Analyzing and Promoting Value Chains

1. Analyzing and Promoting Value Chains Jörg Meyer-Stamer

2. 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 customer • Within a given location, there is rarely more than a few elements of a value chain • Value chains span locations, and are often organized at the global level.

3. Exporters Producers Traders The example of the Sri Lankan cinnamon value chain Customers

4. Another typical value chain: Garments from Santa Catarina Sewing Cotton Spinning Commissioning Export Weaving

5. 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 LED • LED and VC development: • LED and cluster promotion involve VC development at the local level • the VC perspective takes us out of the local perspective = addresses the linkage between the local economy and the larger economy

6. Value-chain perspective = Functional Perspective Cluster perspective = Territorial perspective The Cluster and the Value Chain perspective Value chain perspective = customer-driven perspective Interaction between companies Specialisation between companies Learning by interacting Upgrading by interacting and specialising Clusterperspective often issupply-driven perspective Territorial focus of action plans Functional focus of action plans

7. 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 access • e.g. spice producers in Central Province • complementary activities in the same value chain are present in different locations in the same region • e.g. tourism: regional VC initiative to package attractive product

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

9. Why address value chains?

10. 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 chain • The effectiveness of business promotion activities may be dependent on the collaboration of powerful actors in the value chain • The value chain perspective introduces a strong final customer-focus all along the chain • how do you move a chain? • Organizing collaboration along the value chain may give rise to innovation • Value chain promotion is a problem-driven approach to business development.

11. Isolated inefficiency compromising the whole value chain: The stupid cow syndrome • Competitiveness of leatherware producers compromised by low quality of leather • Tanneries complain about the low quality preparation of hides • Slaughterhouses complain about the quality of cattle • Cattle farmers blame the cows’ habit to scratch, and hurt, themselves at barbed wire.

12. Relevance of actors for value chain, and vice versa • It 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 actor • Example: Slaughterhouses and the leather value chain • quality of hides is crucial for competitiveness for tanneries and leather product manufacturers • sale of hides typically represents 5 - 10 % of income of slaughterhouses • it is difficult to raise the slaughterhouses’ interest in quality of hides.

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

14. Powerful actors in the value chain • A value chain may be dominated by • foreign buyers (e.g. ceramics, garments, footwear, furniture) • big national retail chains • big industrial corporations (e.g. car industry, electronics industry) • Dominating players • often organize support for their suppliers • like to keep suppliers dependent • don’t like suppliers to organize themselves, and possible to desert to another customer.

15. Advantages: stable relationship to customer justifies investment facilitates access to capital access to national and international markets possibly assistance by customer to solve problems consistent quality compliance with standards Disadvantages: dependency on customer constant pressure by customer to reduce price The SME perspective:Trade-offs involved in value chain

16. Advantages: resolution of problems outside the reach of individual company creation of new business opportunities Disadvantages: possibly souring relationship to company that governs the value chain The SME perspective:Trade-offs involved in value chain development initiative

17. Value chain collaboration and innovation • Closer collaboration among companies along the value chain, or from different points in the value chain may give rise to innovative products • Example: Textile industry initiative in NRW -- innovative products based on collaboration with • medical products producers • construction materials producers • car manufacturers.

18. How to understand value chains

19. Simple mapping • Try to depict the overall structure of a value chain by looking at • the sequence of main producers • the supporting industries and services • the supporting institutions • the distribution channels.

20. Descriptive cluster and value chain mapping Upgrading institutions (university, research ...) Suppliers Related and supporting industries Core: Main value generating industries Customer of product or service Infrastructure

21. Labels Buttons Chemical inputs (Technology) Packaging material Capital goods (Technology) Training institutions Consultants Product/Process Certification A simple value chain mapping: The textile and garments industry industry Cotton Spinning Weaving Benefiting Dyeing Sewing Distri- bution Man- made fibres Cus- tomer

22. Test laboratory Clay suppliers Mining Atomi- zation Subcontractors Capital Goods Producers Atomizers Machines Packaging Presses R+D institutes New prod. Ceramic Tile Producers Printing Transfer Techn. ass. Inspection Kiln Inputs Training providers Design Colorifícios Production Techn. ass. Design institutes Stock Distribution Design studios Wholesalers Logistics Home Centers Specialized shops Construction firms Tilers

23. Different types of mapping: Examples from the tourism industry

24. (Source: Heike Glatzel, Futour, Marketing for Quality, 2003) ... the tourist’s perspective Pre visit image/ messages Pre visit information Making bookings Journey to destination Places to eat Places to stay Information in destination Initial welcome Attractions and amenities Infrastructure and environment Farewell and return journey After visit contact and memories

25. ... the functional perspective

26. ... the local value added perspective

27. Analytical mapping

28. Scotland’s Food & Drink Chain 1999 Fishing Industry Fish Breeding Co’s Poultry Upgrading & Innovative Institutions No presence Research Institutes e.g SABRIs Weak Medium Universities Training Providers Strong Imported Commodities/ Raw Materials Colleges Key driver Rendering/ By Products Fish Farming Basic Processing Customers Food Brokers Value Added Processing Fish Markets Multiple Retailers Prepared Meats & Fish Meal Solutions Discounters Gourmet Foods End Users Independent/ Speciality Retailers Red Meat Auction Marts Farmers Abattoirs Snacks Consumers UK Distributors Bakery & Confectionary Food Service Dairy Feed Non-Alcoholic Drinks Further Processing Outwith Scotland Specialist Growers Vegetables Beer In Mkt Agents/ Distrib’s Whisky Overseas Markets Cereals Critical linkage - strong Value Added Components Critical linkage - medium Critical linkage - weak Infrastructure/services QA and Food Safety Equipment Suppliers Marketing/ Design Market Intelligence Industry Bodies Specialist Consultants Transport and Distribution Packaging Legislation

30. Differentiated mapping: Looking at different aspects of a value chain Technical Function Organization Materials flow Technical sequence of production process Organizations involved in production process Knowledge flow Sources and destinations of knowledge Organizations generating and using knowledge Monetary flow Financial instruments Monetary flows among organizations Power structure Organizations exerting power in the chain

31. How to promote value chains

32. Sequence of activities in value chain promotion • Understand the basic features of the value chain: • what is the geographical reach? • who are the main players? • souces of information: • local businesses • locally available research reports • Internet • buyers / wholesale traders • export agents / foreign buyers • do not spend more than a few days: • interview key informants • mine information on the Internet

33. Sequence of activities in value chain promotion • Ask 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 action • facilitation of interaction with other players in the value chain

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

35. Sequence of activities in value chain promotion • Get companies and other organizations from different stages of the value chain together • Conduct a participatory mapping or present + discuss a prepared mapping • Facilitate discussion to identify key bottlenecks in the value chain • Facilitate discussion to identify possible remedies: • within certain stages • between stages • along various stages.

36. Sequence of activities in value chain promotion • Agree with companies and organizations involved in the value chain on • priority goals • priority measures (3 PACA criteria) • division of responsibilities • how to do monitoring & evaluation • Go into implementation cycle: • planning, implementing, evaluating, re-design • use Compass of Competitiveness for M+E.

37. Thank you for your attention!