Analyzing and Promoting Value ChainsJrg Meyer-Stamer

What is a value chain?The entire sequence of economic activities from the generation of raw materials to the delivery of a final product to a customerWithin a given location, there is rarely more than a few elements of a value chainValue chains span locations, and are often organized at the global level.

The example of the Sri Lankan cinnamon value chain Customers

Another typical value chain: Garments from Santa Catarina ExportCommissioningSewingWeavingSpinningCotton

What is the difference between LED, cluster development and value chain development?LED and Cluster: There is none!Cluster development is a selective approach to LEDLED and VC development: LED and cluster promotion involve VC development at the local levelthe VC perspective takes us out of the local perspective = addresses the linkage between the local economy and the larger economy

The Cluster and the Value Chain perspectiveInteraction betweencompanies Specialisation between companiesLearning by interactingUpgrading by interactingand specialisingTerritorialfocus ofaction plansFunctional focus ofaction plansValue chain perspective = customer-driven perspectiveCluster perspective often is supply-drivenperspective

How is value chain promotion connected to local economic development? LED needs to be informed by the value chain perspective how are local producers connected to their market? A series of LED efforts / LOCA exercises in different locations in one region often leads naturally to value chain promotion producers in various locations suffer from the same problems in terms of market accesse.g. spice producers in Central Province complementary activities in the same value chain are present in different locations in the same regione.g. tourism: regional VC initiative to package attractive product

Structure of the presentation:Why address value chains?How to understand value chains?How to promote value chains?

Why address value chains?

Why address value chains?If we try to promote specific companies, we may find that their competitiveness is compromised by inefficiency elsewhere in the value chainThe effectiveness of business promotion activities may be dependent on the collaboration of powerful actors in the value chainThe value chain perspective introduces a strong final customer-focus all along the chainhow do you move a chain? Organizing collaboration along the value chain may give rise to innovationValue chain promotion is a problem-driven approach to business development.

Isolated inefficiency compromising the whole value chain: The stupid cow syndrome Competitiveness of leatherware producers compromised by low quality of leatherTanneries complain about the low quality preparation of hidesSlaughterhouses complain about the quality of cattleCattle farmers blame the cows habit to scratch, and hurt, themselves at barbed wire.

Relevance of actors for value chain, and vice versaIt is not rare to find that a given actor is very relevant for the value chain, but that the value chain is not important for that actorExample: Slaughterhouses and the leather value chainquality of hides is crucial for competitiveness for tanneries and leather product manufacturerssale of hides typically represents 5 - 10 % of income of slaughterhousesit is difficult to raise the slaughterhouses interest in quality of hides.

The final customer-focusCompanies in a value chain look at and deal with their direct suppliers and customersThey do not necessarily know who the final customer iswhich type of wholesale/retail company?which type/segment of consumer?They do not necessarily know what the final customer wants, and they do not careImproved communication and collaboration along the value chain may lead to a better understanding of the final customer and to a better quality product.

Powerful actors in the value chainA value chain may be dominated byforeign buyers (e.g. ceramics, garments, footwear, furniture)big national retail chainsbig industrial corporations (e.g. car industry, electronics industry)Dominating playersoften organize support for their supplierslike to keep suppliers dependentdont like suppliers to organize themselves, and possible to desert to another customer.

The SME perspective:Trade-offs involved in value chainAdvantages: stable relationship to customerjustifies investmentfacilitates access to capitalaccess to national and international marketspossibly assistance by customer to solve problemsconsistent qualitycompliance with standardsDisadvantages:dependency on customerconstant pressure by customer to reduce price

The SME perspective:Trade-offs involved in value chain development initiativeAdvantages: resolution of problems outside the reach of individual companycreation of new business opportunities

Disadvantages: possibly souring relationship to company that governs the value chain

Value chain collaboration and innovationCloser collaboration among companies along the value chain, or from different points in the value chain may give rise to innovative productsExample: Textile industry initiative in NRW -- innovative products based on collaboration withmedical products producersconstruction materials producerscar manufacturers.

How to understand value chains

Simple mappingTry to depict the overall structure of a value chain by looking atthe sequence of main producersthe supporting industries and servicesthe supporting institutionsthe distribution channels.

Descriptive cluster and value chain mappingCore: Main valuegenerating industriesSuppliersRelated andsupporting industriesCustomer of productor serviceInfrastructureUpgrading institutions(university, research ...)

A simple value chain mapping: The textile and garments industry industryCottonSpinningWeavingBenefitingDyeingDistri-butionSewingMan-madefibresCus-tomer

Different types of mapping: Examples from the tourism industry

(Source: Heike Glatzel, Futour, Marketing for Quality, 2003)Pre visitimage/messagesPre visitinformationMakingbookingsJourney todestinationInitialwelcomeInformationindestinationPlaces tostayPlaces toeatAttractionsandamenitiesInfrastructureandenvironmentFarewelland returnjourneyAfter visitcontact andmemories... the touristsperspective

... the functionalperspective

... the local value addedperspective

Analytical mapping

UniversitiesCollegesResearch Institutes e.g SABRIsUpgrading & Innovative InstitutionsTraining ProvidersAuction MartsFarmersCritical linkage - strongCritical linkage - weakWeakNo presenceMediumStrongFeedBasic ProcessingCustomersEnd UsersValue Added ProcessingFish MarketsConsumersInfrastructure/servicesMarketing/ DesignIndustry BodiesLegislationMarket IntelligenceEquipment SuppliersTransport and DistributionPackagingRendering/ By ProductsScotlands Food & Drink Chain1999AbattoirsSpecialist GrowersMultiple RetailersFood BrokersFood ServiceIn Mkt Agents/ DistribsSpecialist ConsultantsKey driverOverseas MarketsValue Added ComponentsImported Commodities/ Raw MaterialsCerealsVegetablesDairyRed MeatPrepared Meats & FishMeal SolutionsGourmet FoodsSnacksBakery & ConfectionaryNon-Alcoholic DrinksBeerWhiskyFish FarmingUK DistributorsDiscountersIndependent/ Speciality RetailersFurther Processing Outwith ScotlandCritical linkage - mediumQA and Food Safety

Differentiated mapping: Looking at different aspects of a value chainTechnical FunctionOrganizationTechnical sequenceof production processOrganizations involvedin production processSources and destinationsof knowledgeOrganizations generatingand using knowledgeFinancial instrumentsMonetary flows amongorganizationsOrganizations exertingpower in the chainMaterialsflowKnowledgeflowMonetaryflowPowerstructure

How to promote value chains

Sequence of activities in value chain promotionUnderstand the basic features of the value chain: what is the geographical reach? who are the main players?souces of information:local businesseslocally available research reportsInternetbuyers / wholesale tradersexport agents / foreign buyersdo not spend more than a few days: interview key informantsmine information on the Internet

Sequence of activities in value chain promotionAsk yourself: Can we reach a sufficient number of companies at different stages of the value chain?Are they in your geographical reach?Is there something you have to offer to them?facilitation of self-help / collective actionfacilitation of interaction with other players in the value chain

Sequence of activities in value chain promotionAsk: Are there powerful playerswho may object to your initiative?who may get involved in your initiative?engage with powerful players get top-level buy-in for value chain initiativeaddress buyers: what is their main headache when they interact with a given value chain?

Sequence of activities in value chain promotionGet companies and other organizations from different stages of the value chain togetherConduct a participatory mapping or present + discuss a prepared mappingFacilitate discussion to identify key bottlenecks in the value chainFacilitate discussion to identify possible remedies:within certain stagesbetween stagesalong various stages.

Sequence of activities in value chain promotionAgree with companies and organizations involved in the value chain onpriority goalspriority measures (3 PACA criteria)division of responsibilitieshow to do monitoring & evaluationGo into implementation cycle:planning, implementing, evaluating, re-designuse Compass of Competitiveness for M+E.

Thank you for your attention!