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Value Chain Approach:

An Industry-Based Approach to Economic Growth with


Poverty Reduction
Value Chain Analysis: What it is, Why we do it, How we use it
World Vision
Washington, D.C.
May 20th, 2008
Steve McCarthy
ACDI/VOCA

OVERVIEW

Action Plan

Implementation

Workshop

Stakeholder

Strategy

Competitiveness

Analysis

Value Chain

Selection

Value Chain

Value Chain Selection


Value Chain Analysis
Competitiveness Strategy
Stakeholder Workshop
Implementation Action Plan: Who will do it?; How to do it?

Goal of the workshop

To understand value chain methodology and


terminology, and how it can be used to identify and
create opportunities for economic growth to drive
poverty reduction
We will use the value chain approach, to understand
trends in global and national markets and conditions
under which micro and small enterprises (MSEs) can
contribute to and benefit from the increased
competitiveness that globalization brings.

Objectives Of The Value Chain Approach

Improve the growth potential of VCs with large


numbers of small firms

Enhance small firm contributions to VC growth

Ensure small firms benefits

The Value Chain Approach.


Links theoretical understanding of how economies work
with practical approaches to making them work better
Informs donor-funded economic growth activities AND
private sector investment
Allows stakeholders to drive the process

WHAT IS A VALUE CHAIN?


Full range of activities that are
required to bring a product or
service from its conception to its
end use, including all the market
channels available to all firms

Global
Retailers
National
Retailers

Sector specific
providers
Cross-cutting
providers

Financial (cross
cutting)

Exporters

Wholesalers

Processors
Producers
Producers
Input Suppliers

Before we go into depth


WHAT IS HAPPENING IN MARKETS

Globalization

Trends
Liberalization of tariff and non-tariff barriers
Bilateral free trade agreements

Consolidation of national and global retailers


Wal-Mart

Consumer concerns and standards


Labor practices, SPS, EUREPGAP

Growth in branding
Specialty coffee

Niche and specialty markets


Organic vegetables

Structure (industry & firm)


Increased concentration into international supermarkets

WHY POVERTY REDUCTION WITH ECONOMIC GROWTH?

Poverty reduction cannot be sustainable without


economic growth
Economic growth requires growth of industries
Economic growth is necessary for poverty
reduction, but in itself, it is insufficient
Poor have to be linked into growth opportunities

WHY INDUSTRIES RATHER THAN FIRMS ?


Globalization changes competitive environment

Globalization Shifts the Competitiveness Strategy

Firms within one country are not competing


against each other, but industries are competing

Firm focus Industry focus

SMALL FIRMS MATTER TO ECONOMIES


% of economy
% contribution to GDP
% of business are selfemployed individuals
% of workers are in
microenterprise informal
sector

87%
94%

90%
60%

70%

40%

70%
40%
+90%

93%

CAN SMALL FIRMS COMPETE?

Yes. By improving their efficiency


Yes By improving quality and taking
advantage of product differentiation
Yes By taking advantage of increases and
changes in demand

Value Chain Selection

Steve McCarthy
ACDI/VOCA

VALUE CHAIN SELECTION CRITERIA

High Competitiveness
Potential

Competitiveness

Gender
NRM
HIV/AIDS

Cross-cutting
Issues

Impact
Employment
Income
MSME potential
Income distribution
MSME growth
Livelihood and Security

Competitiveness

The ability of a firm or industry to achieve and maintain


a competitive edge over market rivals, by
Improved efficiency/cost advantage
Product differentiation/quality
Taking advantage of changes in demand

How to assess or measure it?


Several approaches to selecting or ranking industries :
1)
Boston Matrix
2)
Porters Five Forces Model
3)
Decision Matrix

BOSTON MATRIX

MARKET GROWTH

MARKET SHARE

LOW
H
I
G
H

L
O
W

HIGH

CASH
COWS

STARS

DOGS

QUESTION
MARKS?

Comparing value chains based on:


a short list in selection
Competitiveness

Market demand and growth


potential
Match between local capacities
and nature of competitive
advantage
Competition ( Global threats)
Industry Leadership
Substitutes
End Markets ( Opportunities)
Supporting Markets
Enabling Environment
Infrastructure
Policy

Impact
Number of MSEs
Upgrading potential
Potential for livelihood
improvement
Potential for
employment
generation

while keeping the future trends in mind

Cross-cutting
NRM (Natural
Resource
Management)
Gender
Trafficked
women
HIV/AIDS

PITFALLS IN VALUE CHAIN SELECTION

Selecting local favorite industry


Government / Enabling Environment can dictate what is competitive
Selecting industry with most poor in it (but no potential for growth)
Selecting industry with high growth potential (but no / few poor in it) e.g.
high-tech industry
Selecting industry without comparing to other industries internationally or
in-country (i.e. not knowing industry enough) therefore risking overlooking
competitive threat
Selecting industry on which there has already been a significant investment
in sunk costs but which is not necessarily the most strategic industry

The Value Chain Framework

Steve McCarthy
ACDI/VOCA

A tool to analyze:
Actors
Factors
Relationships

for the Industry and for the Firm


Action Plan

Implementation

Workshop

Stakeholder

Strategy

Competitiveness

Analysis

Value Chain

Selection

Value Chain

VALUE CHAIN FRAMEWORK

OBJECTIVES OF THE VALUE CHAIN APPROACH TO:


A systematic, industry-based approach for design and
implementation to

Improve the growth potential of VCs with large


numbers of small firms

Enhance small firm contributions to VC growth

Ensure small firms benefits

VALUE CHAIN: A FRAMEWORK

Value

Actors

Chain
Analysis

Factors

Relationships

ACTORS

Global
Retailers
National
Retailers
Sector specific
providers
Cross-cutting
providers

Financial (cross
cutting)

Exporters

Wholesalers

Processors
Producers
Producers
Input Suppliers

Factors influencing Value Chain Competitiveness

1. End Market
2. Business Enabling

Environment

Global
National

3. Inter-Firm Cooperation

Vertical

Horizontal
4. Supporting Markets

Sector specific

Cross cutting

Financial
5. Firm Level Upgrading

Global Enabling Environment

Global
Retailers

National Enabling Environment


Sector specific
providers

National
Retailers
Exporters

Wholesalers

Cross-cutting
providers

Processors

Financial (cross
cutting)

Producers
Input Suppliers

END MARKETS
End Markets define universe of opportunities

Final Buyer
International wholesalers and
retailers)
National and Local Markets

Markets define product


attributes
Potential to drive upgrading
investments

Global Enabling Environment

Global
Retailers

National Enabling Environment


Sector specific
providers

National
Retailers
Exporters

Wholesalers

Cross-cutting
providers

Processors

Financial (cross
cutting)

Producers
Input Suppliers

End market demands drive


standards

GLOBAL BUSINESS AND ENABLING


ENVIRONMENT

WTO
Multi-lateral agreements
Free Trade Agreements
Standards
Organic, fair trade

Global Enabling Environment

Global
Retailers

National Enabling Environment


Sector specific
providers

National
Retailers
Exporters

Wholesalers

Cross-cutting
providers

Processors

Financial (cross
cutting)

Producers
Input Suppliers

Business and Enabling Environment defines boundaries of


opportunities

NATIONAL BUSINESS AND ENABLING ENVIRONMENT


Business Environment imposes costs on small firms

Property rights
Duties
Tariffs
Business licensing
Monetary and Fiscal Policies
Public Infrastructure
Policy & Regulation

Global Enabling Environment

Global
Retailers
National
Retailers

National Enabling Environment


Sector specific
providers

Exporters

Wholesalers

Cross-cutting
providers

Processors

Financial (cross
cutting)

Producers
Input Suppliers

Business and Enabling Environment defines boundaries of


opportunities

LOCAL/REGIONAL BUSINESS AND ENABLING


ENVIRONMENT

Infrastructure
Transport,
telecommunication

Regional policies

Global Enabling Environment

Global
Retailers
National
Retailers

National Enabling Environment


Sector specific
providers

Exporters

Wholesalers

Cross-cutting
providers

Processors

Financial (cross
cutting)

Producers
Input Suppliers

Business and Enabling Environment defines boundaries of


opportunities

INTER-FIRM COOPERATION: VERTICAL LINKAGES


Vertical Linkages are fundamental to growth

Relationships among vertically


linked firms, e.g. between:

input supply
distribution to final consumer

Global Enabling Environment

Global
Retailers

National Enabling Environment


Sector specific
providers
Cross-cutting
providers
Financial (cross
cutting)

National
Retailers
Exporters

Wholesalers

Processors
Producers
Input Suppliers

INTER-FIRM COOPERATION: HORIZONTAL LINKAGES


Horizontal Linkages create collective efficiencies
Relationships among
horizontally linked firms
performing like functions
Create economies of scale
Increase bargaining power
e.g. input and bulk sales

Global Enabling Environment

Global
Retailers
National
Retailers

National Enabling Environment


Sector specific
providers

Exporters

Wholesalers

Cross-cutting
providers

Processors

Financial (cross
cutting)

Producers
Input Suppliers

SUPPORTING MARKETS
Supporting Markets include BDS

Sector Specific providers

Global Enabling Environment

Global
Retailers
National
Retailers

National Enabling Environment

Cross-cutting providers
Financial (cross-cutting)
providers

Sector specific
providers

Exporters

Wholesalers

Cross-cutting
providers

Processors

Financial (cross
cutting)

Producers
Input Suppliers

FIRM-LEVEL UPGRADING
Firm-Level Upgrading requires supporting markets

Upgrading by:

Upgrading requires:

Improving products

Access to supporting mkts

Improving process

Access to learning, knowhow, skills

Specializing in new
functions
Moving into new market
channels

Appropriate incentives
(consider risks, expected
returns)

...current capacity to be able to respond to opportunities

VALUE CHAIN FRAMEWORK


Using the VC lens to understand opportunities and
constraints
1. End Market
2. Business Enabling

Environment

Global
National

3. Inter-Firm Cooperation

Vertical

Horizontal
4. Supporting Markets

Sector specific

Cross cutting

Financial
5. Firm Level Upgrading

Global Enabling Environment

Global
Retailers

National Enabling Environment


Sector specific
providers

National
Retailers
Exporters

Wholesalers

Cross-cutting
providers

Processors

Financial (cross
cutting)

Producers
Input Suppliers

VALUE CHAIN GOVERNANCE


Market
(Tomatoes)
Buyers

Balanced
(Organic Coffee)
Buyers

Directed
(Export Crafts)
Major
Buyer

Price

Suppliers
01/18/15

Suppliers

Suppliers

Hierarchy
(Cut Flowers)
Integrated
Firm

GLOBAL VALUE CHAIN ACTORS


Global
Retailers
National
Retailers
Sector
specific
providers

Exporter
s

Wholesalers

Processors
Cross-cutting
providers
Producers
Financial
(crosscutting)
providers

Input Suppliers

Flow of Relationships:
$$
Products
Services
Information

MARKET RELATIONSHIPS
Learning

Benefits

Power

Access to Learning

Affect
Flow of Relationships:
$$
Products
Services
Information

Access to Benefits

Distribution of Power

RELATIONSHIPS
Learning
Benefits
Benefits
Power
Power
Learning

Foster learning
Where will learning come from over time?
Buyers as catalysts for change and learning
Input suppliers as sources of information
Traders as disseminators of innovation
Service providers contributions to learning

Are there market incentives to improve learning


flows?

RELATIONSHIPS
Learning
Benefits
Benefits
Power
Power
Learning

Expand depth & breadth of benefits


Sources of Benefit:
Efficiency gains
Product differentiation/quality
New or increased demand

Create incentives for investment

RELATIONSHIPS
Learning
Benefits
Benefits
Power
Power
Learning

Promote win-win relationships


Asymmetrical

Win-Win

SUSTAINING VALUE CHAIN & SMALL FIRM GROWTH

Foster learning (Learning)


Expand the depth and breadth of benefits (Benefits)
Sustain win-win relationships (Power)

Creating systemic change

The Value Chain Map

Steve McCarthy
ACDI/VOCA

OBJECTIVES OF THE VALUE CHAIN APPROACH


A systematic, industry-based approach for design and
implementation to

Improve the growth potential of VCs with large


numbers of small firms

Enhance small firm contributions to VC growth

Ensure small firms benefits

VALUE CHAIN: A FRAMEWORK

Value

Actors

Chain
Analysis

Factors

Relationships

What is a Value Chain Map?


A visual tool that allows us to understand and present
how the industry works, including functions, actors
and relationships between value chain participants
Can be used for showing quantitative data
Number of enterprises, volume sold, returns, etc.

Useful in identifying bottlenecks


Can be basic or highly detailed

What do we map?

Basic map
Functions
Product life cycle from
conception to end use

Participant(s) at each
function
Linkages between the
participants-horizontal and
vertical

Detailed Map
Added value or gross
margins of each function
Number of firms performing
each function
Volumes moving between
levels

Value Chain Mapping: Basic Map

Four steps:
1. Identify the functions
2. Identify the participants
3. Complete the work sheet
4. Draw the initial map

Step 1: Identify Functions

Functions

Retail
Wholesaling
Processing
Assembly
Production
Input Supply

Step 2: Identify the Participants

Participants

Village Stockists
Input Supply Companies
Small Scale Producers
Producer Associations
Medium-scale and Commercial Producers
Oil Processors
Wholesalers
Retailers

Step 3: Participant Function Work Sheet

Functions

Participants

Wholesalers

Oil Processors

Traders

Input Supply

Medium-Scale
and Commercial
Producers

Production

Producer
Associations

Assembly

Small Scale
Producers

Processing

Input Supply
Companies

Village Stockists

Wholesaling

Functions
Retail

Domestic Oil Market

Wholesaling

Wholesalers

Processing

Oil

Livestock/Poultry Feed Market

Policy Makers

Processors

Cake
Commercial banks/
Non Ban Financ.
Institutions

Traders
Assembly

Production

Medium-Scale and
Commercial Producers
Small Scale
Producers

Tobacco
Company

Producer
Associations

Input Supply
Village Stockists

Mozambique Oilseeds Value Chain

Input Supply
Companies
Seed
Fertilizer
Pesticide

Leasing
Companies

Value Chain Mapping: Detailed Map

1.
2.
3.
4.

Identify the functions


Identify the participants
Complete the work sheet
Draw the initial map

5.

Analysis of overlays

Number of actors performing each function


Volumes moved between one level to another
Value added/gross margins

Analyzing Quantitative Data

Design for Competitiveness

Steve McCarthy
ACDI/VOCA

1. Develop a process for


competitiveness
2. Prioritize constraints

Action Plan

Implementation

Workshop

Stakeholder

Strategy

Competitiveness

Analysis

Value Chain

Selection

Value Chain

Project Design Cycle: Competitiveness Strategy

STEPS: Designing A Competitiveness Strategy

A process for improving competitiveness

1. Identify competitive advantage at the end market


2. Develop a commercial upgrading strategy
3. Create a process to sustain competitiveness

STEP 1: Identify Competitive Advantage at the End Market

Understanding the Structure of the end market


Where can I compete end-market segment

Understanding the Demands of the end market


How can I compete given buyer demands

Market positioning
Where can I compete which strategy

STEP 1: Identify Competitive Advantage at the End Market


End-market Demand: What do buyers want?
Quality
5

Innovative
Design

4
3

Price

India
Italy

1
0

Flexible
Large Orders

Flexible
Small Orders

Response
Time

Punctuality

STEP 1: Identify Competitive Advantage at the End Market

MARKET POSITIONING
Strategies for creating competitive advantage:

Efficiency
competition based on price

Differentiation
competition based on differentiation

Market Focus
niche markets, fair trade, organic

STEP 1: Identify Competitive Advantage


MARKET POSITIONING: Where can Afghanistan compete?
Intense competition in the low-cost, low
differentiation quadrant makes it
unattractive

Differentiation

Excellent

Afghanistan
India

China

Poor
Poor

Cost

Excellent

STEP 2: Developing An Upgrading Strategy

To turn comparative advantage into


competitiveness, industries/firms must resolve key
constraints and take advantage of opportunities by
developing upgrading strategies.

STEP 2: Developing An Upgrading Strategy


Prioritizing constraints using competitiveness lens

Haiti crafts competitiveness strategy Go up-market


Highly differentiated products
New designs every 6 months
Improved transport

Bangladesh shrimps competitiveness strategy Improve quality


Quality assurance/seal
Finance

Kenya tree fruits competitiveness strategy Quality & Quantity

Quality
EUREGAP
Quantity
Variety

STEP 2: Developing An Upgrading Strategy

Principles for developing upgrading strategy


Foster incentives for change/upgrading
Select interventions (constraints and opportunities) that will
result in short term benefits
Balance longer term competitiveness and shorter term
benefits to MSEs

Upgrade using small riskable steps


Start where the industry is

STEP 3: Sustaining Competitiveness

Definition:

to achieve and sustain growth,


industries/firms must be able to respond to
changing market demands
efficiently and effectively

STEP 3: Sustaining Competitiveness

This could require:

Better enabling environment


Cooperation & coordination among stakeholders
More constructive competition among firms
Win-win relationships
Shared vision
Collective action

Access to learning & innovation


Changed behavior

Breadth & depth of benefits

The Stakeholder Workshop

Steve McCarthy
ACDI/VOCA

WHAT to DO?

Action Plan

Implementation

Workshop

Stakeholder

Strategy

Competitiveness

Analysis

Value Chain

Selection

Value Chain

Facilitating a Stakeholder Driven Competitiveness


Strategy

By WHOM and HOW?

Stakeholder Workshops
Definition and Objective

A structured, facilitated discussion with selected value chain


participants who are responsible for critical market
functions, service provision and the legal, regulatory and
policy environment
The end goal of the stakeholder workshop is
to bring together the participants from the value chain who have
incentives to drive investments in upgrading, and
to develop an action plan to get there

Facilitating Stakeholder Workshops

When are they conducted?


After value chain analysis are completed
Periodically after action plan
Who Attends?
15-30 value chain participants identified during value chain
analysis with incentives to bring change to the
industry

Facilitating Stakeholder Workshops

Why do we conduct it?

to put the private sector stakeholder into


the driver seat

Facilitating the Workshop


Presentation of the value chain with general information

Present a brief
overview of the
industry and its
actors
Present the value
chain map and
ask participants if
they agree with it

Livestock/Poultry Feed Market

Domestic Oil Market

Functions
Service Providers
Retailing

Chemengo Retailers

Supermarkets

Wholesalers

Wholesaling

Oil

Processing

Processors*

Agents and Brokers

Cake

Traders

Assembly

Machinery and
Equipment Suppliers

Medium-Scale
and Commercial
Producers

Producer

Production

Small Scale
Producers

Input Supply

Village Stockists

Associations

Financial Services

Engineering Services

Input Supply
Companies
Seed
Fertilizer
Pesticide

Extension

NGOs

LEGEND
Transactions
Processors

= Participant in
the Value Chain

Livestock/Poultry Feed

= Final Market

Production

= Market functions

= Market-Based
= Balanced network
= Captive network

Producer
Associations

= Participant in the
Value Chain, broken
line indicates
skipped functions

Facilitating the Workshop


Discussion of how a more competitive industry would look like: Industry Vision

Start the discussion around how the industry would look like if it were
more competitive

Guide discussions around efficiency, product differentiation and


new demand or markets
What are the characteristics of success in this industryglobally and
nationally?
How can this industry more efficiently compete in global/local markets?
Does it have to differentiate itself in branding, marketing, quality or
price?

VISION

Facilitating the Workshop


Participatory identification of action needed to achieve the vision

now, we have a list of prioritized constraints


and opportunities
butwhat do we do with them?
Who is going to do what?

Facilitating the Workshop


Participatory identification of action needed to achieve the vision

The session will enable the participants to draft an action plan


addressing the constraint and opportunities prioritized
Keep groups focused on discussing and developing a plan that
identifies

What needs to be done in order to overcome the constraint or


take advantage of the opportunity?

Who is going to do it? I or We vs. You

When it is going to be done?

EXPECTED OUTCOMES

Place emphasis on short term results


Enhance and/or exploit incentives for stakeholders to
create win-win relationships within value chain
Avoid redundancy in industry and donor activity
Clearly define role of private sector players, NGOs or
contractors
Outline clear action plan
Who will do What and When?
Clearly articulated exit strategy

The Implementation Action Plan

Steve McCarthy
ACDI/VOCA

Action Plan

Implementation

Workshop

Stakeholder

Strategy

Competitiveness

Analysis

Value Chain

Selection

Value Chain

IMPLEMENTATION ACTION PLAN

a road map to increase the competitiveness of the


MSE dominated industries

THE CHALLENGE

How to build industry


stakeholders ownership of
the competitiveness
process?

How Do We Support a Stakeholder Driven Implementation


Action Plan?

WHAT needs to be done?

WHO intervenes
and HOW?

What needs to be done to create


competitive advantage

How to promote change and


sustain competitive advantage

Activities
WHAT?

Approaches
WHO? + HOW?

WHO?
DEFINING ROLES
Private Sector
Internal actors. Conduct business in a competitive environment
based on economic incentives.
Government
Internal actors. Foster a conducive enabling environment and
provide public goods in the public interest.
Implementing Organizations
External actors. Create incentives for industry actors to create and
sustain competitiveness.
Donors
External actors. Plan, design, and fund activities to build
competitiveness and learn from past experiences.

WHO?
DEFINING ROLES

Industry-Led
Internal actors have a lead role in developing
the strategy and course of action.
What are the implications for external actors?
Project-Led
External actors dictate the strategy and
course of action.
What are the implications for internal actors?

WHO?
INTERNAL CATALYSTS

Is there an actor in the value chain with:


Incentives
Skills
Resources
to drive upgrading investments in the value chain?
to exploit opportunities in the market?

HOW?
FOCUS ON INCENTIVES
Does my intervention create incentives for value chain
actors to change behavior positively affecting
Investing
Learning and Innovating
Cooperating
without ongoing subsidies?

Does my intervention create disincentives resulting in:


Market distortions
Dependencies

WHO?
METHODS OF INTERVENTION

DIRECT PROVISION

Direct delivery of training


Deal making

FACILITATION

Services delivered through


local subcontractors or
grantees

WHO?
METHODS OF INTERVENTION
Direct Provision
Pros
Results in short-term
Easier to control outputs and
outcomes
Easier to manage

Facilitation
Pros
Sustainable
Leverages incentives
Reduces market distortions
Leads to viable exit strategies

Cons
Not sustainable
Easy to confuse project &
operating budgets (crosssubsidies)

Cons
Slower results in ST
Difficult when no providers
available
Cost implications

PRINCIPLES OF INTERVENTION

Redundancy
Dont do it, if its going to happen anyway
Sequencing
Are there things that need to happen first?

Sustainability

Are the incentives adequate?


What happens when I leave?
Does it increase learning and benefits?
Does it create win-win relationships?

Clear Exit Strategies


Am I leaving? If yes, When?
What happens when I leave?
Have I left adequate incentives beyond?

Resource Allocation
Does it make optimal use of project resources?
What are the trade-offs?

KEY MESSAGES
Poverty reduction can only be sustained through economic
growth.
Globalization shifts the competitiveness lens from firm to
industry.
Value chain framework enables us to look at the market
systems, including actors, factors and relationships, in a
systematic approach in order to achieve systemic change.
Power dynamics, learning flows and distribution of benefits.
are key to understanding incentives for improved
competitiveness.
Competitiveness requires a participatory approach and
stakeholder ownership of the process.

Thank You!

Steve McCarthy
ACDI/VOCA

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