11 value chain unit two.ppt
- 1. Lesson objectives At the end of this lesson, you will be able to: Explain Triggers for value chain development Identify Principles of empowering smallholders List down Drive of The Value Chain Approach
- 2. Drive of The Value Chain Approach There are a number of significant trends that are now driving the need for operations oriented analysis from a value chain perspective. These include A. Increasing competition and the primacy of strategy • The value chain is first and foremost a strategic concept, arising from a strategic theory of firm competition. • As companies struggle to compete in an environment of globalization and intense competition, the focus shifts to alternative means to remain competitive. 6
- 3. This creates an increasing interest in Value Chains as a tool to model the extended enterprise and formulate strategies for how to remain competitive.
- 4. B. Evolving governance models for the extended enterprise The information era spurred on by the recent focus of capital investment on internet technologies and “dot- com” business models has increased general business and research interest in alternative value chain and business models. This has been promoted in the research literature by the focus on Core Competencies and the Resource Based View (RBV) of the firm.
- 5. C. Globalization of supply and production • With the growing division of labor and the global dispersion of the production of components, system competitiveness has become increasingly important. • Value chain analysis plays a key role in understanding the need and scope for systematic competitiveness. • The growth in global sourcing and supply has begun a long-term process of leveling the playing field for adding value worldwide.
- 6. • This leads to the need to model global value chains as the predominant mode of business in many industries.
- 7. D. Many benefits already wrung out of manufacturing and the supply chain • Efficiency in production is only a necessary condition for successful penetrating regional and global markets. • Improving the operational capability of other value added activities in the enterprise, such as product development, requires shifting perspective from the supply chain to the value chain.
- 8. E. Trends in management discourse • Another reason is the nature of management fashion trends in academic and management discourse. • This is a lifecycle process revealing how management knowledge entrepreneurs participate in the creation of trends in discourse.
- 9. F. Dynamism of markets and innovations • In addition, in many developing countries there is heavy emphasis on the commercialization of smallholder production system; production is increasingly becoming market oriented. • In order to reap the medium benefit, it is important to understand the nature, structure and dynamics of value chain related to the various enterprises produced by smallholder farmers. • Given the new agricultural innovation system perspective, not only do we need to understand the dynamic but should also focus on the enabling environment, facilitating institutions as well as facilitating services associated with a given value chain.
- 10. In addition to the above driving forces for the development of value chain perspective for approaching the circumstance, there are particular changes in the developing world for the development of value chain perspectives. • Rapid changes in the social and economic environment are challenging smallholders to supply their products to the market and their ability to improve their families’ livelihoods. • These changes include: – • Market liberalization and integration – • The rise of the retail sector and processors – • The decline of government support for and intervention in agriculture and rural areas.
- 11. 1. Market liberalization and integration • Over the past 20 years, new trading policies have liberalized and integrated markets. • Some farmers have benefited. • But many farmers in developing countries have seen their incomes fall. • Their terms of trade (the price of what they sell compared to what they buy) have declined steadily as prices of agricultural commodities have fallen compared with manufactures.
- 12. • The integration of world markets, or “globalization”, has formed closed supply networks. Buyers and sellers sign contracts to produce and trade a wide range of specialized products. Why small holder farmers victims of globalization? • For example, a buyer may want to purchase a specific variety of tomato, grown to strict specifications and packaged in a certain way. • The buyer may negotiate a contract directly with a grower, rather than buying through a trader.
- 13. • This new organization of supply chains is unfamiliar for many African smallholders. • It is very different from the conventional, arm’s-length trade in undifferentiated commodities such as maize or wheat, which may involve many intermediaries, and where the buyer may not know who the producer is. • It is accompanied by a market concentration, with a small number of powerful transnational companies dominating large parts of the agri-food system. • Small-scale producers and processors have little market power in comparison.
- 14. 2. The rise of processors and retailers • The rise of the food processing and retail sectors has compounded market concentration. • Buying power is now concentrated in the hands of a small number of food processing firms and supermarkets that have significant power over producers and other actors in the supply chain. • The supermarkets enforce exacting standards for the produce they buy. • They want their beans to be a uniform length and their mangoes to ripen at exactly the right time • They have developed new private standards and rules, and have created certification and auditing systems to make sure they get the product they want.
- 15. • These rules enable the supermarkets to sell what consumers want – and to be left with as little unsaleable produce at the end of the day. • The supermarkets pay growers attractive prices to ensure they get produce of the right quality. • But the rules are hard for smallholder farmers to comply with: they lack the right technology and management skills. • So smallholders are being squeezed out of a lucrative market.
- 16. 3. Declining government involvement in agriculture and rural areas • Structural adjustment programs (SAP)have meant that developing country governments have significantly reduced their support to farming communities. • Investments in rural infrastructure (roads, electricity, telecommunications), input subsidies, marketing schemes, and services such as extension and research have all declined. • In the past, most African governments provided services to farmers and rural areas through commodity marketing boards and state-supported cooperative movements.
- 17. • The decline of these institutions has hampered economic development as well as farmers’ access to local markets. • As a result of these changes, the majority of smallholder farmers in developing countries are now less organized than before. • They are trying to increase their production in the face of reduced inputs and declining prices. • This increases the supply of low-quality goods onto the market, which further suppresses prices. • This situation is “Cochran’s treadmill” (Cochran 1979): more farmers supply more products into a market where prices are steadily falling, natural resources are being degraded and poorly managed farming systems are spreading into increasingly marginal areas.
- 18. The challenge for smallholder producers • To address this situation, development agencies, donors and NGOs are placing more emphasis on enabling farmers • to increase their level of competitiveness, • to produce for an identified market, rather than trying to sell what they have already produced and also • seeking new market opportunities that offer higher levels of income. • These goals can be achieved through better economic coordination and institutions. • Farmer organizations can play a key role of organizing economic activities beyond local boundaries. • What is the importance of FO in relation with value chain?
- 19. • They can build up relationships with various chain actors and create commitments from various actors to cooperate on mutually beneficial actions and investments and thus create value chains . • Market information- A group finds it easier than individual farmers to obtain the information that members need to grow for a particular market. • At the same time, other chain actors find it more attractive to deal with a group than with numerous small-scale producers. • Capital and skills: The group can pool their resources, access credit and services to develop the technology and skills needed to produce more sophisticated products. • A group is more able than an individual to take risks.
- 20. • Volume- The group can grow enough produce to meet a buyer’s volume requirements. The buyer can deal with the group as a whole rather than with individual farmers. • Quality- A group can set rules specifying quality standards, and can appoint members to enforce them. The group can access extension and marketing advice that would be impractical to provide to individual farmers. • Consistency of supply: A group finds it easier than an individual to ensure a consistent supply of produce in terms of volume and quality. Group members can organize among themselves to grow crops that mature at staggered times, so ensuring a continuous supply for the buyer.
- 21. Principles of empowering smallholders Empowerment is vital for sustainability. Confronted by short project timeframes and limited funding, development organizations often make the mistake of trying to intervene too much – for example, by taking over management of the chain, rather than enabling the farmers’ organization (or other players) to do it themselves. When the project finishes and the development organization withdraws, the value chain is left without a key link, so it collapses. So what do development organizations do?
- 22. • Intermediary organizations should aim instead to support farmer organizations to strengthen their capacity to manage chains or chain activities. • They should embrace the following principles before engaging smallholders in a value-chain development process. • This may help ensure that interventions target development objectives such as equity, gender, sustainable development, and poverty reduction.
- 23. The principles empowering smallholders are the following : 1. Sustainable businesses 2. Equity 3. Inclusion and exclusion 4. Gender responsiveness 5. Social responsibility
- 24. 1. Sustainable businesses • Successful intervention in a chain involves promoting sustainable business models. • This means that the various actors in the chain must all be able to make a sufficient profit. • After an initial period of assistance, each of the actors in the chain must be able to act on their own, without continuing long-term outside subsidies or other forms of support. • A business model that does not generate sufficient profit on a sustainable basis for each of the actors, or that relies on continuous outside support, is doomed to fail in the long term.
- 25. 2. Equity • Equity means ensuring that the economic gains in value chains are fairly distributed among the various actors. • It is necessary to take into consideration aspects such as return on investments and the bargaining power of the various actors. • Returns should be proportionate to the level of effort and risk that the actors assume. • Smallholder farmers should be treated as rational business people who require empowerment to be able to negotiate a higher economic return.
- 26. • 3. Inclusion and exclusion • Value chain development should not be seen as a social policy to include everyone. • It is targeted at particular players – those who have the potential to generate wealth by producing and processing specific products that the market demands. • Inclusion – and exclusion – are a necessary part of such a “game”. Smallholders must be able to meet market conditions if they are to become players in this game. • Not everyone can grow a particular specialist crop (that would merely flood the market). • Not all farmers will have the right type of soils, own enough land, have land near enough to a road, or possess the necessary skills to grow a certain crop. • Where is the limitation of our farmers cooperative/organization?
- 27. • They may not be able to organize themselves into groups, and they may not be interested in doing so. • That does not mean that development agencies should focus on the more fortunate members of society, a “chosen few”, and ignore the rest. • That would reinforce the divisions in society rather than helping create broad-based opportunities (see Pro-poor value chain development below). • Rather, it means that strategies to promote inclusion should focus on building the farmers’ organizational and management skills and supporting farmers to realize where and how they can sustain a profitable business.
- 28. 4. Gender responsiveness • Although women do the majority of farm work in Africa, they are relatively poorly served by development agencies. • There is a danger that women and other vulnerable groups are excluded by default from new, potentially profitable opportunities. • It is a challenge to overcome the inherent gender biases in society, culture and organizations.
- 29. Gender responsiveness…. • Steps are needed to ensure that women and other vulnerable groups (such as young people, elderly people, and people living with HIV/AIDS) are given the opportunity to participate in and contribute to such initiatives. • Ideally, interventions should provide opportunities for various segments in society: men and women, young and old, privileged and underprivileged.
- 30. • Specific interventions to support the needs of disadvantaged groups are often appropriate. • Such groups typically have limited access to and control over resources, so are less likely to benefit from new opportunities. • The intermediary organization should check which groups (in terms of wealth, sex, age, etc.) control what resources. • This will help them understand how decisions are made at household level – for example, how are decisions made on what crops to produce, when to sell, and what to grow for the family’s own consumption? • Understanding this will enable interventions to be designed and targeted properly.
- 31. • 5. Social responsibility • Promoting value chains often involves difficult issues of social responsibility. • For example, many farmers think that children are the best pollinators of crops such as vanilla. During pollination season, they may take their children out of school for weeks or months so they can work on the farm. • The family may earn more money, but at the price of poorer education for the children. • So should development agencies promote vanilla? This is not just an issue for NGOs and government agencies, but also for private firms engaged in value chains. • Irrespective of the size of the enterprise, they should pursue a socially responsible agenda.
- 32. Triggers for value chain development 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.
- 33. Triggers for value chain development 33 Source: ILO, 2007 •The five triggers are the means by which to achieve value chain development. •Using them as a methodological framework helps to identify opportunities and constraints to making the local target sector more competitive and integrate it more effectively into value chains and markets
- 34. I. System efficiency • Opportunities exist to lower costs and increase efficiencies in the market if value chain stakeholders work together. • Buyers want to buy products at the lowest possible price at the highest possible quality; they want quick and flexible responses to their orders and short delivery times. – In order to achieve these market requirements, all opportunities for increasing system efficiency need to be explored – and this requires cooperation and coordination of activities amongst value chain stakeholders. 34
- 35. • Smallholder producers mostly face difficulties in applying efficiency criteria to their activities: – usually they are part of very extensive value chains with many intermediaries adding high costs and resulting in economic waste; – they cannot achieve economies of scale, because they are not organised properly and production is on a small-scale and often scattered throughout a larger area; – they are too small to appear on the map of large buyers; – they have no access to information about market requirements or knowledge about new technologies and production methods. 35
- 36. • We therefore need to look at: – how stakeholders communicate with each other; – their relationship to each other; – where in the chain it comes to unnecessary delays and costs; – how information and knowledge is passed down the chain; – what kind of services are provided within the chain; – the role of every value chain stakeholder; – how reliable and flexible stakeholders react to orders etc. • 36
- 37. • The following questions can be asked to smallholders to assess market and system efficiency. 37
- 38. 38
- 39. II. Product quality and specifications • Markets today are changing fast and competition is becoming increasingly fierce. • If smallholders want to participate and stay in the market, they need to make sure that their products and services meet continuously changing market requirements and demand conditions. • What counts, is the end product that the consumer receives, and the level of satisfaction that it creates. 39
- 40. • There are a number of questions that we need to look at when it comes to product quality and specifications. – Are there any international standards that we need to observe, when we enter into export markets with a particular product (e.g. ISO norms, Health standards such as HACCP, Good Agricultural Practices (GAP) or Good Manufacturing Practices (GMP))? – Does the product comply with these standards? – What are the demand conditions with regard to product quality, design and price? – Does our product fulfill the buyers’ demand? – How do we present our product? – What kind of packaging do we use? – Do we provide sufficient customer service along with a product that we sell? 40
- 41. III. Product differentiation (competition) • Consumers are always demanding new products that require value chain partners to share information and systems. • These products often require consistently high quality, proof of adherence to protocols and legislated standards throughout the production, processing and marketing channels. – The better stakeholders cooperate along the value chain and coordinate their activities, the harder it will get for competitors to copy the product and the production process – because it is not just the product they need to copy, but the entire system. 41
- 42. • It is therefore crucial to know who your competitors are, what they are doing and how they are doing it. • What is the price of their product on the market? • How are they perceived by the buyers compared to your local target sector? • What is your local competitive advantage? • And how can you use this competitive advantage to increase the market share of your local sector? – Public Private Partnership is essential to help producers/producer groups develop differentiated products that are able to compete with others on the market. 42
- 43. The following are some of the questions to be asked for producers to assess product differentiation 43
- 44. IV. Improve social and environmental standards • Consumers are increasingly becoming more conscious of social and environmental standards and are increasingly demanding products that fulfill these requirements. • The “green revolution” sees consumers increasingly demanding organic products and consumer goods that ensure high environmental standards. – If they ignore this demand, they will simply loose the market to those competitors who do comply with social and environmental standards. 44
- 45. V. Business environment • Every value chain and every enterprise operates in a business environment that consists of mainly two dimensions - Immediate environment and wider environment. – The immediate environment - market conditions, existing regulations and administrative procedures and interventions carried out by public service providers or development agencies – directly interact with the enterprise and affect its performance. – The wider environment- monetary and fiscal policies determine stability of prices and the availability of low-interest credits; school education and vocational training lay the foundation for a national economy to develop itself and compete with other countries; infrastructure greatly influences the availability of production factors, delivery times and costs. 45