Chapter One

The Value Chain Approach:

Concepts, Importance and Principles
1.1 Definition of value chain
Before we define what a value chain is, let’s first define what value is? Value is defined
as:
 A fair return or equivalent in goods, services, or money for something exchanged.
 The monetary worth of something: market price.
 Relative worth, utility, or importance.
 A numerical quantity that is assigned or is determined by calculation or
measurement.
 The relative duration of a musical note.
 A: relative lightness or darkness of a color: luminosity B: the relation of one part
in a picture to another with respect to lightness and darkness.
 Something (as a principle or quality) intrinsically valuable or desirable! Value is
what makes something desirable!

What makes something desirable?

Things that make something desirable could be price, e.g. cheap or high value;
Appearance, e.g. looks; Experience, e.g. taste; Ease of use, e.g. fresh-cut and washed;
Availability, e.g. year round like Coca Cola. Above all consumers determine value.
The term ‘Value Chain’ was used by Michael Porter in his book "Competitive Advantage:
Creating and Sustaining Superior Performance" (1985). “Value chain” refers to all the
activities and services that bring a product (or a service) from conception to end use in
a particular industry—from input supply to production, processing, wholesale and finally,
retail. It is so called because value is being added to the product or service at each step.
By definition: a value chain comprises of interlinked value-adding activities that convert
inputs into outputs which, in turn, add to the bottom line and help create competitive
advantage. This means that businesses within the value chain are involved in handling
and adding direct value or consuming the product and also the service network
indirectly involved in the production (eg. quality control, ICT, financial partners (banks,
insurance,), training and research).
A value chain is a connected string of companies, groups and other players working
together to satisfy market demands for a particular product or group of products.
A value chain links the steps a product takes from the farmer to the consumer. It
includes research and development, input suppliers and finance. The farmer combines
these resources with land, labor and capital to produce commodities.
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The value chain describes 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. Considered in its
general form, it takes the shape as described in Figure 1.

Design and Production Marketin Consumption

developmen -Inward /
logistics Recycling
t of a -Transforming
product - Inputs
- Packaging

Figure 1: Four links in a simple value chain

As can be seen from this, production per se is only one of a number of value added links.
Moreover, there are ranges of activities within each link of the chain. Although often
depicted as a vertical chain, intra-chain linkages are most often of a two-way nature –
for example, specialized design agencies not only influence the nature of the production
process and marketing, but are in turn influenced by the constraints in these
downstream links in the chain. In the real world, of course, value chains are much more
complex than this. There tend to be many more links in the chain.
In addition to the various links in a value chain, typically intermediary producers in a
particular value chain may feed into a number of different value chains. In some cases,
these alternative value chains may absorb only a small share of their output; in other
cases, there may be an equal spread of customers. But the share of sales at a particular
point in time may not capture the full story – the dynamics of a particular market or
technology may mean that a relatively small (or large) customer/supplier may become a
relatively large (small) customer/supplier in the future. Furthermore, the share of sales
may obscure the crucial role that a particular supplier controlling a key core technology
or input (which may be a relatively small part of its output) has on the rest of the value
chain.
A value chain is a network of strategic alliances between independent companies that
together manage the flow of goods and services along the entire value-added chain.
“Strategic” implies that the partnership is entered into deliberately by groups of people
who jointly undertake activities they could not undertake themselves. The result is
“competitive intelligence,” and win-win strategy whereby information that could not be

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accessed independently is gathered and shared.
The definition of value chain can be interpreted in a narrow or broad sense:
In a narrow sense, a value chain includes the range of activities performed within a firm
to produce a certain product. In a broad sense, VC is concerned with a complex range of
activities implemented by various actors (e.g. primary producers, processors, traders,
consumers). The key issues for successful VC are good information flows & good
communication across the chain & they are demand driven, not product driven. VC
involves a chain of activities that are associated with adding value to a product through
the production & distribution processes of each activity. The underlying purpose of
every organization is to provide value to its customer and stakeholders.
Value is the perception of the benefits associated with the customer benefit package in
relation to what buyers are willing to pay for them. Value adding activities can include:
§ Bulking § Cleaning § Drying
§ Sorting § Processing § Storage
§ Packaging § Labelling § Branding
One of the simplest functional forms of value is:
Value=Perceived benefits(PB)/Price (cost) to the customer
If the value ratio is high, the good or service is perceived favorably by customers, and
the organization providing it is more likely to be successful.
To increase value, an organization must:

(a) increase PB while holding price or cost constant,

(b) increase PB while reducing price or cost, or
(c) decrease price or cost while holding PB constant.
In order to understand value chain, begin by drawing a simple diagram that shows the
key processes and inputs that contribute to the final product.
Input supply -----> Agricultural production ----> first level handling -----> Processors ----->
wholesalers/distributors -----> Retailers -----> consumers.

You can now replace these generic boxes with more detail where appropriate. Once the
discrete activities are defined, linkages between activities should be identified, a linkage
exists if the performance or cost of one activity affects that of another. At each stage of
the chain the value of the product goes up, because the product becomes more

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convenient for the consumer. Besides value, costs are added at each stage in the chain.
A VC is broader in scope than a SC, and encompasses all pre- and post- production
services to create and deliver the entire customer benefit package.

1.2 Dimensions of Value Chain

The value chain concept has several dimensions. The first is its flow, also called its
input-output structure. In this sense, a chain is a set of products and services linked
together in a sequence of value-adding economic activities. At its simplest, we can think
of a chain as having five main sections. A product is first designed, then raw materials
are purchased and production takes place; the product is then distributed through
wholesalers and retailers. At each stage, services such as transport or finance may be
needed to keep the process going. As we will see when we start mapping real chains,
some of these stages may be subdivided and others combined or compressed.
Nevertheless, the five stages - design, inputs, production, wholesale, and retail - remain
a handy device for understanding each step of the process.
A value chain has another, less visible structure. This is made up of the flow of
knowledge and expertise necessary for the physical input-output structure to function.
The flow of knowledge generally parallels the material flows, but its intensity may differ.
For example, the knowledge inputs at a product’s design stage may be much greater
than the material inputs; production, on the other hand, needs large quantities of
materials, but in many cases, requires only standard or routine knowledge.

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The second dimension of a value chain has to do with its geographic spread. Some
chains are truly global, with activities taking place in many countries on different
continents. Others are more limited, involving only a few locations in different parts of
the world. A UK retailer may, for example, contract with an Ethiopia fabric supplier to
deliver cloth to a garment producer in Sri Lanka. The finished goods will then be shipped
directly to the UK retailer. It is also possible to identify national, regional, or local value
chains. These operate in the same way as the global chains, but their geographic ‘reach’
is more limited.
The third dimension of the value chain is the control that different actors can exert over
the activities making up the chain. The actors in a chain directly control their own
activities and are directly or indirectly controlled by other actors. A retailer, for example,
controls the way he sells, but may be limited (indirectly controlled) by the range of
goods available from wholesalers and producers. A home worker may find that almost
every aspect of her work is controlled by a distant retailer who has specified the design,
quantity, and quality of the garments she is producing. The pattern of direct and indirect
control in a value chain is called its governance.

1.3 Traditional Marketing Systems versus Value Chain Marketing System

Traditional Marketing Systems
In the traditional marketing system, farmers produce commodities that are "pushed"
into the marketplace. Farmers are generally isolated from a majority of end-consumer
and have little control over input costs or process received for their goods. The primary
exception is where local farmers sell produce in local markets and where there is a
direct link from farmer to consumer. In most traditional selling systems
formers/producers tend to receive minimal profit. Any integration up or down the value
chain can help to increase the profit.
In this marketing system, marketing is market “Push”. This tends to be based on
independent transactions at each step, or between each node. Products may often be
sold into a crowded and competitive market. The farmers are largely isolated from the
consumer, and from the demands and preferences of consumers
Research and Development is focused on production and on reducing costs of
production, and may not take account of other steps, links, or dependencies in the chain
(e.g. environmental or social costs).
Value Chain Marketing Systems
In a Value Chain marketing system, farmers are linked to the needs of consumers,
working closely with suppliers and processors to produce the specific goods required
by consumers. Similarly, through flows of information and products, consumers are
linked to the needs of farmers. Using this approach, and through continuous innovation
and feedback between different stages along the value chain, the farmer's market
power and profitability can be enhanced.
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Rather than focusing profits on one or two links, players at all levels of the value chain
will benefit. Well functioning value chains are said to be more efficient in bringing
products to consumers and therefore all actors, including small-scale producers and
poor consumers, should benefit from value chain development.
Here the system is market “Pull”. This is based on integrated transactions and
information. Consumers purchase products that are produced according to their
preferences. The farmer becomes the core link in producing the products that the
consumers desire.Research and development, whilst including techniques targeted at
increased production, is also focused on consumer needs, and attempts to take
account of all of the links, and dependencies in the value chain, e.g. processing,
environmental and social costs or considerations, as well factors such as health
impacts, education and learning.
Communication is in both directions. It is important that both consumers and
processors are made aware of factors limiting production, just as much as farmers and
other producers are made aware of consumer requirements. In order to generate
improvements in the supply or quality of any product, one needs to consider all aspects
of the range of steps in the chain of events from production to consumption, including
both opportunities and constraints, and the demand and supply of necessary products
and services.
An integral component of the value chain is the agricultural supply chain, and in the
literature these terms value chain and supply chain may at times be used
interchangeably, or are at least closely related. However, there is difference in the two
concepts. Let’s learn what the difference is between value chain and supply chain.

1.4 Value chain versus Supply chain

Value chains are concerned with what the market will pay for. Hence, the focus is to
make what you can sell profitably (chain). The main objectives of value chain
management is to deliver quality as desired by the customers/consumers and the focus
is on pie-growing, coordination, and continuous improvement & innovation. Whereas,
supply chains are concerned with what it costs and how best we can utilize our capacity
profitably (Individual business profit). The main objectives of supply chain management
are to maximize capacity utilization and the focus is on pie-sharing, capacity and profit
optimization, maintaining status-quo.

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 Figure 2: Pictorial depiction of value chain and supply chain

Figure 3: Profit condition of value chain and supply chain

Supply chain management is mainly product oriented while Value chain management is
mainly consumer oriented. Value chain managed when we have taken all relevant
indicators for value creation into account; when we have determined our long term
strategy concerning: in company production, outsourcing, market orientation and seller
– buyer relationships. Supply chain is a subset of Value chain.
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Supply chain: one entity often has most power, short-term relationship and value chain
is partnership with shared power, long term relationship.

Elements of the value chain concept are also incorporated within the innovation
systems approach. This involves the use, adoption, uptake, or commercialization of
existing knowledge. Successful innovation not only requires appropriate research
outputs, but also relies on a supportive policy and institutional environment, the
availability of credit and technical support, and the existence of healthy markets and
functioning infrastructure. It is also likely to involve a wide range of key actors from
farmers through to policy makers, private-sector companies, entrepreneurs, as well as
journalists. Success is likely to depend on addressing all of these interrelated factors.

1.5. Types of Value Chain Activities

The term value chain is initially coined by Michael Porter in 1985 Porter’s value chain. A
company’s value chain consists of a linked set of value-creating activities performed
internally. The value chain contains two types of activities.

 Primary activities–where most of the value for customers is created.

 Support activities–facilitate performance of the primary activities.

Michael Porter introduced a generic value chain model that comprises a sequence of
activities found to be common to a wide range of firms.

1.5.1. Primary Activities

The goal of primary activities is to create value that exceeds the cost of providing the
product or service, thus generating a profit margin. They contribute to the physical

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creation of the product or service, its sale and transfer to the buyer, and its service after
the sale.

Inbound Logistics: Include the receiving, warehousing, and inventory control of input
materials. Associated with Location of distribution facilities, Warehouse layout
and designs, etc

Operations: Are the value-creating activities that transform the inputs into the final
product. Associated with transforming inputs into the final product form Efficient plant
operations, Incorporation of appropriate process technology, and Efficient plant layout
and workflow design

Outbound Logistics: The activities required to get the finished product to the customer,
including warehousing, order fulfillment, etc. Associated with collecting, storing and
distributing the product or service to buyers, Effective shipping processes to provide
quick delivery and minimize damages and Shipping of goods in large lot sizes to
minimize transportation costs.

Marketing and sales: Those activities associated with getting buyers to purchase the
product, including channel selection, advertising, pricing, etc. Associated with
purchases of products and services by end users and the inducements used to get
them to make purchases, Innovative approaches to promotion and advertising and
Proper identification of customer segments and needs

Service: Activities are those that maintain and enhance the product’s value including
customer support, repair services, etc. Associated with providing service to enhance or
maintain the value of the product, Quick response to customer needs and emergencies,
and Quality of service personnel and ongoing training

1.5.2. Support Activities

Support activities often viewed as “overhead”, but some firms successfully have used
them to develop a competitive advantage, for example, to develop a cost advantage
through innovative management of information systems. They are activities of the value
chain that either add value by themselves or add value through important relationships
with both primary activities and other support activities.

Procurement: The function of purchasing the raw materials and other inputs used in the
value-creating activities.

 Procurement of raw material inputs

 Development of collaborative “win-win” relationships with suppliers
 Analysis and selection of alternate sources of inputs to minimize dependence on
one supplier

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Technology Development: Includes research and development, process automation, and
other technology development used to support the value-chain activities. Related to a
wide range of activities and those embodied in processes and equipment and the
product itself

 Effective R&D activities for process and product initiatives

 Positive collaborative relationships between R&D and other departments
 Excellent professional qualifications of personnel

HRM: The activities associated with recruiting, development, and compensation of

employees.

 Effective recruiting, development, and retention mechanisms for employees

 Quality relations with trade unions
 Reward and incentive programs to motivate all employees

Firm Infrastructure: Includes activities such as finance, legal, quality management, etc.
Typically supports the entire value chain and not individual activities

 Effective planning systems

 Excellent relationships with diverse stakeholder groups
 Effective information technology to integrate value-creating activities

1.6. Underlying Assumption & Important VC Approach

Concrete overarching goals of value chain include:

1. To achieve social and environmental goals as well as economic ones by

engaging multiple stakeholders, including the end buyers, in the co-design of
market agreements;

2. To develop sufficiently deep relationships among the key players so that the
contracts or agreements can be adjusted as market conditions change.

3. To institutionalize what is learned and achieved into the core mission and
strategies of participating organizations.

Beyond those overarching goals, healthy value chains are those which accomplish the
following four conditions:

1. Increase market access for small scale producers;

2. Improve financial sustainability through buying r/ships that better balance risk,
responsibilities, & benefits among the chain actors;

3. Assist in guaranteeing purchaser access to consistent supplies of agricultural

products that meet or exceed market standards;

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 4. Be sufficiently flexible to enable both buyers & sellers to respond to changing
markets & social & environmental conditions

In general, there is public interest in developing value chains since they involve activities
not just of smallholder farmers, but also of agribusinesses that must be promoted
because of their role in economic development. Economic growth—through the
mobilization of industry participants, the value chain approach can be used to increase
the competitiveness of industries and the sustainability of donor interventions in
support of economic growth. This can be effected by:

 Increases market access for smallholder farmers and agribusinesses.

 Increases profitability of optimal-sized investments in agro-processing as

markets expand.

 Keeps jobs and agro-processing industries.

 Ensures dynamic efficiency of agricultural commodities and high-value exports.

 Financial services—value chain analysis can identify mechanisms for financial

service delivery embedded in market transactions and assist lending institutions
with expanding their definition of creditworthiness.

 Natural resources management—the value chain approach can be used to

strengthen the competitiveness of natural resource-based industries and to
develop competitiveness strategies that are beneficial both to the environment
and to local business development.

 Health—value chain tools can be used to mobilize industry participants to identify

and address health-related constraints to competitiveness and can be used to
increase the effectiveness of service delivery in the health industry itself.

 Conflict mitigation and management—value chain analysis can prioritize industry

constraints and opportunities in post-conflict situations and value chain tools
can bring together diverse, even antagonistic, stakeholders to work towards a
common economic vision.
1.7. Principles of VC Approach in Agriculture

Sustainable food value chains must have ecological, social, and economic integrity.
These are also called the triple bottom line. Agricultural VC has ecological, social, &
economic principles.

 Ecological/Envtl principles: the essential ecological principles of sustainability

include holism, diversity & interdependence. Interdependent r/ships among the
diverse elements of healthy natural ecosystems make the ecological wholes
something more than the sum of their parts. Eg. Pollution impact, levels of flows in
rivers, high conservation value, …
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 Social principles: the essential social principles of sustainability include trust,
kindness, and courage. People in sustainable relationships must have the courage to
trust and to care about others in a world where such things are often considered
idealistic and naïve. Eg. opportunities for smallholders, women, unemployed,
excluded groups, etc

 Economic principles: the essential economic principles of sustainability include

value, efficiency, and sovereignty. They must make their own decisions and accept
responsibility for their actions if they are to maintain economic viability. Eg. Percent
of farmers benefiting, percent of farmers interested in joining the business, annual
income generated, contribution to total volume, diversity of markets/clients, levels of
support from government & other organizations, etc

Sustainable food value chains must be resistant, resilient, and redundant.

 Sustainable food chains must be able to withstand unexpected shocks; they

must be resistant.

 When their resistance breaks down, as after natural disasters and major
economic setbacks, they must be able to bounce back; they must be resilient.

 In the most severe cases, they must have a fallback strategy or “plan B”; they
must have built-in redundancy.

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 Chapter 2
Value Chain Analysis
Value chain analysis describes the activities within and around an organization, and
relates them to the analysis of the competitive strength of the organization. Therefore, it
evaluates which value each particular activity adds to the organizations products or
services. This idea was built upon the insight that an organization is more than a
random compilation of machinery, equipment, people and money. Only if these things
are arranged into systems and systematic activates it will become possible to produce
something for which customers are willing to pay a price. Porter argues that the ability
to perform particular activities and to manage the linkages between these activities is a
source of competitive advantage.
Value chain analysis facilitates an improved understanding of competitive challenges,
helps in the identification of relationships and coordination mechanisms, and assists in
understanding how chain actors deal with powers and who governs or influences the
chain. Developing value chains is often about improving access to markets and
ensuring a more efficient product flow while ensuring that all actors in that chain benefit.
Changing agricultural contexts, rural to urban migration, and resulting changes for rural
employment, the need for pro-poor development, as well as a changing international
scene (not least the increase in oil prices) all indicate the importance of value-chain
analysis.
Value chain analysis plays a key role in understanding the need and scope for systemic
competitiveness. The analysis and identification of core competences will lead the firm
to outsource those functions where it has no distinctive competences.
Value chain analysis is useful for identifying constraints and opportunities for the
provision of financial services. Value chain analysis identifies demand for financial
services within value chains; recognizes that optimal levels of investment require a
range of services from a range of providers, including financial institutions and value
chain actors; and prioritizes needs for donor intervention in financial services and limits
of Value Chain Finance are tied to the quality of cooperation between actors.

2.1. Basic concepts in agricultural value chain analysis

There are four major basic concepts in agricultural value chain analysis: value chain,
stages of production, vertical coordination and business development services. Since
value chains are composed of hierarchy of chain stages, the concept of stages of
production is basic in value chain analysis. Closely related to the stages of production is
the concept of vertical coordination. A value chain needs business support services to
function. Hence, the fourth basic concept is the concept of business development
services.

2.2 Purposes of value chain analysis

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Value chain analysis is conducted for a variety of purposes. The primary purpose of
value chain analysis, however, is to understand the reasons for inefficiencies in the
chain, and identify potential leverage points for improving the performance of the chain,
using both qualitative and quantitative data. In general, agricultural value chain analysis
can be used to:
 Understand how an agricultural value chain is organized (structure), operates
(conduct) and performs (performance). Performance analysis should concern
not only the current performance of the value chain, but also likely future
performances, as well.
 Identify leverage interventions to improve the performance of the value chain
 Analyze agriculture–industry linkages
 Analyze income distribution
 Analyze employment issues
 Assess economic and social impacts of interventions
 Analyze environmental impacts of interventions
 Guide collective action for marketing
 Guide research priority setting
 Conduct policy inventory and analysis
In sum, the concept of value chain provides a useful framework to understand the
production, transformation and distribution of a commodity or group of commodities.
With its emphasis on the coordination of the various stages of a value chain, value
chain analysis attempts to unravel the organization and performance of a commodity
system.
The issues of coordination are especially important in agricultural value chains, where
coordination is affected by several factors that may influence product characteristics,
especially quality. The value chain framework also enables us to think about
development from a systems perspective.
Key issues in value chain analysis
 Share of benefits and costs from value chains and market development.
 Distribution of added value along the chain.
 Market share of the different actors and corresponding size of sub-sector.
 Institutional and legal framework, such as regional production and processing
zones, trade protocols, regulations on movement of people, agriculture
marketing policies and financial institutions.

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  Growth potentials (nodes with market potential).
 Infrastructure development.
 Potential for poverty reduction and rural income generation.
 Potential for sustained food supply at affordable competitive prices for
consumers.
 Potential for maximization of returns on capital investment at different levels
of the value chain strategy.
 Potential for strengthening sector and regional complementarities and
interdependence through implementation of horizontal and vertical integration
approaches in the commodity production value chains strategy.
In general, an in-depth VCA considers the following:
 What are the economic costs along the value chain?
 Where is the most value added to the value chain?
 Who are the most import actors within the value chain?
 What is the institutional framework of the value chain?
 Where are the bottlenecks in the value chain?
 Where is there market potential for growth?
 What is the size of the sector/chain?
 What is the potential for upgrading?
 What possible synergies exist?

Four aspects of VCA in agriculture are important

1. A value chain analysis systematically maps the actors participating in the value
chain system
2. A value chain analysis identifies the distribution of benefits of actors in the chain.
3. A value chain analysis examines the role of upgrading within the chain.
4. A value chain analysis highlights the role of the governance in the value chain,
which can be internal or external.
Tools in Value Chain Analysis
There are different tools in value chain analysis:
1. Prioritizing value chains for analysis
2. Mapping the value chain
3. Governance: coordination, regulation, and control
4. Relationships, linkages and trust
5. Analyzing options for demand-driven upgrading: knowledge, skills, technology &
support services
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6. Analyzing costs and margins
7. Analyzing income distribution
8. Analyzing employment distribution

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2.3. Steps in Value Chain Analysis
Value chain analysis is a process that requires four interconnected steps: data
collection and research, value chain mapping, analysis of opportunities and constraints,
and vetting of findings with stakeholders and recommendations for future actions.
These four steps are not necessarily sequential and can be carried out simultaneously.
The value chain team collects data and information through secondary and primary
sources by way of research and interviews. Mapping helps to organize the data, and
highlights the market segments, participant/actors, their functions and linkages. The
collected data is analyzed using the value chain framework to reveal constraints within
the chain that prevent or limit the exploitation of end market opportunities. The resulting
analysis of opportunities and constraints should be vetted with stakeholders through
events such as workshops, focus groups or “reporting-out” days.
Step One: Data Collection
Good value chain analysis begins with good data collection, from the initial desk
research to the targeted interviews. The value chain framework—that is, the structural
and dynamic factors affecting the chain—provides an effective way to organize the data,
prioritize opportunities and plan interventions.
The desk research consists of a rapid examination of readily available material. The aim
is to familiarize the team with the industry, its market and the business environment in
which it operates, as well as to identify sources for additional information. Information
such as statistics on exports/imports, consumption reports, global trade figures, etc.,
can be obtained through the Internet, phone calls and documents from trade, commerce
and industry ministries, specialized industry journals, and professional and trade
association newsletters. Once the desk research is conducted, an initial value chain
map can be drafted for refinement during the primary research phase.
Interviews are conducted with 1) firms and individuals from all functional levels of the
chain, and 2) individuals outside the value chain such as writers, journalists or
economists. In addition to providing information about the movement of product and
the distribution of benefits, the interviews should inform on value chain actors’ current
capacity to learn; how information is exchanged among participants; from where they
learn about new production techniques, new markets and market trends; and the extent
of trust that exists among actors. Interviews can help to identify where chain
participants see opportunities for and constraints to upgrading. Missing or inadequate
provision of services necessary to move the value chain to the next level of
competitiveness can be identified locally, regionally or nationally.
In addition to individual interviews, focus group discussions are a useful way to explore
concepts, generate ideas, determine differences in opinion between stakeholder groups
and triangulate with other data collection methods. The group may consist of 7-10
people who perform the same or a similar function in the value chain. Guided

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discussion better captures the social interaction and spontaneous thought processes
that inform decision making, which is often lost in structured interviews.
The qualitative data gathered by these methods will reveal dynamic factors of the value
chain such as trends, incentives and relationships. To complement this, quantitative
analysis of the chain is necessary to provide a picture of the current situation in terms
of the distribution of value-added, profitability, productivity, production capacity and
benchmarking against competitors. Analyzing these factors highlights inefficiencies
and areas for reducing cost.
Step Two: Value Chain Mapping
Value chain mapping is the process of developing a visual depiction of the basic
structure of the value chain. A value chain map illustrates the way the product flows
from raw material to end markets and presents how the industry functions. It is a
compressed visual diagram of the data collected at different stages of the value chain
analysis and supports the narrative description of the chain.
Porter distinguished two important elements of modern value chain analysis: The
various activities which were performed in particular links in the chain. Here he drew the
distinction between different stages of the process of supply (inbound logistics,
operations, outbound logistics, marketing and sales, and after sales service), the
transformation of these inputs into outputs (production, logistics, quality and
continuous improvement processes), and the support services the firm marshal to
accomplish this task (strategic planning, human resource management, technology
development and procurement).
The importance of separating out these various functions is that it draws attention
away from an exclusive focus on physical transformation.
Porter distinguishes between primary activities and support activities. Primary activities
are directly concerned with the creation or delivery of a product or service. They can be
grouped into five main areas: inbound logistics, operations, outbound logistics,
marketing and sales, and service. Each of these primary activities is linked to support
activities which help to improve their effectiveness or efficiency. There are four main
areas of support activities: procurement, technology development (including R&D),
human resource management, and infrastructure (systems for planning, finance, quality,
information management etc.).
Some thought about the linkages between activities: These linkages are crucial for
corporate success. The linkages are flows of information, goods and services, as well
as systems and processes for adjusting activities. A certain commodity value chain can
be mapped as:

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Figure 12: A comprehensive value chain map

The purpose of a visual tool in the analysis process is to develop a shared

understanding among value chain stakeholders of the current situation of the industry.
The mapping exercise provides an opportunity for multi-stakeholder discussions to
reveal opportunities and bottlenecks to be addressed in subsequent stages of the chain
development. Maps also help to identify information gaps that require further research.
A two-phased process for developing the value chain map is recommended, as follows:
a) initial basic mapping and b) adjusted mapping. Initial mapping is based on the
information derived from desk research and knowledge at the outset of the analysis.
The second phase includes revisions based on interviews and feedback from firms and
individuals brought into the analysis process. As value chain maps are representations
of a complex system, the analysis must balance the need to generalize with the desire
to charge the map with details. Mapping is a dynamic process; therefore, adjustments
should be made as needed.
Step Three: Analysis of Opportunities and Constraints Using the Value Chain
Framework
Step three uses the value chain framework as a lens through which the gathered data is
analyzed. The framework is a useful tool to identify systemic chain-level issues rather
than focus on firm-level problems. While interviews give the value chain team the
chance to gather information from individual firms, the value chain framework helps to
organize this information in such a way that the analysis moves from a firm-level to a
chain-level perspective. If the chain cannot be competitive, the success of individual
firms is compromised. Therefore, taking a systemic approach is key to sustaining the

19
competitiveness of the chain and the micro and small enterprises (MSEs) operating
within it.
The factors affecting performance of the chain are further analyzed to characterize
opportunities and constraints to competitiveness. These factors are classified under
structure and dynamic components. The structure of the value chain influences the
dynamics of firm behavior and these dynamics influence how well the value chain
performs in terms of two critical outcomes: value chain competitiveness and MSE
benefits.
Structure
The structure of a value chain includes all the firms in the chain and can be
characterized in terms of five elements:
1. End market opportunities at the local, national, regional and global levels—the
framework prioritizes this element because demand in end markets defines the
characteristics of a successful product or service.
2. Business and enabling environment at the local, national and international
levels—this includes laws, regulations, policies, international trade agreements
and public infrastructure (roads, electricity, etc.) that enable the product or
service to move through the value chain.
3. Vertical linkages between firms at different levels of the value chain—these are
critical for moving a product or service to the end market and for transferring
benefits, learning and embedded services between firms up and down the chain.
4. Horizontal linkages between firms at the same level of the value chain—these
can reduce transaction costs, enable economies of scale, increase bargaining
power, and facilitate the creation of industry standards and marketing campaigns.
5. Supporting markets—these include financial services, cross-cutting services (e.g.,
business consulting, legal advice and telecommunications) and sector-specific
services (e.g., irrigation equipment, design services for handicrafts).
Dynamics
The participants in a value chain create the dynamic elements through the choices they
make in response to the value chain structure. These dynamic elements include:
1. Upgrading—increasing competitiveness at the firm level through product
development and improvements in production and marketing techniques or
processes
2. Inter-firm cooperation—the extent to which firms work together to achieve
increased industry competitiveness
3. Transfer of information and learning between firms—this is key to

20
 competitiveness since upgrading is dependent on knowledge of what the market
requires and the potential returns on investments in upgrading.
4. Power exercised by firms in their relationships with each other—this shapes the
incentives that drive behavior and determines which firms benefit from
participation in an industry and by how much

Each plays a role in influencing value chain competitiveness. Using a table format, these
factors of the value chain framework can be evaluated in terms of offering opportunities
for upgrading and the constraints to taking advantage of these opportunities.
Value chain Framework

Figure 13: Value chain framework

Step Four: Vetting Findings of Chain Analysis through Stakeholder Workshops

Value chain analysis helps develop a private-sector vision to reflect stakeholders’

21
interest in improving the efficiency and competitiveness of the chain. The fourth step,
vetting findings, uses value chain analysis through a structured event (or series of
events) like a workshop or reporting-out day to facilitate discussion with and among
selected participants.
The objective of these events is to bring participants together who are responsible for
critical market functions, service provision, and the legal, regulatory and policy
environment. The goal is to have these participants—who have an incentive to drive
investments in upgrading—to develop and assist in implementing a private sector-led
competitiveness strategy. To develop this strategy, the stakeholders will need to
prioritize the opportunities and constraints identified during the value chain analysis.
With an open format, such structured events foster buy-in to the analysis process.
Participants are selected based on the role they play in the value chain, or their
responsibility for critical market functions. There should also be MSE, medium and
larger firm and association representatives who, during the interview phase, exhibited
an understanding of the issues related to the value chain (especially the opportunities),
a strong interest in the types of questions posed during the interview, and leadership
skills among peers or the community.
Vetting events can take on several forms from simple one day reporting-out sessions to
more structured workshops that stretch to two or three days. The events are planned to
reinforce the importance of knowing and understanding the end market. In presenting
the findings of the value chain analysis, workshop leaders should stress that to remain
competitive, stakeholders and other participants must continuously learn what end
markets demand in terms of product specifications, quality, and other requirements.
It can be powerful to have a series of buyers present at the workshop. Where not
possible, a phone call or pre-recorded video interview can be an effective means for
stakeholders to see and hear directly from the buyer.
The event should include facilitated discussions, review and adjustments of value chain
map and a review of the analysis table mentioned above. For this exercise, it is
recommended that the completed table be projected on a screen, and additions and
modifications made during discussions inserted with the computer projecting the table.
This assures a participatory process and on-the-spot adjustment witnessed by
attending participants. If changes are made, the updated table can be rapidly printed
and distributed to participants before they leave.
In environments characterized by a number of donor partners working with the same
group of firms, burn-out and skepticism particularly among the most important change
drivers is likely. In some instances, the firms most important to driving change may not
attend a full-day workshop even though they may be highly committed to the upgrading
process and strategy for making the industry more competitive. If time allows, the
analysis team can meet with these firms in advance of the workshop to convince them
of the value of the competitive planning process. If this is not possible, the analysis
22
team should meet with these firms as soon after the workshop as possible to vet
findings and secure buy-in or commitment to the industry competitiveness planning
process.
In most industries, it is rather unusual that a single company performs all activities from
product design, production of components, and final assembly to delivery to the final
user by itself. Most often, organizations are elements of a value system or supply chain.
Hence, value chain analysis should cover the whole value system in which the
organization operates. Within the whole value system, there is only a certain value of
profit margin available. This is the difference of the final price the customer pays and
the sum of all costs incurred with the production and delivery of the product/service
(e.g. raw material, energy etc.). It depends on the structure of the value system, how this
margin spreads across the suppliers, producers, distributors, customers and other
elements of the value system. Each member of the system will use its market position
and negotiating power to get a higher proportion of this margin. Nevertheless, members
of a value system can cooperate to improve their efficiency and to reduce their costs in
order to achieve a higher total margin to the benefit of all of them (e.g. by reducing
stocks in a Just-In-Time system).
Hierarchy Firms are vertically integrated, so that they can directly control all or most of
the activities of the chain
Some value chains can best be described as balanced networks. Firms form networks,
but because the power relations among them are fairly equal, no one firm or group of
firms dominates the network. In balanced networks supplier and buyer jointly define the
product and combine complementary competencies. An example might be
collaboration between producers of ‘eco-friendly’ knitted fabric and garment
manufacturers who make this fabric into fashion garments. Since both are involved in
high value-added production, they can work together more or less as equals.
Other value chains are governed by lead firms. We call these directed networks. The
lead firms do not merely buy goods in the market. Rather they specify what is to be
produced by whom, and they monitor the performance of the producing firms. In some
cases, the networks are directed, or “driven”, by large producers such as transnational
corporations or other large integrated industrial enterprises. The automobile industry is
a good example of a producer driven value chain. The large automobile companies
dominate the chain by setting the specifications that must be followed by firms joining
their networks of component suppliers.
Other chains are driven by the buyers of the products. In clothing and footwear, many
leading brand-name companies do no production themselves. Instead, they concentrate
on design and marketing. Their strength as buyers enables them to dominate certain
value chains. They determine what fabrics will be used, what styles will be produced,
and in what colors.
Finally, some chains are characterized by vertically integrated firms. In these cases,
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firms, acting through their own decision-making hierarchy, can directly control chain
activities.
2.4. Gender Issues in Value Chain Analysis
2.4.1. Concept of Gender

Gender refers to the socially and culturally constructed differences between men and
women; as distinct from sex which refers to their biological differences. The social
constructs vary across cultures and time.

Sex refers to the biological and physiological characteristics that define men and
women. It describes the biological differences between men and women, which are
universal and determined at birth. These attributes are universal and cannot be changed.
When we consider how females and males differ, the first thing that usually comes to
mind is “SEX”, which is a biological characteristic that distinguish males and females.

Sex marks distinction between women and men as a result of their biological, physical
and genetic differences and it is determined by genetic and anatomical characteristics.

Gender, in contrast, is a social characteristic. It refers to the socially determined ideas

and practices of what it is to be female or male refers to the roles and responsibilities of
men and women.

It includes expectations about characteristics, attitudes and behaviors of both women

and men (femininity and masculinity). Gender refers to the array of socially constructed
roles and relationships, personality traits, attitudes, behaviors, values, relative power
and influence that society ascribes to the two sexes on a differential basis. Gender is an
acquired identity that is learned, changes over time, and varies widely within and across
cultures. It is relational and refers not simply to women or men but to the relationship
between them”.

The English-language distinction between sex and gender was first developed in the
1950s by British and American psychiatrists. Since then, the term gender has been
increasingly used to distinguish between sex and gender construct.

Gender roles are set by convention and other social, economic, political and cultural
forces. It can change over time and vary within and between cultures.
SexBiological characteristics SexBiological category
(Cannot be changed) Men Women
Menstruation
Giving birth
Breasts
Testicles
Massive bones
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Gender Social characteristics Gender Cultural category
(Can be changed) Masculine Women
Earning money Significantly Significantly less
Smoking More Traditionally immoral
Driving car (in Saudi Arabia) Allowed Restricted
Housework (in most of the world) Do less Do more
2.4.2. Social construction of gender

Gender is socially constructed. The correct gender roles one is supposed to fill are
promoted to children from birth due to preconceived ideas regarding what males and
females are supposed to be like. These gender roles tend to be all encompassing. They
dictate what males and females should wear, how they should act and talk, and even
what hobbies they should enjoy. Social construction of gender refers to how society
values and allocates duties, roles and responsibilities to women, men, girls and boys.
This differential valuing creates the gender division of labor and determines differences
in access to benefits and decision making which in turn influences power relations and
reinforces gender roles. This is done at various levels of gender socialization including
family, religion, education, culture, peers and the media.

Social construction of gender difference believes that gender is socially constructed.

Social constructions of gender move away from socialization as the origin of gender
differences; people do not merely internalize gender roles as they grow up but they
respond to changing norms in society. Children learn to categorize themselves by
gender very early on in life. A part of this is learning how to display and perform
gendered identities as masculine or feminine. Boys learn to manipulate their physical
and social environment through physical strength or other skills, while girls learn to
present themselves as objects to be viewed.

2.4.3. Gender and culture

Culture refers to people’s way of life, systems of beliefs, values, rituals, interaction
patterns and socialization which determine attributes, roles, responsibilities, and
expectations in a society. It determines what the society wants and expects from
women, men, girls and boys. It defines the status and power relations between women,
men, girls and boys. Gender concerns are as a result of cultural context and
socialization in a society. Examples of these are:

 Preference for a boy than a girl child

 Heir to property
 Naming systems
 Initiation ceremonies
 Marital practices
 Gender based violence
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2.4.4. Gender Discrimination

Gender Discrimination is systematic or unfavorable treatment of individuals on the

basis of their gender which denies their rights, opportunities or access to resources.
Across the world, women are treated unequally and less value is placed on their lives
because of their gender. Women’s differential access to power and control of resources
is central to this discrimination in all institutional spheres, i.e. the household, community,
market and state.

Within the household, women and girls can face discrimination in the sharing out of
household resources including food, sometimes leading to higher malnutrition and
mortality indicators for women. At its most extreme, gender discrimination can lead to
son preference, expressed in sex selective abortion or female feticide. In the labor
market, unequal pay, occupational exclusion or segregation into low skill and low paid
work limit women’s earnings in comparison to those of men of similar education levels.
Women’s lack of representation and voice in decision making bodies in the community
and the state perpetuates discrimination, in terms of access to public services, such as
schooling and healthcare or discriminatory laws.

The law is assumed to be gender-neutral when in fact it may perpetuate gender

discrimination, being a product of a culture with oppressive gender ideologies. Even
where constitutional or national legal provisions uphold gender equality principles,
religious or other customary laws that privilege men may take precedence in practice.
However, the law, when reformed with women’s input, can be a potent tool for
challenging discrimination, if combined with other strategies, including capacity-building
to overcome barriers to claiming rights. The Convention on the Elimination of all forms
of Discrimination against Women (CEDAW) in 1979 brought into international focus the
rights of women as human rights, including the right to be free from discrimination.
Women activists regard this convention as a key tool to support their struggle against
discrimination in all spheres, pushing governments towards attaining these
internationally recognized minimum standards.

2.4.5. Gender Division of Labor

Gender division of labor is socially determined ideas and practices which define what
roles and activities are deemed appropriate for women and men.

Whilst the gender division of labor tends to be seen as natural and immutable, in fact,
these ideas and practices are socially constructed. This results in context-specific
patterns of who does what by gender and how this is valued. Gender divisions of labor
are not necessarily rigidly defined in terms of men’s and women’s roles, as is
sometimes assumed. They are characterized by co-operation in joint activities, as well
as by separation. Often, the accepted norm regarding gender divisions varies from the
26
actual practice. However, roles typically designated as female are almost invariably less
valued than those designated as male. Women are generally expected to fulfill the
reproductive role of bearing and raising children, caring for other family members, and
household management tasks, as well as home based production. Men tend to be more
associated with productive roles, particularly paid work, and market production. In the
labour market, although women’s overall participation rates are rising, they tend to be
confined to a relatively narrow range of occupations or concentrated in lower grades
than men, usually earning less.

Historically, women’s productive roles have been ignored or under-valued, particularly in

the informal sector and subsistence agriculture. This has led to misconceived
development projects; for example, the services of extension agents and agricultural
inputs being targeted at men. Because women’s labor is undervalued, it is often
assumed by mainstream development policies to be infinitely elastic. For example,
policy makers expect that women can take on roles previously fulfilled by public
services, such as care for the sick and elderly, when cutbacks are made.

The formal documentation and recognition of women’s roles and the related time
burden is crucial for gender-sensitive development interventions. Recently, international
organizations have begun to measure all forms of economic activity by gender.
International definitions of economic activity have also been broadened to include
subsistence farming, food processing.

2.4.6. Gender and value chains

Value chains exist and operate within a given social context which affects the
distribution of resources, benefits and opportunities. Gender is an important aspect of
value chain analysis since gender relations both affect and are affected by the ways in
which value chains function. Value chains offer tremendous opportunities to women
through better market linkages and employment opportunities. At the same time, the
way these value chains operate can affect women negatively. For example,
transnational corporations can take advantage of existing gender inequalities in
bargaining power to cut production costs by employing large numbers of women at low
levels of value chains and for minimum or lower than minimum wage. Enterprise
interventions can also affect gender relations both positively and negatively and
therefore any analysis of value chains including their impacts must include gender
analysis. Gender Analysis in value chains is a methodology that both describes existing
gender relations in a particular environment, ranging from within households or firms to
a larger scale of community, ethnic group, or nation, and organizes and interprets, in a
systematic way, information about gender relations to clarify the importance of gender
differences for achieving development objectives.

There are certain barriers that influence people’s participation and benefits from value
27
chains. Some of these include access to technologies and capital can influence the
extent to which people and especially women, however often have lower access to
capital and technologies can participated at different levels of the value chains that
have most economic returns and that have the most returns to added value. These
would include formal parts of the value chains that render women more likely to
participate at production or within the informal parts of the chain. Women in most of
Africa and south Asia have lower access to technologies and to credit. Access to
financial services is especially critical for women in terms of enhancing their ability to
participate in value chains beyond producer roles including ability to add value to
agricultural produce.

Women, due to lack of collateral have a lower access to financial services than men do.
For example, in Africa, less than 5% of the land is owned by women despite land being
the most important and common form of collateral for formal credit. Analysis of this
differential access; the extent to which it constrains women from participating in value
chains and strategies that can be used to increase women access to financial services
including group savings and loan schemes, collective or group guarantee schemes,
policy interventions that increase women’s ownership of land and other assets can be
identified. Skills, internal organization and external relations can facilitate participation
in value chains at different levels. Internal organization or collective action can ensure
economies of scale in production or reduced costs.

While women have great capacity to self-organize, their organizations have often been
at micro scale and oriented towards providing each other with social and welfare
services much more than around economic activities.

There are however examples of where women organizations have transitioned from
social functions to more market and economic oriented function at local, national, and
even regional level. There are power asymmetries across levels of value chains that
influence value chain governance and the roles and voice of different actors within the
chain. These power asymmetries can determine the positioning of people within the
chain (who is allocated or who plays what role in the chain), and who makes decisions
and has most information about different aspects of the chain (e.g. price information).
As a result of these power asymmetries, women may have a lower voice in the value
chains or have lower access to market information which reduces their negotiation
power. Distribution of the outcomes of the value chain is another aspect that is
gendered. A key to understanding distributional outcomes is to focus on the profits in
the different parts of the chain. Finally, value chain analysis does not stop at the level of
the actors or groups of firms, producers or market actors. It also draws attention to the
national system of innovation – the network of institutions which support economic
actors. What they do impinges on the competitive performance of firms and groups of
firms, and is also subject to the support and regulation provided by governments, whose
actions, too, need to be located in value chain analysis. How supportive or prohibitive
28
these are different groups of actors including women actors is key focus for value chain
analysis. An analysis of some of the barriers to entry and opportunities presented by
different value chains especially for women can lead to an understanding of the
possible value chain interventions that both have an income as well as an equity focus
in their outcomes. However, as many scholars have pointed out, understanding the
position of women in value chains and promoting women empowerment is an issue
also affecting (and affected by) men, and therefore, it is necessary to remain attentive
to the local context, including the diverse notions of masculinity that might both
challenge or support gender empowerment.

Furthermore, gender analysis within the value chains should be concerned with intra-
household conflicts over labor and income by linking broader cultural and societal
processes. Thus, understanding women position in a value chain, how changes in a
value chain might affect gender inequality, and the main constraints for women in terms
of gaining from value chain participation, requires one to place gender in the context of
intra-household bargaining and of broader social processes dimensions.

2.4.7. Frame work for Mainstreaming Gender in Value Chain

i. Gender Empowerment grid

The gender empowerment grid helps the learner to identify areas of analysis and
corresponding gender equality objectives and strategies. The issues to be covered
include:
A. Gender roles/equal opportunities/women’s empowerment
B. Gendered differentiation in access to resources/rights
C. Gendered differentiation in control over benefits/leadership
D. Gendered differentiation in influence on enabling factors/mainstreaming

ii. Value Chain Development grid

The value chain development grid helps learners to identify areas of facilitation services
in value chain developments. For understanding of the learners this section covers six
areas of value chain development facilitation services. These are:
A. Effective Public Policy Management (EPPM)
B. Market Intelligence (MI)
C. Multi-Stakeholder Processes (MSP)
D. Value Chain Financing (VCF)
E. Group Strengthening (GS)
F. Strengthening Value Chain Service Providers (SSP)

iii. Macro-meso-micro grid

The focus of this grid to enable learners identify gender equality issues that to be
identified at different levels. These are:
A. Macro level: cultural, policy and regulatory environment
B. Meso level: delivering pro-poor development services
29
C. Micro level: outreach and impacts at household level

30
 Chapter Three

Value Chain Development

3.1. Concept of Value Chain Development

By definition: a value chain comprises of interlinked value-adding activities that convert

inputs into outputs which, in turn, add to the bottom line and help create competitive
advantage. This means that businesses within the value chain are involved in handling
and adding direct value or consuming the product and also the service network
indirectly involved in the production (for example, quality control, ICT, financial partners
(banks, insurance, and training and research)).

Value Chain Development means positive or desirable change in a value chain to extend
or improve productive operations and generate social benefits: poverty reduction,
income and employment generation, economic growth, environmental performance,
gender equity and other development goals.

It is improvement of cooperation between stakeholders of a particular sector and the

coordination of their activities along different levels of a value chain with regard to the
following five triggers. The ultimate goal of developing value chain is to increase the
competitiveness of the sector on the (international) market. The five triggers for value
chain development are: system efficiency, product quality & specifications, product
differentiation (competition), social and environmental standards and enabling business
environment. Each of them is discussed as follows. Value chain development
generally,

• Empowerment of producers
• Improve quality
• Improve logistics (= planning)
• Cost price reduction (improvement margins)
• Scaling Up  Increase of Volume
 the product through the chain, rather than producers/processors pushing their
product into the market place.

3.2. Stakeholders in value chain development

The term “stakeholders” is commonly used in development but often means different
things to different people. Here stakeholders include all people interested in the
development of the value chain. These are, first of all, the private sector entities and
individuals directly concerned with creating and delivering a product and engaged in the
businesses of primary agricultural production, processing, and marketing. Further,
stakeholders in value chain development include many actors not directly engaged in
production but rather the provision of private and public support such as finance,
31
warehousing, transport, research, or advisory services. Stakeholders may also include
the regulators and government and development agencies that intervene, through
regulations and development programmes, in the development of the value chain. A list
of stakeholders in value chain development can include:

 Farmers, farmers’ organizations and their associations

 Processors (at different levels) and their associations
 Traders and exporters and their associations
 Transporters and middlemen
 Private advisory, business support and accounting service providers
 Chambers of commerce, investment and export promotion agencies and other
parastatal bodies promoting value chain development
 Regulatory agencies such as bureaus of standards, food safety agencies and
metrology institutes
 Private certification and quality control bodies
 Research institutions and universities
 Training and education institutions
 Bilateral and multilateral development Agencies

3.2.3. Value Chain Development and Improvement Strategies

3.2.3.1. Principles of Value Chain Development

1. Role external facilitator transparent

2. Build upon initiatives of VC actors and existing organizations
3. Serve clients impartially and share results
4. Stick to division of tasks between VC actors
5. Enhance environment of respect, safety, trust and autonomy of actors
6. Focus on practical implementation and rapid visible results and impact
7. Openly acknowledge potential conflicts
8. Create balance between participation and results
9. Coordinate efforts of donors along chain

Value chain formation

 Chain Formation & organization
 Chain design
 Chain behavior
 Chain Culture

Chain Formation: all activities and conditions necessary to design as well as implement
collaboration relations between chain links with the purpose to support the productive
functioning of the chain efficiently

Chain Organization: it is about formal as well as informal structures and procedures

advancing the efficient and effective differentiation and co-ordination between entities
32
on all levels within a chain.

3.2.3.2. Prerequisites for Developing Successful Value Chain

There are a number of key organizational considerations in building a successful value

chain. These include among others:

I) Establishing common objectives;

II) Building trust and establishing co-operative working relationships.
III) Managing information flows;
IV) Upgrading in value chains.

I). Establishing common objectives in value chain

The objectives of the value chain will depend on the product, market circumstances, and
the participants, among other factors. The aim might be to bring a new product to
market, or to introduce an existing product to a new market; it might be to provide
assurances of food safety, traceability and/or quality to end consumers; it might be to
maintain or expand market share in the face of increased competition from imports or
from domestic competitors; it might be to respond to new government regulations
which affect product design, processing, or traceability; or to strengthen and deepen
existing relationships with a view to increasing market share.
It is crucial that the parties establish and share a set of mutually agreed-to objectives. If
individual objectives differ, information will not flow freely between the partners. If we
take a lesson from the collective experience of companies involved in joint ventures,
one of the principal causes of failure in such ventures is that the objectives of the
partners are incompatible. The same is true of a value chain. Most other organizational
issues stem from this one point.

33
II) Building trust and establishing cooperative working relationships.

Trust is one of biggest issues in the formation of a value chain. Potential participants
must trust that their partners’ motives are not solely self-serving, and that there are
benefits to working together. Ideally, the value chain will create a win-win relationship
whereby all participants benefit through the establishment, maintenance, or expansion
of secure and sustainable markets. This is often referred to as governance of the value
chain in different literature.

Trust building is an often a painstaking process. Mistrust has to be overcome before

trust can be build. In some less developing countries, mistrust between larger private
sector and SMEs is deep rooted and has a long history to deal with. At times, it is an
issue of attitude change, which takes time. In the former socialist oriented countries
trust between private and public sector was so big. The issue of trust highlights the
importance of continuous dialogue among all parties to ensure that the objectives of
the alliance are being met, and that no one member has tried to create a situation in
which they benefit at the expense of the other partners.

Experience suggests that one way of building trust is around tangible activities in a
carefully designed step by step process. Experience has shown that through schemes
like Market Linkages facilitation, or out grower schemes that are becoming common
these days, development organizations acting as facilitators have managed to bring
together larger private sector companies to enter into a contractual arrangement with
smallholder farmers. In this way, long-term trust building is build up.

Focus on Your Customer and Consumer: Many of us are very focused on our product.
Expanding that focus to include your customer and the final consumer is an important
shift. It is important to identify and define your suppliers and your customers. Each
business in the supply chain has suppliers and customers as well as consumers at the
end of the chain.

Value Chain Suppliers and Customers: Suppose, with the pork supply chain, the
consumer could be looking for increased loin eye depth. The processor will go back to
his supplier, the pig producer, to find a way to deliver this attribute to the customer,
Marcy’s Meat Counter.

Differentiate Your Product: Companies today are looking for ways to differentiate
themselves from their competitors by developing new or improved products. Working
together with your suppliers and customers to deliver a superior product may allow you
to achieve things you otherwise would be unable to deliver.

Contribute Resources: Each business in the value chain has a unique collection of
34
resources that collectively will contribute to the capacity of the new value chain. Taking
an objective look at your resources will be a useful step in the initial stages. You’ll then
have an accurate description of all the resources available for the new venture. For
example, one business may have a very skilled workforce while another business may
contribute a newer equipment line, and yet another business in the chain may have
excellent industry contacts.

III) Managing information flows

Knowledge is power. Often the farmers are in a disadvantaged information position.

They have no information about the performance of their own organization, let alone of
the market. By contrast, companies downstream in the chain tend to have elaborate
information systems. For example, supermarkets register the daily buying behavior of
their customers, while processing companies register the yields, volumes and prices of
major crops. The more information someone manages, the better he or she can
manage a company, and the higher are the returns. To improve the position of the
farmers in the chain, their management of information has to improve. Some elements
of information management are:

• Record-keeping of the use of labor and farm inputs. This is necessary to give a proper
understanding of the costs involved, to base farm management decisions upon
information, and to build the ability to negotiate the price of the product.

• Traceability means keeping records to guarantee the buyer on the source of the
product and the inputs that were used.

• Market information involves knowing about prices and trends in the market so that the
farmers can bargain with potential buyers.

IV) Upgrading the chain

• Process upgrading

This means producing the same product more efficiently – perhaps by using new
technologies or management methods. For example, farmers may grow more by
35
switching varieties or applying fertilizer; they may reduce pest attacks and save costs
through integrated pest management rather than spraying; they may husk maize more
quickly using a machine rather than by hand; or they may invest in build new grain bins
to improve storage. Farmers can also improve their links with other actors in the chain –
for example, they can sign contracts with input suppliers or processors

• Product upgrading

Farmers can improve their product in various ways. For example, they may plant a new
variety that has more desirable characteristics; or they may stop using agrochemicals
and apply for certification so they can sell their produce as “organic”.

• Functional or intra-chain upgrading

Farmers can take on new activities in the chain, either upstream or downstream, or
change the mix of activities they undertake. For example, they may start grading and
sorting their produce; they may bulk it to make pick-up more convenient for buyers; or
they may process it (drying, milling, etc.) to improve its value or increase its storage life.

• Chain or inter-chain upgrading

Farmers can also set out on a new value chain: they can start growing a new crop, keep
a new species of livestock, or start a new enterprise such as dairying or agro-tourism.
They may be completely new to these activities, or they may transfer their skills and
experience from their existing enterprises.

3.2.3.3. Stages in Building a Value Chain

Three stages in building a value chain have been identified. The rest of the guidebook
looks at these three stages and how you might apply them to your own situation. Before
you take a more detailed look at the three stages, look at the summary of each stage
below so that you have an idea of what to expect.

Stage 1: Identifying the Opportunity

In this first stage, you will identify some opportunities for a value chain by first mapping
and evaluating your existing supply chain. You probably have some idea of your
resources but may need to further define a clear project objective or focus. Learn how
to gain the support of some members of the supply chain and perhaps identify
someone who will champion the value chain.
After you have completed this section, you will be able to:
• Map and evaluate your supply chain
• Outline the opportunity by developing a project summary and evaluating the market
• Assess resources, risks and capabilities of a value chain project.

Map Your Supply Chain

Mapping your existing supply chain is the first step in identifying opportunities. By
36
mapping the major companies who are your suppliers and customers, you will better
understand how the product moves through the market channel and identify who you
need to involve in the value chain project.

There are advantages to doing this exercise with one or two of your existing chain
partners:
• You will help create buy-in for the project
• Partners can provide valuable perspectives on the strengths, limitations and
opportunities for the chain.

Stage 2: Developing a Pilot Project Plan

At this stage you look at developing a pilot project plan with clear goals, plans and
measures. A pilot is a small, trial-size version of a commercial-scale value chain. It
minimizes some risk by allowing you and your partners to commit yourself and work out
any bugs while you proceed on a small scale. This is the stage where you identify
suitable partners for the value chain, select a manager and achieve commitment from
all partners perhaps in the form of a written agreement.

Stage 3: Monitoring and Evaluating the Pilot Project

This is the stage where you will implement and monitor your pilot project. You will adapt
and build in order to determine whether a full-scale value chain is a possibility.

3.2.3.4. Strategies for chain development

The most commonly used strategies for value chain development are

I) Product development / Quality upgrading strategy

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II) Investment / Market penetration strategy

38
III) Redistribution strategy

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3.2.3.5. Intervention strategies

Intermediary organizations can help farmers to get integrated into the chain, to improve
as chain actors, or to move onto another form of chain development – partner, activity
integrator, or co-owner. To improve the position of the farmer in the chain, we can either
work on chain activities or on chain management, or on both at the same time.

I. Vertical integration

One type of intervention is vertical integration. This tries to increase the number of
chain activities the farmer undertakes from farming into processing, transport, and
trading. Vertical integration seems the preferred strategy of farmers. They like to
“shorten the chain” by cutting out traders or other intermediary agents. They think that
adding activities to their businesses will provide them a lot of added value and extra
income. This, however, is not always true. Adding activities also means adding costs
and risks. More importantly, it requires a new set of assets and skills. Some of these are:

 Technology: Identifying and using appropriate technologies for the value-adding

activities (grading, processing, transport, etc.). These technologies must be well
maintained and be kept updated. Technological innovation is a permanent concern.

 Finance: Securing access to (a) credit or investment in facilities for processing,

marketing and distribution, and (b) working capital to run the operations. Reserves
must be built up for future investments. Profits must be divided in a rational way
between the farmers and the cooperative they are members of. Profits should be
paid in accordance with the performance or contribution of each member.

 Human resources: Building up managerial competence and appropriate human

resources to operate these facilities – for example, a specialized marketing manager
or quality control staff.

 Organization making: sure that the farmer organization has the organizational
discipline to get involved in joint value-adding activities. Farmer-members should
adhere to quality standards, delivery procedures, obligations to sell their produce, etc

II. Chain management

The return to investments in vertical integration may be disappointing unless due

attention is also given to the second dimension of chain development: involving the
farmer in chain management (arrow B in the figure on the previous page). Some
aspects are the following:

Quality management

Quality management assures that both the product and the production processes
satisfy the consumer. It assures that the farm product can find its way into the market.
Quality can be a unique selling-point, through which one group of farmers differentiate
40
themselves from other suppliers. Quality increases the attractiveness of farmers as
business partners, hence, their bargaining power. Some aspects are the following:

• Grading of the product into homogeneous quality grades,

• Implementation of quality control systems at critical points in the production system.
 Implementation of quality certification schemes that are demanded in the market,
such as GAP (Good Agricultural Practices), Food Safety Certification, Europe GAP
(quality management system of European Union supermarkets), etc.

Chain cooperation

Cooperation with other chain actors is a skill in itself. Often chain relations are marked
by distrust. The farmers and traders fight over the price; the farmers may swindle the
traders by putting low-quality produce at the bottom of the crates, and the traders may
swindle the farmers by using inappropriate weights and measures. This situation is bad
for all. That is why it is important to seek cooperation along the chain. Some elements
are the following:

• Chain vision
• Trust building
• Joint action plans
• Negotiation
Marketing intelligence This involves making sure that the product finds its way into the
market. Production processes must be tailored to market demands. There must be
knowledge of what the consumer wants. Products should be produced, designed and
packaged to attract the preference of the consumer.

3.2.3.6. Facilitating value chain development

This is what the purist among us considers true value chain development interventions.
In most cases the analysis concluded that there is sufficient potential in the selected
value chain, yet that coordination between the various chain actors is insufficient.

Often this lack of coordination is due to a lack of information sharing between actors
and a high level of mistrust. Actors do business with each other, yet these transactions
can be characterized as spot market relations rather than durable relationships. Both
parties lose out, depending on market developments, one year one actor more than the
other, the year after the opposite way. Orientation is on quick gains, often on prices.
Information is not shared but considered a weapon in the power battle within the chain.
However, the lack of information also leads to mismatches in terms of product and
process standards, in the end both lose out. There are no investments made by one
actor in the other, resulting in one weak actor hampering the chain flow, affecting the
other chain actors.

Facilitating only: The facilitating organization with its expert knowledge and
41
communication skills, works on improving transparency along the chain actors. This
implies focusing initially on letting the actors understand their own, but mainly the
position of the other actors in the chain: what are the roles, constraints, gains and
objectives of the others. Once this mutual understanding sinks in, one can start building
on strategy building: which strategy is desirable and feasible to achieve a relative win-
win situation? Thereafter one can assist the actors to design concrete action plans:
short term objectives, tasks and responsibilities. In many cases, it results in ‘VC
platforms of chain actors’ the critics question successes of purely facilitating
interventions: when the intervention has been successful, i.e. when the facilitator did
‘nothing else but talking’ and the actors acted swiftly; was there a sincere need for this
facilitating role, or would the actors have gotten together anyway, sooner or later? The
facilitator played a catalyst role (only), and it is up to the reader to judge the value
thereof: minimal input, intervention owned by the chain actors, likely a sustainable
output.

Facilitating plus: In many chains, building transparency and trust only is not enough, and
often facilitating projects do more than pure facilitating: they bring funds for assisting
chain actors to design and implement (small) interventions to improve the chain
performance. Such funds can be kept by the facilitator (as part of its project funds) or
be given to the chain actors (e.g. a VCD team or platform). The advantage of the first is
that facilitators can ‘steer more’, the advantage of the latter is that ownership and action
is left with the chain actors (but including the battles among them).

In both cases funding should require “consensus among chain actors about the
intervention that is beneficial to the chain (and not to one actor) with a relative equal
contribution of chain actors”. Typical actions include preparing chain actors for
certification, working on the process and standards, often at various levels, improving
supply or undertaking market research. Increasing service provision through embedded
services is also a very effective tool in value chain development.

Facilitating to the max: Facilitating is not necessarily limited to chain actors only, but
might include facilitating (strengthening) linkages with chain supporters: financial and
non financial service providers. These activities lean towards (familiar) BDS projects,
linking and strengthening these service sectors, resulting in improved performance of
chain actors and the chain itself. Key to success (and ownership or at least involvement
of chain actors) is that the focus should be on tangible products, in high demand by the
chain actors, and provided by the BDS providers. Often such BDS strengthening,
focusing on development of sustainable products based on the BDS paradigm shift, are
managed by ‘projects’.

3.2.3.7. Roles of the Actors in Value Chain Development

When analyzing a sub sector, it is important to distinguish the roles of the various
stakeholders. In general, we distinguish three types of stakeholders:
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Chain actors:

Those that are in the chain: Owners of the product taking risk in the chain: basically
buying from other actors, processing (in which ever form) the product and selling the
product to the next actors. Chain actors those directly involved in the production and
sales of the product. Farmers at Selale area of Ethiopia, produce milk and sell it to their
cooperative (Selale Milk Union) or to a trader. The cooperative or the trader
transport/store the milk and sell to a processors (like Mama and Shola), the processor
pasteurize some of the milk and convert some to other dairy products and sell to
retailers (like Supermarkets and kiosks) and finally retailers sell to end consumers.

Chain actors are differing from chain supporters from ownership status they have to the
product. Chain actors own the product. Ownership is transferred from one actor to the
next actor in the chain. Supporters support actors in the chain in finance and other
services but not own the product. Value and costs are added at each stage all the way
to the end consumer.

The number of actors involved from producer to end consumer varies depending the
nature of the product and the established market chain. In the above example five
actors are identified. The first actor groups are producers. Producers sell their products
to 1 Sebeta Agro Industry is a milk processor known for pasteurized branded milk called
Mama.
Traders; traders sell their products to processors. Processors sales their end product to
retailers and retailers sell their product to end consumers. In some cases processors
could sales their products to wholesalers and wholesalers sell their products to retailers.
In a simple value chain; the actors are the producers the traders and the end consumers.

Those that are outside the chain but those that supply goods or services to the chain
actors, often they are distinguished as either financial providers (e.g. banks providing
loans) or non-financial service providers (e.g. accountants or transporters).

Chain supporters are the service providers like banks, microfinance institutions,
insurance companies, transporters, brokers; and other supporters including NGOs,
government agencies, and research centers. The financial services they provide include
loans, pre-financing, shareholdings, factoring, leasing arrangements, and so on. It is not
just financial institutions that provide financial services; for example, an input supplier
may give a farmer a loan in the form of fertilizer, in return for repayment plus interest
after harvest.

Chain influencers:
Those, which influence the performance of the sub-sectors, actors and supporters.
Institutions that influence the entire sub sector (and beyond) without performing an
actor or supporters role: influencers (such as the ministry of commerce) determine
(partly) the factors (such as investment climate).
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The above three types of actors (chain actors, supporters and influencers) and their
respective roles are present in each and every sub sector and value chain. In ‘our
development world’, two more roles can be distinguished:

A temporary (catalyst) role by an organization (often a donor funded project) to “grease”

the chain machinery, either between the actors at the various levels or between the
actors and their supporters, with objective to improve the performance of the entire
chain and its actors.

Capacity builders:
Organizations that build the capacity of certain (groups of) chain actors, often NGOs
with donor funding. Their activities are non-commercial and nonoperational, such as
strengthening farmer cooperatives. It is important to map the various stakeholders
according to the five types described above. Mixing the roles should be avoided:
facilitators require specific expertise (knowledge of the industry, communication skills),
reputation (expert, neutral) and position (not biased). Capacity builders are typically
industry generalists, but experts on organizational development, but biased to specific
actors in the chain (“their target groups”).
The above roles are visualized as follows:

3.2.3.8. Relationships among Actors in Value Chain

Build Relationships: strong business relationships are key to the success of any value
chain initiative. Building and maintaining these relationships takes time, effort and some
skills. This section provides information, techniques and tools to help build these
relationships. This section is useful for individuals who will be facilitating
discussions–it could be a member of the steering committee or an outside facilitator.
It’s also useful for business partners to review, to assess their contributions towards
building a strong team and identify areas where the business partners may need to
make changes. Successful value chain managers’ reported that relationships are the
most important element to successful value chain.

Relationship Strength: Common vision cooperation commitment interdependence trust

communication adaptability often little or no time is spent developing the required
business relationships when groups embark on projects. In fact, most businesses want
to have a trusting relationship with their customer, but think it is acceptable to be tough
on their suppliers. Yet everyone in the chain is both a supplier and a customer.

Build stronger relations in the chain

1. Farmers and traders organize themselves
2. Farmers and traders develop mutual respect and understanding
3. Farmers and traders specialize in their role in the chain
4. Farmers and traders develop partnerships for mutual growth
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 5. Farmers and traders seek higher-level coordination of the chain.

Characteristics of Strong Business Relationships

• Confidence in business partners
• Cooperation among business partners
• Previous experience with business partners on which to base trust
• Sufficient personal experience with business partners in order to assess
trustworthiness
• Viewing business partners as an integral part of the team
• Being able to rely on business partners to deliver products and services on time
• Sharing of valuable market information with business partners
• Sharing of best practices among business partners
• Commitments by business partners met–attend meetings, return calls, and
complete tasks.

Trust is developed as we get to know and understand our business partners and their
actions become predictable. Trust is built through reputation, past experience, behavior
and keeping commitments. It generally develops in five stages: assess, build, confirm,
maintain and strengthen.

Build stronger institutions to support trade

1. Market information
2. Standardized grades, weights and measures
3. Contract enforcement
4. Financial services
5. Policy dialogue and –support

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Collaboration Tips: one of the keys to building relationships with partners is
demonstrating listening skills. Really hearing what your partners are saying builds trust.
Here are some tips and examples to demonstrate that you’re listening.

1. Listening isn’t the same as agreeing.

Practice summarizing and feeding back messages, even when you don’t agree. Stay
neutral–you’ll have a chance to provide your opinion later.
Giving Feedback: for example: So it sounds like in order for this to work for you, it would
be important to have some delivery guarantees in place.

2. Find and acknowledge things you agree on rather than focusing on differences. To
build trust and a common purpose, draw out those things partners agree on first.
Sometimes it may be a principle that everyone agrees on, rather than a practice or
action. Early in the process (or by the end of the first steering committee meeting), draw
up a list of the principles and actions on which the group agrees.

Finding Agreement: for example: It sounds like we all agree that commitment is
important for this to work. Exactly what commitment looks like will need to be worked
out.

3. Avoid using “but” because it contradicts what was said before. Try inserting “and”
instead.
Using “and” not “but”:
Instead of: We agree that commitment is important, but I can’t see us putting in that
much money at the start.
Try: We agree that commitment is important, and it will also be important for us to look
carefully at how much money we can put into the start up.

46
4. Ask questions to understand.
When partners talk about actions or practices that impact them negatively, rather than
defending or explaining, use questions to understand where they’re coming from. It’s
through deepening your understanding of their concerns that creative solutions and
long-term relationships develop.

Decision-Making Processes
You will need to work out a decision-making process that’s perceived as fair by all and
with clear direction on who’s responsible for making which decisions.

- Before having discussions on decision making, create several scenarios that represent
typical decisions that will need to be made by the value chain.

- Each business responds to the scenario with how that decision would be handled in
their business, who would typically make the decision, with whom they would consult
and how long it might take.

- Have each business describe their decision-making process – ensure no judgments

are made about each business’s process. Draw a picture or make quick notes, for
everyone to see, of each process.

- Now as a group, begin to talk about what similarities they see in the processes and
what differences.

- Have the group design a process that will work for the chain as a whole–this will be a
combination of each business’s methods. It will need to meet everyone’s needs, as well
as serve the value chain well.

- After you have agreement on a process, have each business identifies what they will
need to change or adjust about their system to make this work.

Interdependence: Interdependence is achieved by identifying what each partner needs

from the chain to remain committed.

• Spend time finding out each party’s interests. Do this regularly both at meetings and
between meetings. You may want to end each meeting by going around the circle and
each person contributing.
Here’s what we’re going to do to build/support the value chain and here’s what I need to
see from others to remain committed.
• While checking in with participants between meetings is a good way to build rapport
and get a sense of what’s going on, there are a few cautions:

47
- The goal is for chain members to be interdependent, not dependent on the facilitator,
so it’s important that all issues get aired and resolved by the group. Acting as an
intermediary, or smoothing over disagreements between meetings, may be doing the
group a disservice in the long run.

- If a group member expresses dissatisfaction with another member’s actions, the

facilitator’s role is to encourage the member to bring the issue to the table, or to speak
directly to the other member. The facilitator can also help the member clarify and
reframe the issue and prepare them for possible reactions.

• Keeping members focused on the long-term goals–despite small setbacks or

annoyances–is a good “between-meeting” strategy.

Commitment: each partner must make commitments of time, effort and money.

When action plans are being designed, and agreed to, make sure that all partners are
contributing their fair share. Some partners will have money and equipment while others
will have expertise, manpower, industry contacts, etc. Ensure action plans use
“commitment” language such as, “We will complete the survey by October 15,” rather
than “We’ll try to complete the survey…”. As commitments are being made, ask partners
what difficulties they might have in meeting that commitment. Ask if anyone around the
table could assist them in meeting the commitment. The group should also discuss
what will happen if commitments aren’t met.

Chapter Four
Analyzing chain governance

4.1. Value Chain Governance

Governance refers to the inter-firm relationships and institutional mechanisms through
which non-market coordination of activities in the chain is achieved. Within global value
chains, for example, leading supermarkets in European country may exercise control
over their fresh vegetable supply chains. Not only do they specify the type of products
they wish to buy (including varieties, processing and packaging), but also processes
such as the quality systems that need to be in place. These requirements are enforced
through a system of auditing and inspection and ultimately through the decision to keep
or discard a supplier. Clearly, governance in value chains has something to do with the
exercise of control along the chain. At any point in the chain, the production process (in
its widest sense, including quality, logistics design, etc.) is defined by a set of
parameters. The four key parameters which define what is to be done are:

1. What is to be produced? We refer to this as product definition.

48
2. How it is to be produced. This involves the definition of production processes, which
can include elements such as the technology to be used, quality systems, labour
standards and environmental standards.
3. When it is to be produced.
4. How much is to be produced.

To these four basic parameters one might add a fifth parameter, price. Although prices
are usually treated as a variable determined in the market, it is frequently the case that
major customers (particularly those competing more on price than, for example,
product quality) insist that their suppliers design products and processes in order to
meet a particular target price. From the point of view of the analysis of inter-firm
linkages in the global economy, the critical parameters for value chain governance are
the first two: what is to be produced, and how it is to be produced. These parameters
are often set by buyers. In each case, the level of detail at which the parameters are
specified can vary. In the case of product definition, the buyer can provide different
levels of specification. It can set a design problem for the producer, which the producer
then solves by providing its technology and design. The buyer might provide a particular
design for the producer to work on, or the buyer might even provide detailed drawings
for the producer. Buyers can also specify process parameters. This has been most
evident through buyer involvement in their suppliers’ quality systems, but it is also
increasingly evident in specification of process parameters in relation to labour and
environmental standards. Once again, these can be specified at different levels of detail.
In some cases, the buyer may merely refer to the process standards to be attained. In
other cases, the buyer will specify precisely how particular standards should be attained
by requiring and perhaps helping to introduce particular production processes,
monitoring procedures, etc. When the buyer plays this role, we refer to it as the ‘lead
firm’ in the chain.

The question of governance arises when some firms in the chain work according to
parameters set by others. When this happens, governance structures may be required
to transmit information about parameters and enforce compliance.

Product and process parameters can also be set by agents external to the chain.
Government agencies and international organisations regulate product design and
manufacture, not only with a view to consumer safety, but also in order to create
transparent markets (for example, by defining standard weights and sizes or technical
norms). Examples of such parameter setting by agents external to the chain include
food safety standards, norms with regard to the safety of products such as children’s
toys, electrical equipment and motor vehicles and control of hazardous substances in a
wide range of products. Once again, these norms can refer to the product (are its
physical characteristics and design in conformance with requirements?) or to the
process (is it being produced in ways which conform to particular standards?). In some
cases, process norms are pursued as a means to achieving product standards (for
49
example, hygienic food preparation systems are designed to produced safe food) and in
others because of the intrinsic value of particular types of processes (for example,
animal welfare requirements). Governments may set standards which are compulsory
and have legal force. Standards may also be set by non-legal agreements (code of
conduct, etc.) and by a variety of unofficial agencies, such as NGOs, which pressure for
compliance with labour and environmental standards.

Parameters set from outside the chain lead to chain governance when one agent in the
chain enforces the compliance with parameters of other agents or translates the
parameter into a set of requirements which it then monitors and/or enforces. This
situation usually arises when agents at one point in the chain might be held responsible
for actions by agents (or the consequences of these actions) at other points in the
chain.

Governance can be exercised in different ways and different parts of the same chain
can be governed in different ways. Governance, in the sense of arrangements that make
possible the non-market coordination of activities, is not a necessary feature of value
chains. Many goods are traded in markets through a series of arm’s-length market
relationships between firms. The parameters are defined solely by each firm at its point
in the chain. So, for example, a firm might make a product according to its own
estimations of market demand (‘make to forecast’), using a design that has no
reference to any particular customer (i.e. either a completely standard product, or a
product developed in-house) and using its own processes. The buyer then encounters a
ready-made and ready-to-buy product. There are various ways in which inter-firm
relationships can differ from this pattern. For example, the decisions about ‘when’ and
‘how much’ will be made jointly by the producer and the buyer when production is
scheduled according to ‘make-to-order’ rather than ‘make-to-forecast’. This is typical
when products have many possible variants, which renders make-to-forecast
uneconomic.

Generally speaking, we can identify three governance regimes: Open spot market which
is based on price, quality standards and bargaining and negotiation (every batch);
partnership which is based on trust, network agents or family, quality differentiation,
contracts, coordination and co-operation; and fully vertical integrated based on
ownership.

4.2. Why does governance matter?

The issue of governance in value chains is important for the following reasons:
a. Provide market access to small growers or producers in developing countries
b. Fast track to acquisition of production capabilities: lead firms transmit best
practices and provide hands-on advice on how to improve layout, production
flows and raise skills.
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 c. Distribution of gains: Understanding the governance of a chain helps to
understand the distribution of gains along the chain
d. Leverage points for policy initiatives: The fact that some chains are governed by
lead firms from developed countries provides leverage for influencing what
happens in supplier firms in developing countries. This leverage point has been
recognised by government and nongovernmental agencies concerned with raising
labour and environmental standards.
e. Funnel for technical assistance: The central idea is to combine technical
assistance with connectivity. The lead firms of chains become the entry point for
reaching out to a multitude of distant small and medium sized suppliers.

4.3. Why chain governance needed?

Governance by the buyer is costly, requiring asset-specific investments in relationships
with particular suppliers. Such investment also increases the rigidity of supply chains by
raising the costs of switching suppliers. Nevertheless, many instances of parameter
setting and enforcement along the chain are evident.

Buyer specification of product design is most likely to arise when the buyer has a better
understanding of the demands of the market than the supplier. The buyer then
interprets the needs of the market and informs the supplier of what is required. This
information may range from a statement of the ‘design problem’ to be met to detailed
specifications of what is to be produced. The supplier’s limited knowledge of market
demands may arise in fast-moving markets characterised by innovation and product
differentiation. This also likely to arise when developing country suppliers are integrated
into global value chains and exposed to the demands of more sophisticated markets.
Suppliers may be confronted with markets that have different quality requirements and
also different and hard to interpret safety standards. In this situation, the buyer may
even have to supply basic information about product design. The main reason for
specification of process parameters along the chain is risk. Buyers specify and enforce
parameters when there are potential losses arising from a failure to meet commitments
(for example, delivering the right product on time) or a failure to ensure that the product
conforms to the necessary standards. These performance risks, relating to factors such
as quality, response time and reliability of delivery, become more important as firms
engage in non-price competition. As the suppliers become more experienced, and as
they are able to demonstrate their reliability to the customer, the latter may begin to
indicate the standards to be met, but leave it to the supplier to work out how to meet
them.

4.4. Trends in chain governance

What trends in value chain governance do we anticipate with changing development
aspects in the globalized world?
The general increase in chain governance is connected to the big changes in retailing in
51
the advanced countries. There has been an enormous concentration in retailing, in many
developed countries. Concentration in retailing does not necessarily lead to
concentration in sourcing but the scenario which is emerging is increasingly clear: an
increasing number of developing country producers engage in contract manufacturing
for a decreasing number of global buyers.
Brands play an increasingly important role in enterprise strategy, particularly in
consumer products such as garments and footwear. The enormous investment
required to create (or maintain) brands is increasingly made by retailers or other
companies which have no (or only limited) production facilities of their own. Product
and process definition, however, is a strategic part of their operation. Because brands
stand for high quality or well-defined images, they need to define and enforce product
and process parameters. Branding and chain governance thus tend to go together.
Chain governance is not however limited to the sourcing of branded products.
It has been noted that the risk of supplier failure is a key driver of chain governance. The
risk of suppliers not being able to produce to the required specification is highest in new
producer countries. Over the last two decades, many new producer countries have been
able to export to advanced country markets under the tutelage of the global buyers. As
the competence of these suppliers increases, chain governance through the buyers can
be expected to loosen – provided that the increasing competence of suppliers is
accompanied by the emergence of local agents who can monitor and enforce the
compliance with general or buyer specific standards. Some of the formerly new
producers will become world leaders in producing promptly to the specification of the
foreign buyer.
There is however a counter-tendency. While non-price factors (quality, brand, speed)
have come to play an increasing role for competing in global markets, price competition
continues to be unrelenting, leading to a downward pressure on prices, particularly in
labour intensive products sourced from developing countries. The resulting profit
squeeze leads buyers to scout continuously for new producers who offer lower labour
costs.
Business-to-Business (B2B) electronic commerce is being promoted world-wide as a
means of enabling developing country producers to sell in advanced country markets
and transform the relationship between producer and buyer. For the producer, one of
the main advantages of ecommerce is thought to lie in side stepping the intermediary or
avoiding control by the buyer. Reality is unlikely to become this simple and the
governance mechanisms those are in use will probably continue to be most relevant
because: (i) B2B e-commerce is diffusing only very slowly in trade between developing
and developed countries; (ii) some of the established buyers are investing in the
application of e-procurement methods; (iii) where existing intermediaries are
circumvented, trade tends to be conducted through new ‘info-mediaries’ (portals); (iv) all
forms of e-procurement are likely to require mechanisms to contain buyer risk, such a
certification. Monitoring and accreditation agencies will be of increasing importance.
On the other hand, there may be a shift to parameter setting and enforcement by agents
outside the chain. The more conformance/compliance with parameters can be codified,
generalised and credibly applied, the less need there is for governance from within the
chain.

4.5. Vertical linkage in value chain

52
Effective vertical linkages are generally characterized by:

Mutually beneficial relationships: Symbiotic relationships that benefit all of the actors
in a value chain are a major trait of effective vertical linkages. In such a scenario,
various market actors focus on their own core competencies and through collaborative
action realize synergies that improve the competitiveness of the entire chain. Trust, long
-term joint vision, and mutual respect usually form the foundations for developing such
relationships.

Knowledge transfer: Upgrading of production processes, technology, equipment,

management systems, etc. is critical for the survival and growth of firms in a
competitive marketplace. It is often difficult for small firms to access information about
global best practices. Effective vertical linkages facilitate the transfer of knowledge
between firms and create the incentives and knowledge platforms required for effective
upgrading of MSEs. Prompt information transfers and transparency between vertically
linked firms help a value chain respond effectively to changes in market demand.

Quality standards: Well-defined, widely understood, and constantly upgraded quality

standards are another defining element of effective vertical linkages. Vertically linked
firms are proactive, not reactive: Large firms empower and help small firms to
understand and adopt the quality standards to meet market demand.

Embedded services: The frequent provision of high-quality embedded services (where a

service is provided as part of the transaction at no extra cost) typifies effective vertical
linkages. Lead firms can provide a wide range of embedded services to affiliated
suppliers and buyers to ensure consistent quality of end products and services. These
embedded services are often seen as an integral part of business transactions and
considered a necessary cost of doing business.

Furthermore important is what kind of system is described: production chains, value

chains, service chains, innovation chains or what kind of network, an alliance network of
competitors or a network of partners that is complementary to each other’s business?
What are related systems that may have a part to play later on? After that; questions
arise like: who starts with the analysis, with what reason and which goal? If there are
more interested parties a synchronization of goals can be necessary.

4.5.1. Value Chain networks

A network consists of companies who share the same interests and act together to win
in the markets. A network is always composed of individual companies who act in a
network to succeed and survive in the business. Besides, co-operation is usually
voluntary according to (Ollus et al., 1998).

According to Hyötyläinen (2000), one of the most important goals of networking is

53
effective adaptation to changing circumstances. And, networked enterprises mainly
have three levels of networks in the overall system. These are: the strategic network, the
partner companies and the delivery contract companies, respectively.

 The strategic network is the core of the networked enterprises and has one
distinct core company that has a central role in the network. A central role means
that the core company creates and develops the strategic network and also
maintains it.

 After the strategic network are partner companies in the model of networked
enterprises. Partner companies are co-operating with the companies in the
strategic network. The relationships between the strategic network companies
and the partner companies are close and long term.

 The third level includes delivery contract companies needed in distribution and
logistics, but these are outside the network.

54
Network: a number of actors who have a set of non-sequential exchange relationships.
Usually, the term network is employed when the actors involved have long-term
business relationships that could be either formal or informal. These include logistical,
financial, informational, legal and dependency relationships.

Net chain: a contraction of ‘chain’ and ‘network’. A set of networks comprised of

horizontal ties between firms within a particular industry or group, which are
sequentially arranged based on vertical ties between firms in different layers. In the way
they use this term each network is limited to a node of the chain, e.g. a network of
suppliers at the beginning of the chain, followed by a network of manufacturers, and so
forth.

Chain knowledge: a critical success factor; In order to create and organize chains a
good deal of knowledge and expertise is required: chain knowledge!

Chain knowledge includes interrelated types of knowledge:

i) about product design and packaging;
ii) about market requirements and customer preferences
iii) about production/ distribution processes and their integration.

Value chains partners facilitate the sharing of all three forms of knowledge among
chain participants. Create a level playing field.

Role /task of the Value Chain Development Coach:

1. Project developer
2. Adviser/consultant: content, chain and networks, sector
3. Process coach
4. Facilitator (network, events, support actions)
55
 5. Administrative expert (donor program)
6. Support with capacity direct or via consultants

Skills & attitude of the VCD Coach

1. Aware and able to switch roles
2. Keep the actors moving, by stimulation
3. Keep focus on the objectives of the project but
4. Keep the relevance for the program in sight
5. Tactical smartness
6. Know the different organisation cultures, languages and incentives. (Connecting
private and public interests.
7. Act neutral, independent, trustfully

P osi ti on an d focu s V al u e C h ai n D ev el op er coach

Co n t e xt

Netw ork Ch an ge
m an age m e n t m an age m e n t
Va lu e
Ch a in a n d Ch a in
netw ork Co a ch Pr o je ct
m an age m e n t
k n o w le d ge

56
 TIP
Enabling Environment for Value Chain Development

5.1. What is Business Law?

Business law is a branch of law that examines topics that impact the operation of a
business. It consists of many different areas, including: law of contracts, intellectual
property, the law of corporations and other forms of business organizations, securities
law, employment law and bankruptcy.

Business law and Commercial law are very closely related, so much so that the terms
are often used interchangeably and the legal issues they address frequently overlap.
The Uniform Commercial Code (UCC) is the principal presiding authority over
commercial transactions.

Business laws are legal issues involved in value chain development. In the processes of
value chain development, Agricultural businesses interact in many and varied ways. To
name just a few types of business transactions, there are contracts, mergers and
acquisitions, leasing, etc. How these transactions are carried out is overseen by
Business Law. Additionally, how businesses are formed and developed is a large part of
Business law. This area of law is very wide-ranging; it deals primarily with defining the
rights and responsibilities of actors, supporters, and governors at different levels of the
value chain development for the effectiveness of the businesses, rather than enforcing
these laws.

5.2. Law of contract

Among different categories of business law applied to value chain development law of
contract is frequently used. Therefore this category of business law is focused in this
section.

A contract is a legally-enforceable promise or set of promises made by one party to

another. A contract is a legally binding agreement concerning a bargain which is
essentially commercial in its nature and involves the sale or hire of commodities such
as goods, services or land. In the value chain development the actors and supporters of
the chains are governed by contract law for oral and written agreements associated
with exchange of goods and services, money, and properties. Few examples of law of
contract in the process of value chain development include the following:

 Legal agreement between logistics providers and traders or producers

(agreements associated with exchange of services).
 Legal agreement between traders and producers (agreements associated with
57
 exchange of agricultural commodities).
 legal agreement between traders and financial institutions, such as banks and
micro financial institutions (agreements associated with exchange of money,
which is also termed as law of credit) etc
Law of contract includes topics such as the nature of contractual obligations, limitation
of actions, freedom of contract, termination of contract, and covers also agency
relationships, commercial paper, and contracts of employment.

Typically, in order to be enforceable, a contract must involve the following elements:

1. A "Meeting of the Minds" (Mutual Consent): The parties to the contract have a
mutual understanding of what the contract covers. For example, in a contract for
the sale of an agricultural product, say coffee, the buyer thinks he will obtain the
predetermined amount of coffee and the seller believes he is contracting to sell
the commodity, if there is no meeting of the minds and the contract will likely be
held unenforceable.

2. Offer and Acceptance: The contract involves an offer (or more than one offer) to
another party, who accepts the offer. For example, in a contract for the sale of
coffee, the seller may offer the commodity to the buyer for Birr 100.00 per KG.
The buyer's acceptance of that offer is a necessary part of creating a binding
contract for the sale of the commodity. For example, if the buyer counter-offers
to purchase the commodity for Birr 80.00 per KG, that typically counts as a
rejection of the original offer for sale. If the seller accepts the counter-offer, a
contract may be completed. However, if the seller rejects the counter-offer, the
buyer will not ordinarily be entitled to enforce the prior Birr 100.00 price if the
seller decides either to raise the price or to sell the coffee to somebody else.

3. Mutual Consideration (The mutual exchange of something of value): In order to

be valid, the parties to a contract must exchange something of value. In the case
of the sale of coffee, the buyer receives something of value in the form of the
coffee, and the seller receives money. While the validity of consideration may be
subject to attack on the basis that it is illusory (e.g., one party receives only what
the other party was already obligated to provide), or that there is a failure of
consideration (e.g., the consideration received by one party is essentially
worthless), these defences will not let a party to a contract escape the
consequences of bad negotiation. For example, if a seller enters into a contract
to sell the coffee for birr 100.00 per KG, and later gets an offer from somebody
else for birr 130.00 per KG, the seller can't revoke the contract on the basis that
the commodity was worth a lot more than he bargained to receive.

4. Performance or Delivery: In order to be enforceable, the action contemplated by

the contract must be completed. For example, if the purchaser of the coffee pays
Birr 100.00 purchase price, he can enforce the contract to require the delivery of
58
 the commodity. However, unless the contract provides that delivery will occur
before payment, the buyer may not be able to enforce the contract if he does not
"perform" by paying Birr 100.00. Similarly, again depending upon the contract
terms, the seller may not be able to enforce the contract without first delivering
the coffee.

5. Good Faith: It is implicit within all contracts that the parties are acting in good
faith.

6. No Violation of Public Policy: In order to be enforceable, a contract cannot

violate "public policy". For example, if the subject matter of a contract is illegal,
you cannot enforce the contract. A contract for the sale of illegal drugs “Hashish”,
for example, violates public policy and is not enforceable.

Oral Contracts
There is an old joke that "an oral contract isn't worth the paper it's written on". That's a
reference to the fact that it can be very difficult to prove that an oral contract exists.
Absent proof of the terms of the contract, a party may be unable to enforce the contract
or may be forced to settle for less than the original bargain. Thus, even when there is
not an opportunity to draft up a formal contract, it is good practice to always make
some sort of writing, signed by both parties, to memorialize the key terms of an
agreement.

Please note that, although sometimes an oral contract is referred to as a "verbal

contract", the term "oral" means "spoken" while the term "verbal" can also mean" in
words". Under that definition, all contracts are technically "verbal". If you mean to refer
to a contract that is not written, although most people will recognize what you mean by
"verbal contract", for maximum clarity it is helpful to refer to it as an "oral contract".

5.3. Business Law in Ethiopia

In Ethiopia, company is a form of business organisation as enunciated under Article 210

of the Commercial Code. Article 210(1) defines a business organisation as “any
association arising out of a partnership agreement.” And the Code defines partnership
agreement as follows:
A partnership agreement is a contract whereby two or more persons, who intend to join
together and to cooperate, undertake to bring together contributions for the purpose of
carrying out activities of an economic nature and of participating in the profits and
losses, arising out there of, if any. The agri-business value chain development in
Ethiopia as the association of people come together for profit is governed by the
company law under discussion.

It can be easily inferred from this that a business organisation is an “association” of

persons, based on a partnership agreement, who bring together their capital to do a

59
business with the objective of obtaining profit.

The terms business organisation, business association, business enterprise, and

business structure could be used interchangeably. However, there is a need for caution
with the term “association” as it is defined under the Civil Code to mean a “grouping
formed between two or more persons with a view to obtaining a result other than the
securing or sharing of profits.”

Companies established as enterprises include the Ethiopian Airlines Enterprise, Water

Works Design and Supervision Enterprise, Ethiopian Seed Enterprise and agricultural
development enterprises such as Bale Agricultural Development Enterprise, Arsi
Agricultural Development Enterprise, and Awassa Agricultural Development Enterprise
play a great role at different stages of value chain development in Ethiopia.

Companies can be classified into numerous forms based on different criteria such as
basis of incorporation, liability, number of members, control, ownership and origin.
These grounds of classification and how they should be understood in the Ethiopian
context will be reviewed below.

Classification based on manner of incorporation

In terms of the manner of establishment or incorporation, companies can either be
classified as registered companies or as statutory companies.

a) Registered companies
A registered company is a company that acquires its legal personality upon registration.
Until it is registered fulfilling the legal requirements, it will not be considered as a
company with legal personality. In terms of registration, Article 212 of the Commercial
Code covers two types of companies among the forms of business organisation. These
are Share Company and private limited company. It has to be underscored that although
Article 211 of the Code defines a business organisation as “any association arising out
of a partnership agreement”, it does not define or describe what is meant by the term
“company” apart from indicating that there are only these two types of companies.

Registration of companies requires the incorporation of their partnership agreement in

the Memorandum of Association and Articles of Association that will govern their
operations. Upon registration, they acquire legal personality to enter into the operational
stage. Once established and registered, the organ registering them, the Ministry of
Trade and Industry or the relevant regional bureau, recognizes their operations
according to the registered memorandum and articles of association.
Should there be any need for amendment, any amendment to these establishing
documents (Memorandum of Association and Articles of Association) has to be agreed
upon by the members/shareholders of the companies and registered at the Ministry of
Trade and Industry in the same manner as the original establishing documents. And, in
the case of share companies engaged in the financial sector such as banking, insurance
and micro financing, these companies have to be registered by the National Bank of
60
Ethiopia to acquire legal personality.

b) Statutory Companies
Statutory companies (also known as “public enterprises” or “State owned enterprises,
SOEs”) are companies that are established by law, as opposed to registered companies
which are established by a memorandum of association. Public enterprises are defined
as wholly State owned enterprises established to carry on for gain manufacturing,
distribution, service rendering or other economic and related activities. These are
companies that are “formed to carry out some special public undertakings, for example,
railways, waterworks, gas, electricity generation, etc.” There are several reasons for their
establishment that include (a) national security for areas such as defence industries
and public transport; (b) revenue raising in particular in events such as where tax
collection is difficult or impossible; (c) economic control and self-reliance; (d) lack of
private investment in undertakings where large-scale investment is required; (e) equity
considerations when private companies fail to function profitably; and (f) the fear of
private monopoly situations. The major characteristics of such public enterprises
include public ownership, public control and establishment by a separate law, having
distinct legal personality, limited degree of autonomy and public finance.

It can be observed from review of the various Regulations establishing various types of
public enterprises in various sectors that statutory companies operate in Ethiopia under
three distinct names, i.e., corporations, enterprises and share companies. Prominent
examples of corporations include the Ethiopian Telecommunication Corporation, and
the Ethiopian Electric Power Corporation, examples of companies established as
enterprises include the Ethiopian Airlines Enterprise, Water Works Design and
Supervision Enterprise, Ethiopian Seed Enterprise and agricultural development
enterprises such as Bale Agricultural Development Enterprise, Arsi Agricultural
Development Enterprise, and Awassa Agricultural Development Enterprise. As regards
State owned share companies, these are forms of share companies that are ‘transitory’
in nature as they are in the process of transformation and are waiting for sale to the
private sector. It must be underscored that the power to convert a public enterprise into
a share company type of business organization resides in the Council of Ministers by
virtue of Article 47(2) (a) of Proclamation No. 25/1992. The capitals of these share
companies are divided into shares and totally held as government shares.

Generally, most aspects of developing value chain have some legal consequences.
Whether the chain is just starting up, expanding, or winding down, it must comply with/
act in accordance with the federal, regional, and local laws that govern the overall
business activities.

Standards in Value Chain

One of the key challenges for development is to reduce rural poverty in developing

61
countries through increasing production and export of agricultural products. However,
changes in the nature of markets and trade for these products in recent years have
created new challenges. Addressing these requires initiatives at multiple levels, in both
developing and developed countries and within the system of international regulations
governing trade. The new challenges arise in the areas of markets and competition and
also from the increasing importance of public and private standards in regulating trade:

1. The increasing importance of large buyers in global food value chains. The
requirements of large buyers (not only retailers but also processors) for quality,
reliability of delivery and product differentiation have raised the level of competence
required of producers and the level of coordination in value chains. In the case of many
non-traditional agricultural exports, issues of product quality and freshness (and hence
time to market), product differentiation and increased processing place great demands
on production systems and may favor large-scale production.

2. Increasing concentration at various points in the value chain, including input suppliers
(seeds, feed stocks, chemicals, input packages for GM products, etc.), Processors and
retailers. This concentration has implications for the questions of access to
agribusiness value chains for small producers, and also the returns producers obtain
from participating in these chains. It raises questions about market structures and
market power, as well as strategies to offset this power: regional branding, geographical
indicators, niche products and alternative marketing channels.

3. The increasing importance of both public and private standards in food industry.
Public, mandatory standards relating primarily to human and animal safety (sanitary and
phytosanitary standards, SPS) have become more extensive and stringent. At the same
time, private sector standards, and in particular standards and developed by coalitions
of private companies and business associations, have become increasingly important
factors in access to marketing channels. Such standards relate to food safety, social
standards and environmental impact.

Different studies analyses these challenges from a global value chain perspective,
examining their implications for policies at both the micro and meso levels (technical
assistance, local institutional capabilities, producer organizations, etc.) and the broader,
macro level of the framework of institutions and policies that regulate agricultural
production and trade, including standards-setting, intellectual property rights and global
competition policy, as well as trade capacity building and trade promotion initiatives.

The global value chain approach places particular emphasis on the coordination of
different actors along the chain of activities involved in the production, processing and
distribution of products. It highlights the linkages between enterprises, how their
activities are coordinated and the role of lead firms in determining what is to be
produced, how and by whom.
62
Clearly, the prospects for developing country producers are not solely determined by the
internal dynamics of global value chains for agricultural products, or even the impact of
standards on agricultural production systems. Production and trade in agriculture are
influenced by quantitative restrictions, tariffs and tariff escalation, which have been at
the centre of multilateral trade talks, with particular emphasis being given to tariffs,
quotas and subsidies for agriculture in the European Union and the United States.
Irrespective of these reforms, poverty reduction in developing countries depends upon
producers being able to take advantage of the market opportunities that arise.

Setting Standards
The SPS agreement emphasizes the need for countries to adopt science-based
standards. The recommended means of doing this is through following standards
approved by international standards-setting organizations such as the Codex
Alimentarius Committee (CAC) and the World Organization for Animal Health (OIE).
These committees work to a scientific agenda, but this does not, by itself, ensure that
the standards affect different countries equally.

Research on the technical product standards developed by the International

Organization for Standardization (ISO) and the International Electro-technical
Commission (IEC) has shown that when a single technical standard is required, there
may be a choice between differing, equally feasible solutions that benefit some
producers more than others.

In agriculture, such situations arise when solutions to particular human, animal or plant
health/safety problems are designed with particular production systems in mind. A
solution that works well in the context of one agricultural system may not work well in
the context of another. While the application of the principle of equivalence should
ensure that different but equally effective solutions are recognized, in practice
equivalence may be difficult or expensive to establish. In the case of regimes for the
import of organic produce into the EU, countries can request to be listed by the
European Commission as having equivalent regimes for certifying organic produce. This
means that produce can be imported directly into the EU if it satisfies the country's own
system. By 2001, only one developing country, Argentina, had secured listing. As part of
its efforts to secure this listing, the Argentine government ruled out group certification,
believing this to be incompatible with EU requirements. This makes it more difficult for
cooperatives and out growers’ schemes obtaining organic certification, or at the very
least increases the cost of doing so.

Challenges for Developing Quality Systems in Value Chains

• Reduction of costs of compliance e.g. transaction costs
• Improvement of public private collaboration
• Harmonization of standards
63
 • Connecting consumers and farmers in a new way
• Dilemma management of standardization versus differentiation
• Creation of better access of developing countries to standardization bodies
• Transparency of value chains
• Improvement of communication about green products

Definition of Quality: When the experiences with a product after buying it, meet the
consumer’s expectations before buying it!”

Quality is defined by the expectation of the consumer: however product quality is made
during production and can only deteriorate afterwards, so keep quality loss as minimal
as possible.
Almost all is controlled by product temperature and communication!!

Quality index cut flowers

• Condition (25%)
• Shape (30%)
• Color (25%)
• Stem and Leave (20%)
Causes of quality problems:
• Mechanical damage
• Physiological processes
• Infection by pathogens

Quality management systems standards

64
Securing social quality
Systems:
1. MPS – Socially Qualified
2. Florverde
3. Ethical Trading Initiative (ETI)
4. Fair Trade
Focus
1. MPS: Working conditions, Health, Safety, Terms of employment
2. FlorVerde: Working conditions, Terms of employment, socio-economic
infrastructural development
3. ETI (UK): Focus on chain, not production, No child labour, No excessive
hours
4. FT: Minimum Fair price, invest in social, economic and environmental
development

Securing Environmental quality

Systems:
1. MPS – ABC
2. EUREP-GAP = QS
3. Organic Production (EEC No. 2092/91)
4. Florverde
Focus

65
 1. MPS-ABC: every 4 weeks recordings on fertilizer, chemical, energy use;
waste management
2. EUREP-GAP (UK) = QS (Ger): Good agricultural practice standards on
fertilizer, chemicals, waste management, recycling water
3. Organic: No artificial fertilizer, no chemicals, no GMO
4. FlorVerde: Minimize production impact by GAP standards

Securing commercial quality

How to succesfully
implementQuality
Management?
Step 1: Analyse
position on life cycle

Grow th
Ma r k e t
focu s

Bir th
Pr od u ction
focu s

Step 2: Analyse Development status

66
Step 3: HHH-analysis

Pr oce d u r e s K n o w l e d ge / Mo t iv a t io n /
of w or k in g in fo r m at io n loy alt y of
av ailab le p e op le

Han ds He ad He ar t

Q u alit y Pe r f o r m a n c e

11 2

Scheme 1: MPS-Q
Focus: Quality assurance of products and services by proper quality and achieving
maximum reliability:
 Understanding and having control over business processes
 Improve of customer relation by being a reliable partner
67
  Achieve structured customer management
 Good exchange of information with customers
Provide clear and reliable product information to customers

Scheme 2: ISO
Focus: Standardization of processes with focus on continious improvement
 A good, workable policy plan, with clear objectives;
 Quality control (Supply of good product to the client?);
 Qualified staff;
 Internal communication configuration;
 Descriptions of all processes within the company;
Continuous checks to feed continuous improvement
Scheme 3: EUREP-GAP
 Traceability
 Record keeping
 Varieties & Rootstock
 Site History & Site Management
 Soil & Substrate Management
 Fertilizer Use
 Irrigation & Fertigation
 Crop Protection
 Harvesting
 Post-Harvesting Treatments
 Waste & Pollution Management, Recycling & Re-use
 Worker Health, Safety & Welfare
 Environmental Issues
 Complaint Form
 Internal Audits

Scheme : FlorVerde
Focus: Standardization of quality factors
 Tracking system
 Post-harvest handling, water, preservatives
 Cold chain management
 Vase life testing
Securing Service
Service is:
Reliability
 Deliver what you promised to deliver
 Time
 Quantity
 Quality
 Take customers seriously
68
  Act upon their complaints and demands
 Give them information

Securing Service, Some directions:

 ISO
 Within its standards it is compulsory to measure customer
satisfaction and to act upon the outcome of the measurement
 Eurep GAP
 Has a complaint form
 Date of complaint
 Who complained? About what?
 Which action is taken? By whom?
 Was the action effective?
 FlorVerde
 Tracking and tracing
Traceability of products can be secured by introducing barcode systems.

69