Operationalising Jörg

Meyer-Stamer
Value-Chain jms@mesopartner.com

Development in
the PACA Way

Draft Paper Duisburg

Please do not quote, but do circulate December 2004
and please give me feedback

mesopartner
local economic delivery
www.mesopartner.com www.paca-online.de
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© by the author
1 Introduction

One important strand of the economic development literature in the past ten years
has highlighted the relevance of “commodity chains” or “value chains”. Value
chains are networks of economic actors, mostly companies, that span the various
activities from harvesting or mining raw materials to putting them onto the shelf
of some shop.

By looking at value chains, academia has started to describe the micro-economy

in a more realistic way. Most of it is not about anonymous market transactions but
rather involves relatively stable arrangements between sellers and buyers. The
value chain perspective also solves some of the problems of the sector perspective
at industry and services, which tends to lump together companies that are
completely unconnected in the real world. In a given region, you may have a
chemical sector that consists of plastic product manufacturers, paint producers,
pharmaceutical companies and fertiliser companies; lumping them together under
one heading is pointless, especially from a development / promotion perspective.
A value chain perspective, on the other hand, directs our perspective at groups of
companies from very different sectors which interact closely. For instance, in the
ceramic tile value chain product and process innovation is driven by companies
from the ceramics sector (the tile sector), the chemical industry (the glaze
manufacturers), and the machinery sector (capital goods) (Meyer-Stamer, Maggi
& Seibel 2001). A value chain perspective captures real economic structures and
is thus more useful in guiding development interventions than a sectoral
perspective. 1

What is the relevance of value chains and value chain initiatives for territorial
development? What is the use of subnational regional value chain initiatives at a
time when everybody talks about global value chains?

The fundamental justification for value chain initiatives is similar to the one for
cluster, linkages and other network initiatives: For a promotion agency, it is more
efficient to work with groups of companies rather than individual companies.
Working with groups can lead to much more significant results. Based on this
view, there are two different lines of reasoning.

1 The sectoral perspective must not be confused with the subsector perspective, which is not
much different from the value chain perspective (e.g. Lusby and Panlibuton 2002).

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local economic delivery
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The first one applies to local / regional subsectors that have a potential to be
involved in global value chains, but which have not appeared on the radar screen
of global buyers so far. In this situation, the purpose of a regional value chain
initiative is to promote the upgrading of companies, moving towards
internationally acceptable productivity and quality standards so that over time the
regional value chain can be connected to a global value chain (regarding the trade-
offs this involves see Meyer-Stamer 2003a).

The second line of reasoning applies to regional value chains that produce goods
or services that are primarily sold on the local or regional market and that have
little or no potential of being exported. Even in the case of the highly competitive
and internationally integrated U.S. economy, this segment accounts for two thirds
of national employment (Porter 2003, 560). The purpose of value chain initiatives
in this segment is to improve productivity and quality. For instance, in its value
chain work with the construction industry, the Competir-project (Meyer-Stamer
2004) addressed the issue of waste of materials, which is a massive problem on
Brazilian construction sites. It causes an increase in housing prices, thus wasting a
part of the income of house and apartment buyers who otherwise would have
spent this money on other products.

In other words, regional value chain initiatives make sense both in industries with
an export potential and in industries that sell locally. Ironically, they are only
difficult to realise in industries that are already integrated into global value chains
and where a global lead firm discourages local upgrading initiatives as they might
compromise their power position (Meyer-Stamer 2003a).

2 Value Chains and Principles of a Strategy for Territorial Development

Following the terminology of Henry Mintzberg (“Five Ps for Strategy”), we

suggest to conceptualise strategy in the context of territorial development in the
meaning of “position”, “pattern” and “perspective” (rather than “strategy as plan,”
i.e. as a written document).

• Strategy as position is about locating a territory in a number of very clearly

defined market niches, and developing specific competitive advantages to
establish a dominating position in those market niches, in order to be able to
appropriate rents (as opposed to entering into a price underbidding game in
highly competitive commodity markets).

• Strategy as perspective is about conceptualising territorial development in a

consistent way, having the key stakeholders aligned behind a shared
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perspective of where to go and how to get there, and having a shared

perspective of what territorial development does, and what it should not do.

• Strategy as pattern addresses the consistency of behaviour. It is the outcome of

alignment of relevant players around a shared perspective. It is based on
consistent behaviour, especially if actors take decisions on their own without
constant consultation.

The purpose of any territorial development programme is to transform the

economy in the location or region. The objective is to create growth and income
with a strong emphasis on equitable distribution, based on economic
empowerment for previously disadvantaged communities. The key challenge is to
define strategy as perspective and as position. We would tend to argue that there
is no point in a territorial development programme supporting a random sample of
LED and RED initiatives scatted across locations and sectors. In this manner, the
programme would not create critical mass and visible impact. The only way a
programme can create a visible impact is by having a clear focus, i.e. perspective
and position in the way defined by Mintzberg.

Each and every territory has a comparative advantage in something, since

comparative advantage has been defined since David Ricardo as the least
significant disadvantage – if a territory has no absolute advantage in anything, it
should focus at its comparative advantage. Many territories also have some kind
of competitive advantage, i.e. some kind of activity where local players are better
than most competitors elsewhere. Territorial development should start at existing
comparative and competitive advantages. Often, its main thrust will involve an
effort to move from comparative to competitive advantage, i.e. to organise an
effort – based on individual entrepreneurship and collective effort – to create a
specific advantage that cannot be easily replicated by competitors elsewhere.
Territorial development initiatives should not be based on wishful thinking, i.e.
trying to create industries or economic sectors that don’t exist and where no
potential advantage can be leveraged.

Strategy as perspective is about the way a territorial development programme will

operate. We would advise against supporting each and every project that is in one
way or another linked to the sectors where a comparative or a competitive
advantage exists, since this would not be sufficiently focused. We would tend to
argue in favour of catalytic projects that have a potential to leverage the upgrading
and the development of a specific competitive advantage. But we would strongly
argue in favour of taking the promotion approach one step further and looking at
value chains. International experience shows two things. First, a value chain is a
more appropriate conceptualisation of economic reality than a sector, since the
latter is often a fictitious construct that is convenient to gather statistics but does
not describe the reality of patterns of economic transaction. Second, a true
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competitive advantage can only be created if all the links in a value chain operate
at world class levels. Even one missing link or weak element in the chain can
compromise the competitiveness of the entire value chain in a given territory.

For these reasons, promoting a value chain has emerged as a preferred approach to
economic and business promotion in recent years. Value chain promotion offers
the potential to identify really critical bottlenecks and problems, and designing
interventions that have a huge leverage factor. It is a problem-driven approach to
economic development that combines all sorts of specific approaches, like
entrepreneurship promotion, business upgrading, management training, skills
development, promotion of business development services, export promotion,
investment promotion, and others.

Value chain promotion appears as a particularly promising approach in territorial

development initiatives that are addressing economies which are segmented and
fragmented. A value chain approach has advantages compared to other approaches
that seek to modernise and upgrade the “informal economy”, and connect it to the
“formal economy”. A value chain initiative is driven by clearly identified market
demands. Traditional approaches tended to promote the supply side without a
clear understanding of market potentials, thus battling with the challenge to find a
market after production had picked up. With the value chain approach, it is
possible to match the skills and capacities of emerging businesses, clusters of
businesses, and local communities with verified market demand.

A value chain approach combines a functional with a territorial focus. It is

possible, and sometimes practical, to pursue LED with a primarily territorial
focus, as is suggested, for instance, by concepts like the “leaking bucket”.
However, the growth and income potential of a purely local approach is limited.
The key objective must be to identify the potential competitive advantage of a
given location and to connect this location to the bigger market, be it provincial,
national or international. This permits to realise economies of scale that are driven
by specialisation, and more specifically the degree of building competence and
competitive advantage that specialisation permits.

3 Issues in regional value chain initiatives

It is useful to consider some key issues in the execution of regional value chain
initiatives (see Meyer-Stamer 2004 for practical examples).

• The organisers of a value chain initiative had better assume that the
relationship between companies in the chain is difficult. We often observe
that, along the value chain, everybody is busy blaming everybody else for the
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lack of competitiveness; the “stupid cow syndrome” presented by Fairbanks

and Lindsay (1997) is a typical example in this respect. So we will often find
that the relationships among companies along a given value chain are
characterised by aversion, distrust and perhaps even open hostility. Against
this background, it is even more important that an initiative leads to quick
wins, since this is the only possibility of breaking with destructive, distrustful
behaviour.

• One of the crucial features of the value chain approach is to look at things
from the perspective of the final consumer. This involves a change in mindset
not only for businesses inside the value chain but also for business support and
promotion organisations. For groups of businesses, the value chain approach is
the equivalent to the business process reengineering approach within a
company, which also aimed at overcoming fragmentation and mutual blaming
and substituting this with a shared orientation at the customer. For business
support and promotion organisations, the value chain approach involves a
change in practice, moving from support measures that are based on an
analysis of internal deficiencies of companies towards support measures that
take markets and customers as a point of departure.

• A value chain initiative is not necessarily about win-win-options for

everybody in the chain. For instance, inputs suppliers may be on the losing
side, and it takes careful management and persuasion to avoid their active
resistance, for instance by pointing out the long-term benefits of the value
chain initiative, which is leading to strong growth that also benefits the
suppliers as increased scale of supplies compensates for lower unit prices.

4 PACA and regional value chain initiatives

Using PACA in value chain initiatives is not just an idea. Some PACA tools were
successfully used by Competir, a regional value chain initiative in Brazil. Yet the
usual focus of PACA is a local economy, not a value chain, and the methodology
is primarily geared in this direction. Accordingly, using PACA systematically in
regional value chain initiatives will involve a certain amount of adaptation and
development of additional tools.

The reasons to use PACA in regional value chain initiatives are straightforward:

• It is not necessarily useful to contract costly external consultants or researcher

to conduct mappings and analyses of regional value chains. A PACA Exercise
can render the necessary results much quicker and at a lower cost. Moreover,
it would already involve, mobilise and motivate those players who
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subsequently would champion practical activities in a given value chain

initiative.

• Regional value chain initiatives are up against a variety of obstacles, such as

lack of trust between companies and time constraints of business people. For
that reason, PACA principles like swift action for quick wins are crucial to
convince the players in a value chain that the initiative makes sense.

• PACA is a proven method when it comes to connecting companies, supporting

institutions and government. It overcomes communication barriers between
these different sectors. Especially for government it is often difficult to project
commitment and competence to the private sector. PACA can be very useful
in overcoming this perception.

• PACA is a methodology that is not only useful to launch a development

initiative but also to assess and refocus ongoing initiatives. It can be used both
to drive and to monitor and evaluate territorial development initiatives, in
particular if the Compass of Competitiveness is included. This thus solves the
difficult challenge of introducing monitoring and evaluation into a value chain
initiative.

A PACA in a regional value chain initiative has to apply general PACA

principles:

• Limited diagnostic effort: Limit research to the minimum necessary, in

particular by assessing reports which already exist because some donor or
development organisation had money to spend. Also assess the research on
value chains in the same industry in other regions and countries; the Internet
offers a huge number of them. Conduct your own field research in the sense of
action-research.

• Participatory, action-oriented diagnostic: Use Mini-workshops and interviews

with players from your value chain to understand its structure and the
opportunities and challenges it is facing. Document any proposals that come
out of the Mini-workshops, including noting the people who made them and
who may be willing to champion their implementation.

• Quick wins: When it comes to defining proposals for practical activities, don’t
address the biggest challenge – you won’t be able to address it with players
who don’t trust each other and who are sceptical about the whole process.
Rather go for proposals which promise quick wins, i.e. solve problems that are
really bothering businesses in their day-to-day operations and that yet are not
too difficult to sort out. Quick here means: it should be possible to have a
visible result within no more than a few months.
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The main justification for a value chain initiative is the fact that one element of
the chain (or several of them) compromises the competitiveness of the entire
chain. Adapting PACA for value chain work probably will mean to move from an
emphasis on opportunities to a recognition of the existence of bottlenecks – many
of which, however, can probably give rise to business opportunities.

5 Operationalising Value Chain Initiatives

There are different ways of operationalising territorial development from a value

chain perspective. One frequently pursued approach includes a sequence that
emphasises ample research before any practical activity is implemented and
stakeholders are involved. We would advise against this for two main reasons.
First, it is costly and time consuming without necessarily delivering results.
Second, the success of any value chain initiative is defined by the interest and
buy-in of key players from within the value chain, and research does nothing to
get this.

We would rather suggest the type of approach that has been pursued by Scottish
Enterprise in its cluster and value chain projects (SE uses clusters and value
chains as synonyms).

The distinctive feature of this approach is the very early stage at which
stakeholders are engaged. There is a limited effort of picturing and scoping the
value chain at the very beginning, which is, in fact, essential to know which
stakeholders to engage with in the first place. Engaging the stakeholders takes
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place before any major research and strategising effort is launched, so that
research and strategy can be driven by the stakeholders themselves. This, in turn,
leads to a stronger buy-in from the stakeholders since the entire initiative is much
more relevant to their immediate concerns.

At the early phase of a value chain initiative, it is crucial to bear in mind a few
key insights from the assessment of successful and not so successful value chain
initiatives.

• Identify powerful actors in a value chain. Frequently, you will find that value
chains are in fact not just spontaneously emerging from a market-driven
process and operate in an uncoordinated way but are actively managed by
powerful players. At the level of international value chains, names like Nike
and Ikea come to mind. Yet the same phenomenon often happens in national
and regional value chains, especially in situations where wholesale or retail
companies are in a gatekeeper position. Launching a value chain without
permission, and preferably active support, from those powerful actors is a
waste of time. A value chain initiative that is not supported by those players
that are clearly recognised as the power centres by most players in the chain
has no credibility.

• Look for market failure along and around the value chain. Sometimes market
failure is the outcome of strategic or opportunistic behaviour, with a powerful
player at some stage of the chain trying to protect a monopolistic position.
More often, though, market failure is due to the lack of communication along
the value chain, and the absence of any player who pictures and analyses the
value chain as a whole. Typical examples of market failure are business
opportunities in the value chain that are not picked up, so that far away
suppliers or service providers have to be brought in at a high transaction cost
that compromises the competitiveness of the chain, and inadequate
information flows along the value chain, so that business decisions by
companies along the chain are taken under particularly large uncertainty.

• Have a close look at the value chain. What appears as one value chain at a
superficial glance often turns out to be maze of sometimes parallel, sometimes
intertwined value chains on closer investigation. Scope your value chain
initiative in a way that is meaningful to players within the value chain.

• Expect nobody to have a clear picture of the value chain. Businesses involved
in a value chain will often have an intuitive understanding of its structure, but
it takes an elaborate effort to make this implicit understanding explicit.
Different businesses in the same value chain will often have different
perceptions of the structure of the value chain. Aligning these perceptions is
an important element of a value chain initiative.
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• Make sure that you picture any value chain starting at the very end, i.e. a clear
understanding of the segmentation of final customers and the distribution
channels serving them. Most value chains (the car industry being one of the
few exceptions) are governed by players far down the chain, and their
behaviour is driven by their understanding of markets and customer
behaviour. One of the key objectives of any value chain initiative is to
communicate this further up the chain, so that even the producers of primary
products (e.g. raw vegetables) understand which market segment they are
serving.

6 Sequencing a Value Chain Initiative

The following table gives an overview of a possible sequence of the first steps in a
value chain initiative.
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What? How? Deadline? Outcome?

1. Picturing and scoping: Understanding the basic structure of the value chain
Engage with • Get buy-in from top management x+4 Involvement of lead
powerful actors in • Get clear orientation for company’s weeks buyers in the initiative
the value chain buyers
Assess existing Collect & read existing reports x+4 Initial understanding of
research weeks value chain
Interview key x+4 ditto
informers weeks
2. Rapid Action-oriented Mapping
Mapping • Invite buyers, actors from along the x+6 • Deepened
Workshop chain and representatives of weeks understanding of
(half day) supporting institutions value chain
• Conduct participatory mapping • Role and
exercise, looking at competence of
– the structure of actors along the business service
value chain providers starts to
– the key bottlenecks / weak spots of become visible
the value chain
– the power structure and conflicts in
the chain
• Verify which important actors are
missing
Action Workshop • Invite as above plus other important x+8 • Clearly defined
(one day) actors weeks responsibilities and
• Verify mapping time-table for action
• Identify bottlenecks / weak spots • Creating
• Brainstorming around activities to communication and
address bottlenecks / weak spots trust along the value
• Prioritisation (3 Criteria) chain
• Definition of implementation (Pfeiffer’s
6 questions)
3. Quick-win Implementation Phase
Several quick-win Implementation by actors in the value x + 14 • Specific problems
projects chain weeks addressed
• Creating
confidence, trust,
motivation
• Deepening the
understanding of the
value chain
4. Rapid Research & Reflection
Workshop of core Document the learning x + 16 •
team • on the structure, power structure and weeks
bottlenecks of the value chain
• the position of BDS in the value chain
Workshop with • Present and discuss learning x + 16 •
value chain • Brainstorming on follow-up action weeks
champions • Planning next steps
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7 Issues in PACA-based value chain initiatives

7.1 To what extent is it necessary to develop additional Mini-workshop

formats?

Some of the standard PACA Mini-workshop formats, such as the Five Forces
format and the Interaction Matrix Mini-workshop, obviously are useful for a value
chain PACA Exercise. On top of that, there is the opportunity to introduce
additional Mini-workshop formats the specifically look into value chain issues.
For instance, the framework used by the Scottish Enterprise Food & Drink
initiative (Figure 1) can easily be translated into a workshop format, the outcome
of which would probably look similar to Figure 2 (which was the outcome of a
tourism value chain mapping workshop in a region in South Africa).

Figure 1 Figure 2

To what extent do you need a clear, coherent and consistent definition of value
chains to conduct a value chain PACA? Whereas the definition is important for
academic work, especially if it involves statistical analysis, it is only of limited
relevance for action-oriented value chain initiatives. Players from within a value
chain tend to have an implicit understanding of the structure of the value chain
they are operating in. The mapping of the value chain they will provide is the one
which is relevant for your initiative.

7.2 What would be the main challenges involved in a value chain PACA?

First, in a value chain PACA, it is advisable to assume the validity of the six
obstacles to cluster initiatives I have outlined elsewhere (Meyer-Stamer 2003b,
see Table 1). This implies not to have a too optimistic expectation regarding the
viability of a value chain initiative. Even if the possible benefits appear very
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convincing to an outsider, industry insiders may perceive things in a very different

way.

Table 1: Obstacles to co-operation in clusters

Obstacles to co-operation
between firms
Prisoner's dilemma in an un-
cooperative environment
Costs and risks of co-operation
Obstacles to co-operation
between firms and supporting
institutions
Difficult relationship between
SMEs and associations, in
particular chambers
Common problems of co-
operation between firms and
supporting institutions
Obstacles to co-operation
between private and public
sector
Local governance issues
(political rivalry, collective
conservatism, role of chambers)
Global governance issues
(externally owned firms, foreign
buyers)

Second, there are practical issues. Players from a regional value chain will have to
travel larger distances than actors involved in a conventional local PACA
Exercise. This creates an obstacle which can only be overcome if you do a really
good job in the build-up phase, i.e. identify proper champions and use them to
mobilise other players from the chain. Public business promotion agencies
sometimes believe that it is sufficient to send a letter or a fax to mobilise business-
people for workshop. This is usually not the case. It is crucial to mount a
systematic mobilisation effort, putting a lot of time and effort into convincing
actors that there is a strong reason, preferably a good business case, for allocating
time for Mini-workshops or interviews.

The purpose of a value chain PACA, just like a local PACA, is not to create huge
landmark projects. The purpose is rather to unleash a radical change in the type of
relationship between players in the chain – to move from distrust and
confrontation to co-opetition, i.e. a pattern where tension and conflict still exists,
but where it is nevertheless possible that players along the chain address common
problems and improve their overall competitiveness. The outcome of the first
rounds of activities will be anything but spectacular, but businesses will still
appreciate them. Over time, small successes induce a change in mindset and
behaviour. Players in the regional value chain will start to understand that their
main rivals are not their respective suppliers and customers, but value chains
elsewhere in their country and in the world.