventures
 one of the principal causes of failure in such ventures is
that the objectives of the partners are incompatible.
 The same is true of a value chain.
 Most other organizational issues stem from this one
point.
 II) Building trust and establishing cooperative
working relationships.

 Trust is one of biggest issues in the formation of a

value chain.
 Potential participants must trust that their partners’
motives are not solely self-serving, and that there are
benefits to working together.
 Ideally, the value chain will create a win-win
relationship whereby all participants benefit through
the establishment, maintenance, or expansion of
secure and sustainable markets.
 This is often referred to as governance of the value
chain in different literature.
 Trust building is an often a painstaking process.
 Mistrust has to be overcome before trust can be build.
 In some less developing countries, mistrust between
larger private sector and SMEs is deep rooted and has a
long history to deal with.
 At times it is an issue of attitude change, which takes
time.
 In the former socialist oriented countries trust between
private and public sector was so big.
 Development organizations acting as facilitators
have managed to bring together larger private
sector companies to enter into a contractual
arrangement with smallholder farmers.
 In this way long-term trust building is build up.
 Focus on Your Customer and Consumer: Many of
us are very focused on our product.
 Expanding that focus to include your customer and the
final consumer is an important shift.
 It is important to identify and define your suppliers and
your customers.
 Each business in the supply chain has suppliers and
customers as well as consumers at the end of the
chain.
 Value Chain Suppliers and Customers:
Suppose, with the pork supply chain, the consumer
could be looking for increased loin eye depth.
 The processor will go back to his supplier, the pig
producer, to find a way to deliver this attribute to
the customer, Marcy’s Meat Counter.

 Differentiate Your Product: Companies today
are looking for ways to differentiate themselves
from their competitors by developing new or
improved products.
 Working together with your suppliers and
customers to deliver a superior product may allow
you to achieve things you otherwise would be
unable to deliver.
 Contribute Resources: Each business in the value
chain has a unique collection of resources that
collectively will contribute to the capacity of the new
value chain.
 Taking an objective look at your resources will be a
useful step in the initial stages.
 You’ll then have an accurate description of all the
resources available for the new venture.
 For example, one business may have a very skilled
workforce while another business may contribute a
newer equipment line, and yet another business in
the chain may have excellent industry contacts.
 III) Managing information flows
 Knowledge is power. Often the farmers are in a
disadvantaged information position.
 They have no information about the performance of their
own organization, let alone of the market.
 By contrast, companies downstream in the chain tend to
have elaborate information systems.
 For example, supermarkets register the daily buying
behavior of their customers, while processing companies
register the yields, volumes and prices of major crops.
 The more information someone manages, the better
he or she can manage a company, and the higher
are the returns.
 To improve the position of the farmers in the chain,

their management of information has to improve.

Some elements of information management are:
 Record-keeping of the use of labor and farm inputs.

 This is necessary to give a proper understanding of the costs

involved, to base farm management decisions upon information,
and to build the ability to negotiate the price of the product.
 Traceability means keeping records to guarantee
the buyer on the source of the product and the
inputs that were used.
 Market information involves knowing about prices
and trends in the market so that the farmers can
bargain with potential buyers.
 IV) .Upgrading/Improvment
 In order to respond effectively to market
opportunities (MSEs) and industries need to
innovate to add value to products or services
and to make production and marketing
processes more efficient. These activities are
known as upgrading.

 Firm-level upgrading can provide MSEs with

higher returns and a steady, more secure income
through the development of knowledge and the
ability to respond to changing market conditions.
 …
 Upgrading also leads to industry
competitiveness and to national economic growth.
 Upgrading at the industry-level focuses on
increasing the competitiveness of all activities
involved in the production, processing, and/or
marketing of a product or service and mitigating the
constraints that influence value chain performance.
 …
 Upgrading is a multi-dimensional process that

seeks to increase the economic competitiveness

(profits, employment, skills) and/or social

conditions (working conditions, low incomes,

education system) of a firm or industry.

 …
 Upgrading involves a learning process
through which firms acquire knowledge and
skills—often through their relationships with
other enterprises in the value chain or through
supporting markets—that can be translated
into innovations or improvements that increase
the value of their products or services.
 …
 Upgrading is based on a firm’s capabilities—its internal
capacity to learn and change from what it has done in the past,
as well as to innovate and ensure continuous improvement in
products and processes.
 Essential to upgrading are both the opportunity and ability to
learn and the incentives for firms to invest in upgrading: if
firms do not foresee viable benefits to investments, like higher
incomes, secure markets or lower risks, they are unlikely to
spend time or resources on upgrading.
 Types of Upgrading

 The types of upgrading firms undertake are

characterized under the following categories:
 Process upgrading
 Product upgrading
 Functional upgrading
 Channel upgrading
 Process Upgrading

 Process upgrading increases the efficiency of

production either through better organization of the
production process or the use of improved
technology.
 For example, farmers may grow more by switching
varieties or applying fertilizer;
 they may husk maize more quickly using a machine
rather than by hand; or they may invest in build new
grain bins to improve storage.
 Farmers can also improve their links with other actors
in the chain – for example, they can sign contracts
with input suppliers or processors
 Product Upgrading
 Product upgrading—improving product quality and increasing
value for consumers—may be stimulated by changes in end
markets, usually stemming from changes in customer
preferences, or the desire for higher value added, higher quality,
and consequently more profitable products on the part of MSEs.
 To remain competitive in rapidly changing markets, MSE
producers must be able to upgrade their products on an
ongoing basis in order to adapt to new trends and achieve higher
standards.
 Functional Upgrading
 Functional upgrading is the entry of a firm into a new,
higher value-added function or level in the value chain.
 Farmers can take on new activities in the chain, either
upstream or downstream, or change the mix of activities they
undertake.
 For example, they may start grading and sorting their produce;
 they may bulk it to make pick-up more convenient for buyers;
 or they may process it (drying, milling, etc.) to improve its
value or increase its storage life.
 Channel Upgrading

 Channel upgrading is when firms enter one or more

new end markets in the same basic product—
domestic, regional or global.
 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
 …
 Channel upgrading is also a response to changing
market conditions —as new markets open up, old ones may
shut down, consumer preferences change, and prices
fluctuate in existing markets.
 In some cases, MSEs seek out new channels for lower quality
by-products that are not currently being sold, such as when
avocado or almond producers sell low quality product to oil
processors at a lower cost to earn additional income and
reduce wastage of product that cannot compete in higher-
value channels.
 4.1.3. Stages in building a value chain

 Three stages in building a value chain have been

identified.
Stage 1: Identifying the Opportunity
 In this first stage, you will identify some opportunities for a value
chain by first mapping and evaluating your existing supply chain.
 You probably have some idea of your resources but may need to
further define a clear project objective or focus.
 Map Your Supply Chain
 Mapping your existing supply chain is the first step in identifying
opportunities.
 By mapping the major companies who are your 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.
 There are advantages to doing this exercise with one or two of your existing
chain partners:
 You will help create buy-in for the project
 Partners can provide valuable perspectives on the strengths, limitations
and opportunities for the chain.
 Stage 2: Developing a Pilot Project Plan

 At this stage you look at developing a pilot project

plan with clear goals, plans and measures.
 A pilot is a small, trial-size version of a commercial-
scale value chain.
 It minimizes some risk by allowing you and your
partners to commit yourself and work out any bugs
while you proceed on a small scale.
 This is the stage where you identify suitable partners
for the value chain, select a manager and achieve
commitment from all partners perhaps in the form of
a written agreement.
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.
 4.4. Supporting factors for value chain development
and improvement
4.4.1. Logistics in value chain
 Logistics is the art of moving goods; The right amount at the right
place, at the right time and at the right quality.
 Agri-food logistics is the art of moving agricultural and food
products from farm to fork.
 The simple idea of a nicely organized one-dimensional chain is just
a simplified model of reality.
 In reality one might better speak of a multi dimensional network
 4.4.2. Value chain finance:

 Value chain finance (VCF) can be described as all

financial products and services that flow to or
through any point in a value chain
 in order to increase returns on investment and
growth and competitiveness of that value chain.
 The term value chain finance may also refer to an
approach in which the specific features of trading
within a value are exploited to reduce finance risks
and to facilitate services by financial institutions.
 …
 Value chain finance means “linking financial institutions to the
value chain, offering financial services to support the product
flow, and building on the established relationships in the chain”.
 They further elaborated that the product flow in the value chain is
used as a carrier to provide financial services and way of financing
can spread risk among the financial institutions and chain actors
and provides alternatives to traditional collateral requirements.
 It provides tremendous potential for unleashing capital, scaling up
and sustaining chain prospects, but it needs to be managed and
organized well.
 Types of value chain finance

 Value Chain financing has three types of finance for

the actors in the value chain. These are
 chain liquidity,
 agricultural finance and


value chain finance.
Chain Liquidity
 Chain liquidity refers Short-term loans from suppliers or buyers
within the value chain.
 Such financing within a chain is common between farmers or
farmer groups and traders.
 These credit flows are generally called trade credit, or chain
credit.
 Agricultural finance refers financial services from
commercial banks, microfinance institutions and other
financial institutions.
 Value chain finance financial services that are based on
cooperation in the value chain
 4.4.3. Value chain information management

 To manage the flow of goods and services in a value chain,

there has to be an effective management of information
exchange between all members, including managing
feedback from customers and/or end consumers.
 Open communication and information sharing are essential
to a successful and market-responsive value chain.
 The development of market intelligence capacity and
market information systems in most value chain supported
programme is in response to this need.
 Key to the success in most value chains has been
communication and information sharing between
chain partners.
 Open communication and information sharing is
critical so that value chain partners are receiving
continuous feedback from one another and
potential problems are identified and dealt with at
an early stage
 CHAPTER FIVE
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

 The Netherlands Development organization
(SNV’s) Approach

 SNV Business Organisations 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

 …
 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 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.
 …
 Key interventions areas for this demand
driven value chain approach are therefore:
 Sector development
 Business development
 Knowledge development and learning
 And service capacity development
 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 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

 ...
 GTZ used the following value chain integration map to
explain its experience in value chain development in SiriLanka
 NIMPF Approach to value
chain
 NIMPF approach follows eleven steps in four phases for
value chain development
 …
 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.
 We can use a multilevel SWOT analysis; identify incentive structures,
assess infrastructure, socio-cultural, natural, economic and political
 …
 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.

 …
 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.
 The ICEBERG approach to
value chain

 The Iceberg approach is similar to the

NIMPF approach that we discussed above.

 However, the Iceberg principle is a model

considering not only the visible, subject-logic

level, but also the invisible emotional level

 …
 From the four approaches that we have seen above,

we can identify four key dimensions of a value chain:

 Consumer and demand driven

 Based on collaboration between links

 All partners add vale and share value

 It is a complex network of actors

Thank you!