Course : Value Chain Analysis and Development

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 Chapter One

Value Chain Approach: Concepts, Importance and Principles

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 Value Chain Approach: Concepts, Importance and Principles
Concepts of Value Chain
What makes something desirable?
o Things that make something desirable could be price, e.g. cheap or
high value; Appearance, e.g. looks; Experience, e.g. taste; Ease of
use, e.g. fresh-cut and washed; Availability, e.g. year round like Coca
Cola.
o The term ‘Value Chain’ was used by Michael Porter (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.

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 Value chain comprises of interlinked value-adding activities that
convert inputs into outputs which, in turn, add to the bottom line
and help create competitive advantage.
o 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 (eg. quality
control, ICT, financial partners (banks, insurance, and training and
research).

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✓ “value chain” describes the full range of value-adding activities required
to bring a product or service through the different phases of production,
including procurement of raw materials and other inputs, assembly,
physical transformation, acquisition of required services such as transport
or cooling, and ultimately respond to consumer demand(Kaplinsky and
Morris 2002).

✓ 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.

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✓ Value chains include all of the vertically linked,
interdependent processes that generate value for the
consumer, as well as horizontal linkages to other value
chains that provide intermediate goods and services.
❑ The term “value chain” refers to the process of continued

addition of value that occurs while the product passes from

one actor in the chain to the next.
❑ Value chains focus on value creation: typically via
innovation in products or processes, as well as marketing
and also on the allocation of the incremental value.

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 Value and value addition
✓ The Value Chain concept was developed and popularized in
1985 by Michael Porter.
✓ Porter defined value as the amount buyers are willing to
pay for what a firm provides , and he conceived the “value
chain” as the combination of nine generic value added
activities operating within a firm activities that work
together to provide value to customers.

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Porter’s Value Chain

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❑ Primary activities are directly involved in transforming inputs into
outputs and in delivery and after-sales support.
They include:
Inbound Logistics: material handling and warehousing;
Operations: transforming inputs into the final product;
Outbound Logistics: order processing and distribution;
Marketing and Sales: communication, pricing and
channel management; and
Service: installation, repair and parts etc

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❑ Support activities support primary activities and other

support activities. They are handled by the organization’s

staff functions and include:

Procurement: purchasing of raw materials, supplies and

other consumable items as well as assets;

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❑ Technology Development : know-how, procedures and
technological inputs needed in every value chain activity;
Human Resource Management: selection, promotion and
placement; appraisal; rewards; management development; and
labor/employee relations; and
Firm Infrastructure/set –up : general management, planning,
finance, accounting, legal, government affairs and quality
management.

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 Value Addition in Agriculture

❑ Value addition: is simply the act of adding value to a product,

whether you have grown the initial product or not. It involves

taking any product from one level to the next (Fleming,2005).

❑ Adding Value – Process of changing or transforming a product from

its original state to a more valuable state.

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 Value Addition in Agriculture

❑ BUT – Raw Commodities already have value? Many raw

commodities have value in their original state. They are raised by an

agricultural producer; then sold by that producer for further

processing Corn, wheat, weaned calves, market lambs, watermelons

etc. all HAVE value. They are worth something.

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 Value Addition in Agriculture

❑ Could producers get MORE $$$ for their products if they

–-------- ?

✓ Grew products differently

✓ Physically changed their products before selling them

✓ Coordinated with an agribusiness to change the way their

product was marketed?

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 Value Addition in Agriculture

✓ Adding value to products can be accomplished in a number of

different ways, but generally falls into one of two main types:

✓ Creating Value

Innovation

Industrial Innovation

✓ Capturing Value

Coordination

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 Value Addition in Agriculture

❑ Creating Value – occurs with actual or perceived value to a customer

for a superior product or service:

✓ Innovative new products

✓ Enhance a product’s characteristics

✓ Enhance services

✓ Create brand names

✓ Develop unique customer experiences

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 Value Addition in Agriculture

✓ Capturing Value: Changing the distribution of value in the food/fiber

production chain. Meant to ‘capture’ more of the consumer dollar

through:

• Direct Marketing

• Vertical Integration

• Producer Alliances

• Cooperative Efforts

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 Value Addition in Agriculture

6 Key Strategies for Adding Value

✓ Changing physical state of products

✓ Producing enhanced value products

✓ Differentiating products

✓ Bundling products

✓ Producing more products that improve efficiency up the supply

chain

✓ Owning assets up the supply chain

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 Value chain and Supply Chain
Value chain
✓ The value chain is a concept which can be simply described as the
entire range of activities required to bring a product from the initial
input-supply stage, through various phases of production, to its final
market destination. It also includes post consumption waste disposal
and recycling activities.

✓ As opposed to the traditional exclusive focus on production, the

concept stresses the importance of value addition at each stage,
thereby treating production as just one of several value-adding
components of the chain.

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 Value chain

Source: - Kaplinsky, R., M. Morris, 2000 Figure 3- A generic value chain

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✓ Supply chain is an integrated process where in a number of various
entities work together in an effort to acquire raw material, convert the
raw material in to specified final product and deliver final product to
retailers.
✓ Supply chain sometimes called as Production Chain includes several
chains links that enable the flow of goods and service from the
producer to the consumer.

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✓ Supply Chain Management (SCM) emerged in the 1980s as
a new integrative philosophy, to manage the total flow of
goods from suppliers to the ultimate user.

✓ The primary focus in supply chains is on the costs and

efficiencies of supply, and the flow of materials from their
various sources to their final destinations.

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✓ Supply chain: It is taken to mean the physical flow of

goods that are required for raw materials to be transformed

into finished products. Supply chain management is about

making the chain as efficient as possible through better

flow scheduling and resource use (Dunne,2001).

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✓ The term value chain is primarily used in this course , as it
is inclusive and incorporates supply logistics, value
addition, transactions, and market linkages.
✓ Value chains encompass all of the factors of production
including land, labor, capital, technology, and inputs as well
as all economic activities including input supply,
production, transformation, handling, transport, marketing,
and distribution necessary to create, sell, and deliver a
product to a certain destination.
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Factors Supply chain Value chain
Information Little or none Extensive
flow
Principal focus Cost/price Value/quality
Strategy Basic product (commodity) Differentiated
product
Orientation Led by supply Led by demand
Organizational Independent actors Interdependent
structure actors
Philosophy Competitive of the enterprise Competiveness of
the market chain
Adapted from: Toma & Bouma Management Consultants. November 1998. Value
Chains as a Strategy. Agriculture and Food Council. Edmonton, Alberta, Canada.

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✓ The issue is not so much about which concept is superior or
preferable, since they are complementary and their
effective implementation can deliver improved business
results.
✓ Both are made up of companies that interact to provide
goods and services. When we talk about supply chains,
however, we usually talk about a downstream flow of
goods and supplies from the source to the customer.

✓ Value flows the other way, customer is the source of value,

and value flows from the customer in the form of demand,
to the supplier.

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✓ We need to stop thinking of supply chains and value chains
as very distinct and different entities, but, rather, they are
much related and we should integrate the two in
application.

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 Types of value chains
✓ There are different types of value chains based on various
classification criterion: These are:
1. Strength of role in the network/value chain
 Value chains can be classified into two based on the
governance structures: buyer-driven value chains, and
producer-driven value chains (Kaplinisky and Morris,
2000).

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 Types of value chains….
Producer- driven value chains
 Large, usually transnational, manufacturers play the
central roles in coordinating production networks
(including their backward and forward linkages).
 This is typical of capital and technology intensive
industries such as the automotive, aircraft, computer &
etc.
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 Types of value chains…
Buyer-driven value chains;-
 Buyer driven chains are usually labor intensive
industries, and so more important in international
development and agriculture.
 In such industries, buyers undertake the lead coordination
activities and influence product specifications.

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 Types of value chains…
2. Level of complexity of value chains
✓ The Simple Value Chain
✓ The Extended /Complex value chain
3. Number of value chains
One value chains
✓ In some cases, alternative value chains may absorb only a
small share of their output; in other cases, there may be an
equal spread of customers. 5/9/2020 31
 Types of value chains…
3. Number of value chains…
Many value chains
✓ In addition to the manifold/diverse links in a value chain,
typically intermediary producers in a particular value chain
may feed into a number of different value chains.

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 Types of value chains…
4. Number of labels
The various activities which were performed in
particular links in the chain.
✓ One label:- Focuses on a value chain analysis on
a single level of the chain
✓ Many labels: - Focuses on a value chain analysis
on many levels of the chain. 5/9/2020 33
 Types of value chains…
5. Center of analysis (product or corporate)
Product value chain: -A product value chain
covers one product
Corporate value chain: - A corporate value chain
covers the product portfolio of a whole company.

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 Value chain analysis is important both conceptually &
practically.
 There are three main sets of reasons why value chain
analysis is important in this era of rapid globalization.
 They are:
I) With the growing division of labor and the global
dispersion of the production of components, systemic
competitiveness has become increasingly important.
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 II) Efficiency in production is only a necessary condition
for successfully penetrating global markets.
III) Entry into global markets which allows for sustained
income growth that is, making the best of globalization
requires an understanding of dynamic factors within the
whole value chain.

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 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.
 Mapping the flow of inputs, goods and services in the
production chain .
 Allows each firm to determine who else’s behavior plays
an important role in its success.
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✓ It helps to explain the distribution of benefits,
particularly income, to those participating in the global
economy.
✓ Helps to identify the policies which can be implemented
to enable individual producers and countries to increase
their share of these gains.
✓ VCA is a useful analytical tool to identify change agents
and leverage points for policy and technical interventions
by proper understanding of overall trends of industrial
reorganization
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✓ Value chains provide an analytical and diagnostic tool
for identifying viable, remunerative income-earning
opportunities for poor households in the rural
developing world.
✓ In highly competitive and increasingly global
agribusiness markets, poor households must find
niches in which they can compete effectively in the
rapidly growing urban, rural and export markets.

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✓ Value chain analysis provides useful information on
structure linkages, actors, and dynamics, it helps to
identify where, how, why, and by whom value is added and
created along the chain, as well as how changes could
result in improved performance (Hawkes and Ruel 2011)

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 VCA provides evidence on the flows of goods,
information & finance through the various stages of the
chain.

 Helpsto identify opportunities to improve the contribution

of specific actors & the overall performance of the chain.

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 The rules of thumb in value chain approach:
 Find out what consumers want most and how well you are
equipped to satisfy those demands.
 Built on trust and team work to access markets and supply
competitive products. This implies that all actors have to:

Apply appropriate production and handling

technologies.
 Become business oriented.

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 The rules of thumb in value chain approach…
 Trust and understand each other as partners in the value
chain
 The competitiveness of a value chain depends on trust,
cooperation and communication between all actors.
 The strength of the entire value chain depends on the
performance of every single partner in the value chain.
 The competitiveness of the final product corresponds to
the capacities of the weakest link in the value chain.
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 Quiz
1. Assume you are owner/manager of mango juice
processing company do you think that applying the
principles of value chain approach is imperative & why ?

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 Value chain has the following major characteristics:
✓ It is a business oriented model.
✓ It shows the full range of on farm and off farm activities
that create final product offered to the consumer.
✓ There are a number of actors (individuals or groups along
the value chain who undertake specific activities to create
the final product.

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Value chain has the following major characteristics:

✓ Enterprises receive materials as input, add value to the

raw materials through production and support process,
and self-finished products to consumers.

✓ Valueis added at every stage of the chain to offer better

products for the consumer, and higher revenue for the
enterprise.

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 Feature of an Effective/Successful 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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 The value chain concept has several dimensions.
 The first is its flow, also called its input-output structure.
 A chain represents the entire input-output process that
brings a product or service from initial conception to the
consumer’s hands.
 In this sense, a chain is a set of products and services
linked together in a sequence of value-adding economic
activities.
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 A product is first designed, then raw materials are
purchased and production takes place; the product is then
distributed through wholesalers and retailers.
 At each stage, services such as transport or finance may
be needed to keep the process going.
 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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 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.

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 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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