The Value Chain Development Approach

Berhanu Gebremedhin

LIVES ?????• Promotes improved technology and

practices

• Builds knowledge

• Builds capacity

• Facilitates linkages

LIVES Staff?????• Champions of value chain development

• Promoters of market oriented extension

• Brokers of knowledge

• Builders of capacity

• Facilitators of linkages

The Value chain defined• An agricultural value chain describes the full range of

actors and their value-adding activities required to bring a product or service through the different phases of production, including the procurement of raw materials and other inputs, assembly, physical transformation, acquisition of required services such as transport, cooling, storage, and ultimately respond to consumer demand.

• Hence, value chains include all of the vertically linked, interdependent stages/processes that:– generate value for the consumer, – as well as horizontal linkages to other value chains that

provide intermediate goods and services – • Value chain within a value chain

Input supply Production Post- harvest

handling Trading Processing Trading Consumption

The Value Chain

• Value chain actors: Actors involved in ownership of a commodity and its value addition

• To be contrasted with service providers (also called business development services (BDS))

Service Providers/ Business Development Services (BDS)

• Public (extension, input supply, research, market information etc.): provide service mostly for free, but also on fee

• Private (transport, processing, storage, etc.): provide service on fee

• If service is provided by the value chain actor itself for own business, service becomes part of the value chain actor activities

• A service is expected to add value

Consumption

Market information and intelligenceFinancial services

Transportation

Communications

Govt. policy regulation

Tech. & business training & assistance

Production input supply

& Business Support Services

Research

The Value Chain

Trading

Processing

Trading

Post-harvesthandling

Production

Input supply

The Value system• The value system comprises the value

chain actors, service providers and the institutional environment in which the value chain actors and service providers operate, including the institutions that govern their actions and interactions.

• Therefore, value chain development requires system thinking.

The value chain analysis • Value chain analysis breaks up a chain to its constituent parts in order to

better understand its components and its functioning

• Identifies chain actors at each stage and discerns their functions and relationships

• Analyzes services available to chain actors

• analyzes chain governance

• identifies value adding activities in the chain and assigns cost and added value

• evaluates the flow of goods, information and finance through the various stages of the chain

• identifies chain constraints and opportunities

• examines the interactions of the chain and its policy and institutional environment (its enabling environment)

• Develops chain upgrading vision and strategies

The value chain analysis (2)• Reasonably flexible and the value chain can be analyzed from the

point of view of any one of the large number of actors in the chain

• Value chain analysis can help design projects and programs to provide support to a value chain in order to achieve a desired development outcome

• Desired development outcomes include:– Increasing the level of income– Increasing the level of export– Generating employment– Benefiting a particular group in a society– Concentrating development in underdeveloped regions.

• The entry point, and therefore the concentration of the value chain analysis, is directly related to the desired development outcome

The value chain development approach• Building a competitive value chain requires:

– understanding the demand for products and services in key markets,

– investing in the factor inputs, capacity, and services to best meet the needs of those markets, and

– Improving the policy and institutional environment of businesses

• In increasingly integrated regional and global markets, firms do not merely compete against firms- value chains compete against value chains.

• The value chain framework, therefore, ensures both systematic and systemic analysis of the value chain and the factors and relationships that affect its competitiveness

Factors affecting competitiveness of value chains

• End markets– Local, National, Regional, international

• Business support services– Inputs– Finance– Technical support

• Business enabling environment

• Inter-firm cooperation – vertical linkages– Horizontal linkages

• Firm-level upgrading

The Value Chain Development process• Selecting a value chain for development– Determine the scope of value chains to be

developed– Conducting market research – Prioritizing alternative value chains

• Analyzing a value chain– Value chain mapping– Quantifying value chain in detail– Economic and technical analysis of a value chain– Identification of constraints and opportunities

The Value Chain Development process (2)• Determining the chain development strategy– Setting a vision/model and strategy for value chain

development– Setting operational development objectives and

activities– Identifying actors to implement the development

activities– Clarifying public, private and donor roles

• Implementing value chain development– Strengthening business linkages (facilitating vertical

integration and horizontal collaboration)– Strengthening services in value chains (assessing

service needs, and service provision, strengthening private service provision, strengthening public service provision)

– Financing value chain development (brokering private and public value chain financing)

– Improving policy and institutional environment of value chains)

• Monitoring and managing impact

Prioritizing Value Chains for Development

• Participatory approach to value chain selection needed

• Participants:– Policy makers– Decision makers– Farmers/farmer organizations– Private sector– Service providers– Development partners

Prioritizing value chains (2)• Sources of list of potential chains– Consultation with experts– Previous assessments– National priorities– Sectors supported by other initiatives– Market analysis– Quantitative analysis – Capacity to respond to market demand

Value Chain Governance• Governance refers to the rules operating in a value chain, and the

system of coordination, regulation and control in which value is generated.

• Governance refers to both the formal rules of and the informal institutions of competition that influence how production and marketing is structured.

• Hence, governance aims to understand what factors affect the organization of production and the position of chain actors in the arrangements.

• Instruments of governance range from contracts between value chain participants to government regulatory frameworks, to unwritten norms that determine who can participate in a market

• Requirements may be official or unofficial, and may originate from within or outside the chain.

Value Chain Governance (2)• Analysis of value chain governance has three dimensions:– Coordination structures (key actors, mechanisms, the

coordination structure)– Rules and regulations (compliance to rules and

regulations, sanctions and incentives to ensure compliance)

– Control mechanisms (transmission of information and services)

• There may be more than one system of coordination operating in a single value chain in any given area.

Developing vision/model for a value chain • Upgrading a value chain requires a vision and strategic perspective

• The upgrading vision describes the aspired change of the value chain answering the question:– How should the value chain look like five years from now?

• Determining the desirable future/vision of a value chain is important because:– Visioning defines what the endeavor to develop the value chain is all about– Visioning defines the actual justification for upgrading– Visioning helps to prioritize action and stay focused– Visioning helps build consensus among stakeholders on the way forward

• it is very important to ensure that the vision and strategy is formulated and shared by the stakeholders

• Building on the vision, the upgrading strategy describes how the vision can be reached by improving services, processes, capacity and the relationships of operators.

Analyzing Chain Constraints and Opportunities

• Constraints and opportunities have to be derived in relation to the vision/model for the chain

• It is important to note that the objectives of intervention should not just be inferred from current chain problems but from the opportunities and the necessary changes implied by the vision.

• The key question to answer is :– What gaps exist between the requirements of a value

chain derived from the vision and its current structure and performance?

• The basis for constraint and opportunity analysis is the chain map.

Identifying areas of upgrading • Interventions can be systematically identified

by:– Determining possibilities to remove barriers

hindering progress towards the vision– Determining possibilities to fulfill the

requirements connected to the vision– Identifying points of leverage in the value chain

• The interventions must be visualized in the value chain map by indicating the stages and actors of the chain they refer to.

Strengthening services in value chains• Value chain upgrading regularly implies better access to services

• Profitable value chains are supported by services that allow the chain to grow, be more efficient, and enhance its competitiveness.

• Essential services include input supply, financial services, market information, product development support, technical support, transportation, quality assurance (eg. Certification), extension and skills development, etc..

• Demand for services can also offer opportunities for businesses to emerge as suppliers.

• Services can be provided through many different mechanisms: – Public– Private– Embedded services in transactions

• Once needed services are identified interventions can be developed to introduce a service

Steps in identifying needed services• Map services currently provided along the value chain

• Identify services needed to upgrade the chain

• Develop indications of service sustainability, profitability, quality and location within the chain

• Improve the responsiveness of public service providers

• improve the private services currently being offered

• Develop business plans to introduce private services

• Strategically use temporary external services

Interventions to strengthen services• Address the supply side – service providers

• Address the demand side

• Address the institutions governing service demand and supply

Improving the business/enabling environment of value chains

• Macro policies and sector-specific conditions affect chain performance through:– Increasing costs and decreasing competitiveness– Decreasing product and service quality– Increasing risk– Decreasing FDI and constraining long-term strategies

• These include:– macro-economic policies (monetary, financial, duties, taxation etc.) – Laws and regulation for business registration, employment, contract

security and enforcement– Infrastructure (roads, power, water, telecommunication etc.)– Product grades and standards– Property rights (eg. land and water rights)– Publicly supported services (research, technology promotion etc.)

RBM&E of Value Chain Performance • Focus is on results, not just on inputs and

activities• Logic Model (LM)• Performance framework (PF)• Performance measurement framework (PMF)• Data collection• Comparison of performance against vision • Explaining deviations and feed back to

project management

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Value chain governance

• Steps in analyzing governance– Determine demand and supply conditions – seasonality etc.– Determine the system of coordination (formal and informal arrangements

between actors)• May range from very-loosely coordinated, market-based trading structures, to intensely

coordinated vertical integration– Analyze how target populations participate in the value chain – understanding

target populations functional range and formality of participation can be useful in understanding opportunities for upgrading to benefit target population

– Identify formal and informal rules and regulations– Analyze the impact of rules and regulations on value chain participants– Analyze target sector knowledge and awareness of rules, norms, and standards

and identify gaps.– Analyze how information and service are provided internally through the value

chain and externally