GAMBELLA UNIVERSITY

College of Agricultural Science

Department of Agribusiness and Value Chain Mgmt

Value chain Analysis and Development

ABVM (232)
By: Ayantu.G
Topic One: Introduction
Basic concepts of Value Chain

Many use the terms “value chain” and “supply chain”

interchangeably; however, we differentiate these two
terms.

Supply chain: the physical flow of goods that are required for
raw materials to be transformed into finished products.

 Supply chain management is about making the chain as

efficient as possible.
Cont.
Figure 1. Supply chain
Value chain:
A value chain refers to: an entire system of production,
processing and marketing from inception to the finished
product.

 It is a full range of activities that are required to bring a

product (service) from conception through the different
phases of production to delivery to final consumers and
disposal after use.

It consists of a series of chain actors, linked together by

flows of products, finance, information and services.
Cont.
A value chain is a group of companies working together
to satisfy market demands.

Figure 2. Basic value chain map

Table 1. Supply chain vs value chain
Supply chain (mainstream SC, conventional SC) Value chain (value-based SC)

Mainly product oriented Mainly consumer oriented. Take in to account

consumer interest.
Competitive and adversarial. No or less cooperation. Combine cooperation with competition to achieve
Seek to buy as cheaply and sell as expensively as advantages in the market place. Cooperation
possible. within the value chain, competition with other
value chains.
Business relationships are framed in win loss terms (pie Business relationships are framed in win- win terms
sharing) with in partners (pie growing)
Benefits and profit are not evenly distributed across the Welfare of all partners is taken in to consideration
supply chain. Processors and marketers usually receive including appropriate profit margins and long-term
disproportionately higher share business agreements.

Farmers are often operating in restriction markets or Farmers are strategic partners with rights and
under short term contract; bear much responsibilities related to information,
of the risk; and may be treated interchangeably (and risk taking,governance and decision making
exploitable) in put suppliers.

Lack of trust among marketing channel members High level of interdependence and trust

Tactical and operational processes Strategic interest in the performance and well-
being of other partners
Internally focused on the creation of physical good view on organization from the customer’s
perspective-the integration of goods and services
to create value.
Value Chain Mgt Vs Supply Chain mgt

• The main objectives of value chain management are to

deliver quality as desired by the consumers.

• Focus is on Pie-Growing, Coordination, Continuous

Improvement & Innovation.
-------------------------------------------------------
• The main objectives of supply chain management are to
maximize capacity utilization.

• Focus is on Pie-Sharing, Capacity and Profit

optimization, maintaining status-quo.
Cont.
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, value chain is concerned with a

complex range of activities implemented by various
actors (e.g. primary producers, processors, traders,
consumers).
Cont.
The key issues for successful value chain are good
information flows and good communication across
the chain and they are demand driven, not product
driven.

Value chain involves a chain of activities that are

associated with adding value to a product through the
production and distribution processes of each activity.

The underlying purpose of every organization is to

provide value to its customer and stakeholders. Value
is what makes something desirable.
Cont.

What makes something desirable?

Things that make something attractive/pleasing 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.

Value adding activities includes:
 Bulking
 Cleaning
 Drying
 Sorting
 Processing
 Storage
 Packaging
 Labelling
 Branding
Cont.
One of the simplest functional forms of value is:
Value = Perceived benefits/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 perceived benefits while holding price or cost
constant,
(b) increase perceived benefits while reducing price or
cost, or
(c) decrease price or cost while holding perceived benefits
constant.
Cont.
Generally, 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
accessed independently is gathered and shared.
cont.

In general, the value chain of most agribusinesses looks

like the following.
Input supply -----> Agricultural production ----> first level
handling -----> Processors > Wholesalers/distributors ---->
Retailers > consumers

A value chain is broader in scope than a supply chain,

and encompasses all pre- and post- production
services to create and deliver the entire customer
benefit package.
Cont.
Figure 3. Pre and post service view of the value chain
Cont.
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.
cont.

Figure 4. Porter generic value chain model

 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 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.
• Location of distribution facilities
• Warehouse layout and designs
Cont.
 Operations: Are the value-creating activities that
transform the inputs into the final product.
o Associated with transforming inputs into the final
product form
o Efficient plant operations
o Incorporation of appropriate process technology
o Efficient plant layout and workflow design

Outbound Logistics: The activities required to get

the finished product to the customer, including
warehousing, order fulfillment, etc.
Outbound Logistics (cont. )
• Associated with collecting, storing, and distributing the
product or service to buyers
• Effective shipping processes to provide quick delivery
and minimize damages
• 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.
Marketing and sales(cont.)

• 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.

• Proper identification of customer segments and needs

cont.

 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
o Quick response to customer needs and
emergencies
o Quality of service personnel and ongoing training
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.

o 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.
cont.
 Procurement: The function of purchasing the raw
materials and other inputs used in the value-creating
activities.
o Procurement of raw material inputs
o Development of collaborative “win-win”
relationships with suppliers
o Analysis and selection of alternate sources of
inputs to minimize dependence on one supplier
cont.
 Technology Development: Includes research and
development, process automation, and other technology
development used to support the value-chain activities.
o Related to a wide range of activities and those
embodied in processes and equipment and the
product itself
o Effective R&D activities for process and product
initiatives
o Positive collaborative relationships between R&D
and other departments
o Excellent professional qualifications of personnel
cont.

 HRM: The activities associated with recruiting,

development, and compensation of employees.
o Effective recruiting, development, and retention
mechanisms for employees
o Quality relations with trade unions
o Reward and incentive programs to motivate all
employees

 Firm Infrastructure: Includes activities such as

finance, legal, quality management, etc.
Cont.

o Effective planning systems

o Excellent relationships with diverse stakeholder
groups
o Effective information technology to integrate value-
creating activities
o Typically supports the entire value chain and not
individual activities
 Value Chain Actors
A value chain is made up of a series of actors from input
suppliers, producers and processors, to exporters and buyers
engaged in the activities required to bring product from its
conception to its end use (consumption).

Actors are usually defined through their input-output

transformations and inter-actor transactions.

Can be a corporate person, a natural person or other entity, that

is able to influence its direct surroundings

28
 Three levels or Stages (based on their roles)

I. Value chain main actors

Directly deal with the products
They involves in producing, processing, trading and owning the
produces
Actors in a value chain may include
 Input suppliers

 Producers

 Itinerant collectors

 Assembly traders

 Wholesalers

 Retailers

 Processors

29
Contd..
II. Value chain supporters
Never directly deal with the product, but whose services
add value to the product.
Play supporting role to enhance the operation of the
different stages of the value chain and the chain as a whole
Can be grouped into
 Infrastructural services
 Production and storage services
 Marketing and business services
 Financial services

30
Contd..
Basic infrastructural services include market place
development, roads and transportation, communications,
energy supply, and water supply

Production and storage services in value chain include input

supply, genetic and production material from research, farm
machinery services and supply, extension services, weather
forecast and storage infrastructure

31
Contd..
Marketing and business support services include market
information services, market intelligence, technical and
business training services, facilitation of linkages of producers
with buyers, organization and support for collective marketing.

Financial services include credit and saving services, banking

services, risk insurance services, and futures markets.

32
Contd..
III. Value chain influencers
These include the regulatory framework, policies, etc.

Specific policy and regulatory service elements influencing

value chain performance include land tenure security, market
and trade regulations, investment incentives, legal services,
and taxation

33
 CHAPTER TWO

Value Chain Analysis

34
TOPIC 2. VALUE CHAIN ANALYSIS (VCA)

Value chain analysis describes the activities within and

around an organization, and relates them to the analysis
of the competitive strength of the organization.

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.

Value chain analysis is useful for identifying constraints

and opportunities for the provision of financial services.
Cont.

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
Analyses agriculture–industry linkages
Analyze income distribution
Analyze employment issues
Cont.

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.
It is the base for
 Value chain improvement
 Value chain development(complete new value chains)

Facilitates improved understanding of competitive challenges

It is useful for identifying constraints and opportunities for the

provision of financial services.

Relationships and coordination

Governance issue

38
Contd..
There are four major basic concepts in agricultural value chain
analysis

A. Understanding the value chain and context

B. Development of interventions and innovations

C. Testing and implementation

D. Evaluation and recommendations for improvement

39
Key issues to be addressed
Share of benefits and costs

Distribution of added value along the chain.

Market share of the different actors

Institutional and legal framework

Growth potentials (nodes with market potential).

Infrastructure development.

40
Contd..
Potential for;
 Poverty reduction and rural income generation

 Sustained food supply at affordable competitive prices

 Maximization of returns on capital investment

 Strengthening sector and regional complementarities and

interdependence through implementation of horizontal and
vertical integration approaches

41
 Purposes of value chain analysis
The primary purpose of value chain analysis, however, is to
understand the reasons for inefficiencies in the chain

To identify potential leverage points for improving the

performance of the chain, using both qualitative and
quantitative approaches

It is increasingly used by donors and development assistance

agencies
 To better target their support and
 Investments in various areas

42
 Steps in Value Chain Analysis
It requires four interconnected actions:

1. Data collection and research

2. Value chain mapping
3. Analysis of opportunities and constraints
4. Vetting of findings with stakeholders and recommendations for
future actions.

These four actions are not necessarily sequential and can be

carried out simultaneously

43
Step 1: 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.

44
Contd..
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

45
Contd..
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.

46
Contd..
The qualitative data 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
o distribution of value-added,
o profitability, productivity, production capacity and
o benchmarking against competitors.

Analyzing these factors highlights inefficiencies and areas for

reducing cost.
47
Step 2: 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.

48
Contd..
Porter distinguishes between primary activities and
support activities.
Primary activities are directly concerned with the creation
or delivery of a product or service.
Grouped into five main areas:
 Inbound logistics
 Operations

 Outbound logistics

 Marketing and sales

 Service.

49
Contd..
Four main areas of support activities:

 procurement

 technology development (including R&D)

 human resource management

 infrastructure

50
Contd..
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.

Maps are also used to identify information gaps that require

further research.

51
Cont

Figure5: A comprehensive value chain map

 Step 3: Analysis of Opportunities and Constraints
Using the Value Chain Framework
The framework is a useful tool to identify systemic chain-level
issues rather than focus on firm-level problems

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

53
 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
2. Business and enabling environment
3. Vertical linkages between firms at different levels of the
value chain
4. Horizontal linkages between firms at the same level of the
value chain
5. Supporting markets

54
cont.
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.
cont.
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.
cont.
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.
E.g. cooperatives.
cont.
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 competitiveness since upgrading is dependent on
knowledge of what the market requires and the potential
returns on investments in upgrading.
Cont.
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.
 Step 4: Vetting Findings of Chain Analysis
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 __to bring participants.
The goal is to have these participants—to develop and assist in
implementing a private sector-led competitiveness strategy.
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.

61
Contd..
Firms form networks

Can be directed networks; governed by lead firms.

The lead firms do not merely buy goods in the market.

 Specify what is to be produced by whom
 Monitor the performance of the producing firms

62
Contd..
In some cases, the networks are directed, or “driven”, by large
producers such as transnational corporations or other large
integrated industrial enterprises.

Some chains are characterized by vertically integrated firms.

In these cases, firms, acting through their own decision-making

hierarchy, can directly control chain activities

63
Contd..
Value chains can best be described as balanced networks

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

64