Implementing the Value Chain Approach
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Contents |
Facilitating Changes in Firm Behavior
Implementers of the value chain approach aim to set in motion a process of continual upgrading among the actors in a value chain without themselves becoming a part of the chain. Direct interference in the value chain typically threatens sustainability, drives service providers into the donor market, and isolates MSEs from market-based actors. By contrast, the value chain approach seeks to facilitate changes in firm behavior that increase the competitiveness of the chain and generate wealth for all participating firms, thereby contributing to economic growth with poverty reduction.
Changing firm behavior requires an understanding of the incentives of the various stakeholders—why they behave in the way they do, and what is needed to motivate them to change their behavior. Implementers of the value chain approach identify firms within the industry with the incentives, ability and willingness to address constraints and facilitate upgrading throughout the chain. They then work to assist such catalytic firms to understand the potential advantages for themselves of intervening to increase the competitiveness of the chain.
To ensure facilitation activities are leading to the intended changes in behavior, value chain development projects need to establish a knowledge-based management system that actively monitors behavioral change and questions the continued appropriateness of project activities. This process of monitoring and redesigning activities will be ongoing since market dynamics and inter-firm relationships are constantly changing.
When incentives or resources do not exist within the industry, or are inadequate to relieve a constraint or drive the upgrading needed for increased competitiveness, an explicit exit strategy should be developed for project interventions. Interventions may be designed to:
- demonstrate the potential of an upgrading initiative;
- reduce the risk to firms investing in upgrading; or
- accelerate the scaling up of an upgrading initiative.
Once the purpose of the project intervention has been achieved, the direct involvement of the project in the value chain should cease.
Transforming Relationships
Shifting the Balance of Power
Activities that can shift the balance of power include:
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By making the benefits of win-win relationships explicit to stakeholders, some firms can be encouraged to change the way they relate to others. However, sometimes conflicting incentives and high levels of mistrust diminish the effectiveness of such simple appeals to self-interest. Other strategies to improving the quality of relationships include:
- using trusted intermediaries;
- establishing standards and increasing transparency;
- shifting the balance of power within the chain (see text box); and
- employing risk-sharing mechanisms.
Value chain development projects operating in environments characterized by high levels of mistrust may need to start with small initiatives that create quick and visible impact to help actors recognize the benefits of collaboration.
Targeting Leverage Points
Value chain project implementers target points of leverage that have a multiplier effect on interventions in order to maximize impact and outreach. Points of leverage include the following:
- Economic structures—product or service aggregation points and actors with the ability to influence large numbers of stakeholders (e.g., lead firms, traders, input suppliers).
- Social structures—respected community members, chiefs and elders who are able to influence others to collaborate or to adopt new techniques, technologies, services or inputs.
- Commercial incentives—competition and/or firm strategies that can be used to pressure buyers, traders and others to change predatory or abusive behavior.
- Social incentives and norms—social factors that influence decision-making, particularly at the MSE level.
Empowering the Private Sector
The goal of the value chain approach is to enable private-sector stakeholders to act on their own behalf: to upgrade their firms and collectively create a competitive value chain that contributes to economic growth with poverty reduction. If sufficient leadership exists within a value chain, project implementers can provide stakeholders with the information they need to develop and take ownership of a strategy to compete in particular markets. At a minimum, stakeholders need to buy into the competitiveness strategy, taking responsibility for and committing their own resources to completing necessary upgrading activities, and recognizing the need at some level to collaborate—as well as compete—with other firms in the value chain.
The value chain analysis and strategy development process is therefore participatory to the extent possible. Information on the chain is gathered from industry stakeholders and key informants, synthesized, analyzed and presented back to the actors in the chain for ground-truthing. Stakeholders are assisted to understand the information and its implications for the industry. To encourage stakeholders to invest strategically, implementers of the value chain approach look first at the opportunities in the end market, and then consider the constraints to exploiting these opportunities. While information about constraints originates primarily with firms, the focus of value chain analysis is on the performance of the chain as a whole since individual firms can not succeed over the long term if the value chain in which they operate is uncompetitive.
Throughout this process, the role of the donor and implementing partner is to facilitate and support implementation of the competitiveness strategy by the private sector in such a way that ensures that development objectives—economic growth, poverty reduction and other concerns such as sustainable natural resource management—are also met.
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