Value chain analysis

Kaplinsky and Morris (2001) developed VCA as an analytical framework for practitioners based on the global value chain approach. Several non-governmental, international, and research organizations promote and conduct VCAs. Examples of these organizations are World Vision, CARE, and Netherlands Development Organisation SNV, the International Labor Organization (ILO), the Food and Agriculture Organization of the United Nations (FAO), the United Nations Industrial Development Organization (UNIDO), the International Fund for Agricultural Development (IFAD), the World Bank, the International Institute for Environment and Development (IIED) and the International Center for Tropical Agriculture (CIAT).

Value chain analysis, as implemented by practitioners, addresses market development in local, regional, and national value chains, especially with smallholder farmers as the target group (Herr 2007; M4P 2008; World Vision 2016). There are several VCA frameworks that have slightly different perspectives, but most have been based on the work of Kaplinsky and Morris (2001). Some frameworks focus specifically on pro-poor growth (GIZ 2008; M4P 2008), on smallholders (Lundy et al. 2014; Riisgaard et al. 2008), on gender (Agri-ProFocus 2012; Mayoux & Mackie 2007; Terrillon & Smet 2011), on local value chain promotion (World Vision 2016), or on participatory approaches (Lundy et al. 2014; Riisgaard et al.

2008).

Value chain analysis provides analysts and practitioners with a structured, yet flexible framework, to identify the flow of products and interactions between different actors in a value chain. It forces the analyst to consider micro, meso, and macro aspects of production and exchange activities. The analysis of a value chain therefore helps to identify strengths, weaknesses, opportunities, and constraints in the value chain, from an economic as well as an institutional standpoint. This analysis is the basis for developing value chain interventions.

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Value chain analysis has four main components: (i) mapping the value chain, (ii) analyzing the governance structures of the chain, (iii) identification of opportunities for upgrading, and (iv) assessing distribution of benefits in the value chain. There are many case studies following the value chain framework. Dolan and Humphrey (2000) examined the changing governance patterns in the trade of fresh vegetables between Africa and the United Kingdom, while Dolan and Sutherland (2002) highlighted gender and labor conditions in Kenyan horticulture. In another study, Ponte and Ewert (2009) conducted a value chain analysis of South African wine, in terms of upgrading through improved product quality and associated processes.

Mapping the value chain identifies the flow of products, services, and information as well as the actors and the enabling environment, and the linkages between them. The goal is to understand the actors, relationships, and interconnections in order to identify entry points or key leverage points to improve the value chain performance. This provides a visual representation and overview of the actors and transaction patterns in the value chain (GIZ 2008; Lundy et al. 2014; M4P 2008).

Analyzing governance structures is a crucial step to understand the nature of relationships and the coordination mechanisms that exist between actors in the value chain. Value chain governance has been discussed and developed over the past 20 years (e.g. see Gereffi et al.

2005; Gereffi & Lee 2014; Gibbon et al. 2008; Humphrey & Schmitz 2001; Kaplinsky &

Morris 2001; Ponte & Sturgeon 2014) and can be defined as “how certain actors set, measure, and enforce the parameters under which others in the chain operate” (Bolwig et al. 2010: 176). Governance examines how different decisions are made and implemented, how activities are coordinated, and how decision-makers are held accountable. The lead stakeholder in the value chain often has the power to control the terms of participation and thereby influence other actors’ involvement. Socio-structural contexts such as power relations shape economic activity and are central when analyzing governance. The governance structure in value chains specifies what type of product is needed, by whom, how much, when and how it should be produced, and at what price. Governance includes power asymmetry, rule-making, sanctions, and degree of trust and dependence between the different parties (Bair 2009; Kaplinsky & Morris 2001).

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Governance draws on transaction cost economics. This form of economics addresses the factors that determine when it is too costly to rely on market exchange and more efficient to internalize the exchanges within a firm (Coase 1937; Williamson 1979). Based on the complexities of transactions, governance can be categorized from open market coordination to hierarchies. In a similar manner, Gereffi et al. (2005) elaborate on the earlier literature of transaction cost economics from a sociological perspective, developing an expanded typology based on capabilities of the supply-base, complexity of transactions, and ability to codify transactions. The typology ranges from i) classic markets, with fairly simple products where price is the driving factor in an open market, to ii) modular value chains where suppliers with high capability more or less independently produce complex products for buyers, to iii) relational value chain governance with complex products requiring close interactions between buyers and sellers leading to mutual dependence and high level of asset specificity, to iv) captive form of governance where suppliers with limited capability are highly dependent on larger buyers. The last type, v) hierarchical governance, is characterized by vertical integration which is common when products and transactions are so complex that producing them in-house is the best solution. The degree of explicit coordination and power symmetry ranges from low in classical markets to high in hierarchies (Gereffi et al. 2005). When developing complex agricultural value chains, paying attention to coordination and lowering transaction costs is central to achieve competitiveness. Hence, governance is closely linked with upgrading, and sets the conditions for where and how upgrading can take place, as well as the implications of the interventions.

Identification of opportunities for upgrading – also referred to as strategies for adding value – is the intervention step of VCA. There are many different definitions of upgrading a value chain. Pietrobelli and Saliola (2008: 5) state that upgrading is “innovating to increase value added”. Kaplinsky and Morris (2001), on the other hand, emphasize the importance of seeing upgrading in a wider perspective and as being distinct from innovation. Another definition is offered by Mitchell et al. (2009: 8) which defines upgrading as the “means [of]

acquiring the technological, institutional and market capabilities that allow our target group (resource-poor rural communities) to improve their competitiveness and move into higher-value activities,” which is a specific definition focusing on the human aspect of higher-value chain upgrading. In this paper, the definition that will be used is offered by Riisgaard et al. (2008:

7): “Upgrading can be defined broadly as a positive or desirable change in chain

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participation that enhances rewards and/or reduces the exposure to risks”. This is accomplished by identifying high leverage points for change in the value chain.

There are numerous approaches to upgrading a value chain. Kaplinsky and Morris (2001) identify four types which are often discussed in the value chain literature, namely process upgrading, product upgrading, functional upgrading, and chain upgrading. Process upgrading focuses on improving the efficiency of internal and external processes within individual nodes and/or between nodes in the value chain. Examples of this are processes that ensure timely deliveries, collection of quality produce, or improved marketing of a product (Kaplinsky & Morris 2001). Organizational restructuring, collaborations, or capability building are ways to achieve process upgrading. Product upgrading refers to improving existing products and/or developing new ones. Product upgrading is closely linked to process upgrading, because changes in products often lead to changes in processes.

Functional upgrading is achieved when a firm changes one’s position within the chain to add value. An example of this can be farmers who start processing in addition to producing vegetables. Finally, chain upgrading involves moving to a new chain altogether. If it turns out that participating in one chain is not profitable, farmers may look for other options.

Smallholders often have a diversified livelihoods strategy and they might refocus from one crop to another, for example. But high barriers of entry into new value chains might limit their options (Kaplinsky & Morris 2001; Mitchell et al. 2009).

Assessing the distribution of benefits is the last step in VCA. This focuses on who gains and who loses in value chains. One approach is to observe who can participate, and the terms of participation, in terms of inclusive value chain development. Noticing where there is an increase in income is a common way of assessing benefits. Another approach is to calculate how added value is distributed among chain participants to address how much of the value goes to the smallholders versus the traders or the processors (GIZ 2008; Kaplinsky & Morris 2001). More secure market linkages and access to new services are also potential benefits from value chain interventions. Benefits in the value chain can be assessed when conducting the initial VCA, or after implementing upgrading strategies. However, assessing the impacts of value chain interventions can be challenging, owing to the complexities of value chain activities and relations which are constantly changing –even without any targeted value chain intervention (Humphrey & Navas-Alemán 2010).

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