Chapter 4

Value chain development and

improvement
 Building a Value Chain
Building a Value Chain
• Value chain building is a deliberate initiative to promote
potential value chain development in a sustainable manner.
• It involves working for inclusion of target groups,
improving participation and benefits of the target group,
incorporating other developmental concerns.
• Building a chain begins chain formation.
• Chain Formation includes all activities and conditions
necessary to design as well as implement collaborative
relations between chain links/actors with the purpose of
supporting a productive functioning of the chain efficiently.
 Value Chain Development
 Opportunities for value chain development
 World Trade Organization (WTO) agreement on
agriculture: it is an organization established to break the
barriers to trade and regulate international trade by
ensuring the enforcement of international standards.
 International standards: these are standards set at the
international level to ensure that quality goods are
supplied to the market. They also prevent discrimination
against weaker countries.
 Changing consumer preferences and behavior: people’s taste
and preferences change because of availability of alternative
products on the market.
 This creates opportunities for new products to be introduced.
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 Value Chain Development

Opportunities for value chain development

 Factor endowment: this has to do with comparative
advantage.
 The producers might have certain resources that enables
them to produce certain goods better that others. These
resources thus become opportunities for the producers to
produce more of these goods for the market.
 Advances in technology: advances in, communication,
transportation, information, production and processing
technologies have created opportunities to create and add
value thus ensuring the efficient production of goods.

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 Value Chain Development

Opportunities for value chain development

 Expanding domestic market: increases in population
and income levels as well as changes in consumer
preferences and taste have combined to expand the
domestic market thus creating opportunities for producers
to introduce more products to the market.
 Trade agreements: agreements between regional and
international economic groupings like the Economic. Bi-
lateral agreements between trade partners have created
opportunities for the production of diverse goods to
satisfy the demands of the market.
 They have also created opportunities for accessing inputs,
capital, technical assistance and technology.
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 Value Chain Development

Challenges in value chain development

The major challenges value chain promoters usually face
are:
 Lack of strong commitment by the value chain actors
Limited awareness on the benefit of value chain by
policy makers, private sectors, and government offices.
Poor culture of working together by private sectors for
common goals which emanate from poor notion of the
concept of competition.

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 Value Chain Development

Challenges in value chain development …

Poor linkage among producers, researchers, policy
makers, private sectors, academic institutions
 Lack of chain lead private firm for specific commodities
 Limited engagement of private sector in value chain
promotion initiatives
Short duration of value chain development projects on
average three years which considers value chain as quick
fix.

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 Value Chain Development

Challenges in value chain development …

 Poor business to business culture / B2B relation

 Limited financial management capacity of clients

Lack of role models / sector leaders
Change resistance by some value chain stakeholders

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 Steps in Developing 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. After you have completed this
section, you will be able to:
 Map and evaluate your supply chain.
Outline the opportunity by developing a project
summary and evaluating the market.
 Assess resources, risks and capabilities of a value chain
project.
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 Steps in Developing a Value 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.
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.

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 Steps in Developing a Value Chain..

Try to answer the following questions.

o Are objectives being met?
o Have the objectives changed?
o Are all partners satisfied with progress?
o What needs to change to increase satisfaction or
ensure continuing support?
 Evaluate the Pilot Project

• Once the pilot project is completed, it has to be

evaluated and decision has to be made whether the
group wants to establish a more permanent value chain.
• Then, identify the learning gained and discuss the next
steps to establishing a more permanent value chain and
relationship.
 Evaluate the Pilot Project
• In this ask these questions:
– What was accomplished?
– Can more be accomplished by continuing?
– Can we add to the objectives?
– Are there any new areas we can work on together–
cost reduction, safety, quality, new products or new
markets?
– What can we do together that can’t be done
independently?
– Are there any new opportunities?
 Principles of Value Chain Development

• Chains start from formation.

• Chain formation encompasses all the activities
and conditions necessary to design as well as
implement collaborative relations between chain
links with the purpose to support the productive
functioning of the chain efficiently.
 Principles of Value Chain Development

• Once chains are formed they need to be

organized.
• Chain organization is about formal as well as
informal structures and procedures advancing
the efficient and effective differentiation and co-
ordination between entities at all levels within a
chain.
 Cont …
Value chain development procedure should ensure
the following points:
• Transparent external facilitator role
• Build upon the initiatives of VC actors and existing
organizations.
• Serving clients impartially and share results fairly
• Sticking to division of tasks between VC actors
• Enhancing environment of respect, safety, trust and
autonomy of actors.
 Cont …
Value chain development procedure should ensure the
following points:
• Focus on practical implementation and rapid visible
results and impact.
• Openly acknowledge potential conflicts.
• Creating balance between participation and results
• Coordinating efforts of supporter (donors) along chain.
 Requirements for Successful Value Chain
Development

• Establishing common objectives in value chain

The objectives of the value chain depend on the product,
market circumstances, and the participants, among other
factors.
• Building trust and establishing cooperative working
relationships
• Trust is also one of the crucial 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 from working together.
 Requirements for Successful Value Chain
Development

Managing information flows

• Knowledge and communication are very crucial in any
engagement to succeed. However, farmers are often at
disadvantage in access and use of information.
• They have no information about the performance of their
own organization, let alone of the market. By contrast,
companies downstream the chains tend to have elaborate
information.
 Requirements for Successful Value Chain
Development

• Traceability: it is accessing information about the

product or service in exchange. It is important to
guarantee the buyer on the source of the product and the
inputs that were used. This also requires keeping records
and its management.

• Market information: knowing about prices and trends

in the market so that the farmers can bargain with
potential buyers.
 Value chains upgrading and implementation
strategies

 Upgrading: Denotes a development path of a firm, a

group of firms or an entire value chain in response to
efforts to improve their/its position and level of value
addition compared to competitors.
 In its broadest sense, upgrading can be viewed as
synonymous with positive value chain development.

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 Value chains upgrading and implementation strategies

 Gereffi (1999) defines upgrading as: “…. A process of

improving the ability of a firm or an economy to move to
more profitable and/or technologically sophisticated
capital and skill intensive economic niches.”
 McDermott (2007) defines upgrading as: “the shift from
lower- to higher-value economic activities by using local
innovative capacities to make continuous improvements
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in processes, products and functions”.
 Value chains upgrading and implementation strategies
Kaplinsky (2000) gives four directions in which economic
actors can upgrade:
Increasing the efficiency of internal operations,
Enhancing inter-firm linkages,
Introducing new products and
Changing the mix of activities conducted
within the firm.

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 Value chains upgrading and implementation strategies

Pietrobelli and Saliola (2008) define the following

upgrading options:
Entering higher unit value market niches,

Entering new sectors,

Undertaking new productive functions and in all
cases enlarging the technological capabilities of
the firms.

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 Types of Upgrading

1. Product upgrading, which is the innovation,

diversification or improvement of the final product.
2. Process upgrading meaning improvement in
production and in the distribution of technology and
logistics.
3. Functional upgrading relates to improvements from
entering into higher value-added functions in the value
chain.
4. Chain upgrading : moving to a new value chain

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 Logistics in value chain

• Logistics is concerned with having goods and services of

the right amount at the right place, at the right time and at
the right quality.
• With progress in time, basic ground pattern of the
logistical structure is changing in order to meet the
complex flow of goods and services. Clustering based on
collaboration and integration of product flows, storage
and information is one such change.

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 Logistics in value chain

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 Value chain finance

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

financial products and services that flow to or
through any stage in a value chain in order to increase
returns on investment and bring about growth and
competitiveness of the chain.
 Value chain finance
• Value chain finance approach is the recent one which
followed from earlier concepts. Four phases of
finance concept development over times are listed
below.
• Agricultural credit era (1950 – 1985)
• Donor microfinance era (1980 – 2000)
• Commercialization of MFIs (2000 – present)
• Value Chain Finance (2005 – present)