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WHAT IS A VALUE CHAIN?

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1.0

VALUE CHAINS

Value chain has recently emerged as a popular business concept. The growing integration of the global economy has provided the opportunity for substantial economic and income growth. However, by the same token, creating and maintaining value in an intensively competitive world of changing markets and technologies is a great challenge to recon with. The key question to ask is how to take advantage of such globalisation trends, and even more, how to do so in the world where there is a disparity in terms of social and economic development. Experience tells us that many have gained from globalisation but not everyone has gained particularly those participating from developing economies. There has been a large number of casualties: Those who have been excluded from market entry Those who have suffered from liberalisation and globalisation Those who have gained, but remaining poor

Value chain concept attempts to provide a framework for systematic analysis of these challenges and development of potentially win-win strategies. 2.0 The historical development of Value Chain

It is literally impossible to account for the chronological development of the value chain concept in time. All that is widely acknowledged in literature is that value chain concept is relatively new, but it is generating a lot of interest both in the private sector and the public sector. There are therefore no quick and easy recipes for building successful value chains. Value chain is an economic development concept. Tracing relevant concepts that are linked to value chain, a number of abstracts can be mentioned: Adam Smith in his famous writings, he argued that firms division of labour and specialisation in certain tasks allowed for development of specific skills. F. W Taylor, theories on work organisation was focused on increasing the efficiency of each of different work-stations through scientific management. This approach towards production organisation dominated from the 1890s until the late 1970s. Later, increasingly the approach towards production organisation shifted towards a more systemic focus. The application of just-in- time principles to production flow made it obvious that striving towards island efficiency often led to bottlenecks and systemic inefficiency. The other push promoting systematic thinking was the use of electronicbased automation technologies. More recently the need to get products to the market quickly meant that the historical divide between development, design, production and marketing had to be bridged. It is from this rationale that Value chain concept started been explored. Value chain analysis plays a key role in the current thinking, in understanding the need and scope for systemic competitiveness.

What is a Value Chain

VCD 2006

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3.

What is then a value chain?

Hereby a few definitional citations from different authors: A value chain is: A vertical alliance or strategic network between a number of independent business organisations within a supply chain. The supply chain refers to the entire vertical chain of activities: from production of farm, through processing, distribution, and retailing to the consumer i.e. from gate to plate. By Hoobs et al Sept 2000 A vertical alliance of enterprises collaborating to achieve a more rewarding position in the market. By Agriculture & Food Council of Alberta April 2002 The description of the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use. A further distinction is made between simple and extended value chains indicating the complexity in the real world situation. By Kaplinsky et al There are many more definitions, but probably the best way to comprehend what value chains are, is by delineating what they are not? A value chain is not vertical integration. Vertical integration occurs when a single firm owns several stages in the supply chain. For example, a grain-handling company that owns a flourmill and a bakery is vertically integrated. Another example is ESSO owning refineries and several retail outlets. In a vertically integrated firm, products move between the stages of production, processing, and distribution as a result of managerial decisions within a single company. In a value chain, products move between independent firms working together in a vertical alliance. A value chain is not a horizontal alliance like a co-operative. A co-operative is a horizontal alliance, usually across one level of the supply chain. In agriculture, this often involves a group of producers collaborating to achieve a mutually beneficial goal, such as the processing or the storage and handling of grain. A co-operative might be responsible for more than one function of the supply chain for example input supply and/or marketing, but that does not make it a value chain. As with a vertically integrated firm, there is no reason why a cooperative could not be part of a more extensive vertical value-chain network, but the two concepts are different. A value chain is not a series of traditional spot-market transactions. A spot-market transaction involves multiple buyers and sellers and occurs within a certain time period. There is no long-term relationship or commitment among individual buyers and sellers and often price is the main determinant of the sale. An auction provides a good example of spot market transaction. A value chain is also different from the adversarial business relationships In traditional relationships, the goal is to maximize gains to the individual enterprises, often through purchasing at lowest possible price and selling at the highest possible prices. There is little trust and even less sharing of information among the principals. Value chains are built on cooperation rather than adversarial and short term business relations.

What is a Value Chain

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4.

Comparison of Traditional and Value Chain Business Relationships

One-way of understanding what value chain stands for is to contrast and compare it with other business relationships practices. These have been termed traditional business relationships and are presented in table 2 below. Table 2: Comparison of traditional and value chain business relationships Traditional Little or none Cost/price Commodity Supply push Independent Self optimisation Companies Value Chain Extensive / accessibility Value/quality Branding (reputation) Demand pull Interdependent Chain optimisation + Support Organisations

Attributes Information sharing Primary focus Orientation Power relationship Organisational structure Philosophy Actors

5.

Sub Sector and Value Chain Analysis

There are a number of terminologies in synonymous use, which may often confuse the reader. The more pronounced concepts that we feel may need to be carefully understood are: Subsector versus Value chain analysis. Table 3 tries to draw the differences, similarities and interrelation: Table 3: Comparison of various concepts Subsector concept Value chain Reference is a subsector defined by a key Reference is specific value chains designed raw material or final product e.g furniture for to focus on satisfying a particular customer local market, edible oil for export etc need. Deals with both vertical and horizontal logic of It is a particular form of supply chain that functions and actors in a subsector. deals with vertical alliances or strategic network between numbers of independent business organisations with a motive to meet a particular customer need. It has a developmental entry point, with a Focus is on value and quality optimisation motive of identifying leverage interventions Interdependency among a number of firms that could affect a large number of (at least three) participants. Often development interest to Driving force is the customer needs and choose leverages that can make more SME hence need for strong governance benefit (pro-poor economic growth objective) (management of critical control points)

Interrelationship

between

Sub

Sector

and

Value

Chain

Analysis

What is a Value Chain

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VCD/SUB SECTOR INTERRELATIONSHIP

IMPLEMENTATION, M&E
ENTRY POINT

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SUBSECTOR SELECTION VALUE CHAIN IDENTIFICATION SUBSECTOR ANALYSIS VALUE CHAIN MAPPING

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SSA
DEMAND/SUPPLY ANALYSIS COMMERCIALLY VIABLE SOLUTIONS IDENTIFICATION OF SERVICE PROVIDERS

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VALUE CHAIN ANALYSIS

UPGRADING STRATEGIES