Strategic Factors
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End Markets
End markets are the starting point of the value chain approach. End market analysis focuses predominately on current production capacity of the chain in the country studied and its ability to respond to end market demand. End market analysis must not be limited to regional or national demand. Even if the value chain product is not exported, cost, standards and knowledge of its world-wide production and consumption will lead to a better understanding of global markets and what buyers require.
End markets define the universe of opportunities for placing the product in those markets. The markets include international wholesalers and retailers, as well as national and local buyers. The end markets define the attributes of the product allowing one to understand how much work is needed to place the product into a more competitive posture. It is through the analysis of end markets that we are able to identify the investment needs that will drive chain upgrading.
Business Enabling Environment
Chains operate in a business enabling environment that can be at once global, national and local. The business enabling environment defines the boundaries or limits of the opportunities presented by looking at end markets. The analysis must look at the enabling environment from several levels; the international enabling environment requires one to investigate conventions, treaties, agreements, and market standards that engage a country or require it to abide to norms and standards applicable to the studied value chain. This includes researching the extent to which the country is signatory and bound to bilateral and multilateral conventions. While trade agreements, such as the Lomé Convention or AGOA can open opportunities for firms, international standards such as EurepGap and USDA’s APHIS program can as well close the same opportunities.
Information for the analysis is needed on other levels, including on national and local policies, duties, business licensing procedures, enacted regulations and the state of public infrastructure. In Guatemala, national export policies imposed tariffs that reduced the ability of craft exporters to compete on a global market. On a local level, poor local government operations and infrastructure and poor enforcement of legal and regulatory regimes increases transaction costs that limits investments and upgrading incentives. In Madagascar, lack of local investments in farm to market infrastructure over the years significantly reduced the production and resulting drop of export of lima beans, which at one time had made Madagascar a key supplier of lima beans to the US.
While overall, international, national and local the enabling environments define boundaries to end-market opportunities, they also permit can point to the constraints they impose on MSE. The analysis process must determine whether and how the business enabling environments facilitate or hinder the performance of the value chain, and if they hinder, where can they be improved?
Relationships
The Relationship: The analysis looks at how firms interact with each and how power, learning and benefits are distributed within a value chain. Understanding the relationships helps to understand why there are constraints and how and by whom they can be resolved.
Inter-firm cooperation looks at vertical linkages and horizontal linkages among value chain firms and individuals. Vertical cooperation considers the quality of relationships among vertically linked firms up and down the value chain. These relationships, which can be analyzed in terms of knowledge sharing, skill transfer and trust, form the basis for growth and expansion of the value chain. If it is determined that in the studied value chain there is little or no knowledge sharing between producer and collectors/first line traders, or if there is a lack of confidence between the two levels, there are chances transaction costs will be high and the small producer, with little or no information of what the raw product will be used for in the destination market might disregard quality standards. On the other hand the buyer of the raw product may have a vested interest in helping SME producers and thus inform or provide training to the small producer in meeting production standards requiring new skills. In conducting the analysis we want to determine if there are signs of win-win situations among functional levels and firms. Click here for an example of vertical and horizontal relationship analysis.
Gathering information on horizontal collaboration includes looking at firms performing in the same functional line, such as all the collectors of milk in a dairy value chain. One of the objectives of the analysis would be to look for signs where collaborative bargaining power could reduce the cost of large milk container or small mobile refrigeration units for industry-wide collectors. Another perspective of horizontal collaboration would be to see if there is awareness among same function firms and individuals to seek for efficiencies of inter-firm collaboration in order to compete in a global market. Click here for an example of horizontal collaboration.
Supporting markets: Supporting markets play an important role in firm upgrading. They can be analyzed individually, but it is best to look at them as whole to understand the dynamics of the services provided. Supporting markets include for-profit firms and individuals who provide multiple services to firms and individuals in the chain. They include input providers that are sector specific (such as agricultural input suppliers, technical services) and cross-cutting providers (such as management training, financial institutions, business development services).
The degree of development of supporting services is a function of the expansion of the studied value chain. During the research and analysis, look for supporting markets in the most unsuspecting services areas. If the value chain involves a large number of MSEs, probe studies that include informal sector service providers. Click here for a case illustrating the importance of supporting markets.
Firm Level Upgrading
Upgrading is an ongoing, never ending process. Upgrading opportunities for firms are realized through investment in time, resources and energy and relate to the following:
- improving the product’s quality
- improving the production/processing
- specializing in new functions; and/or
- moving into new market channels.
Thus, the analysis requires treating information not only on firms and individuals that have the capacity and willingness to invest in upgrading strategies and, but also on the business enabling environment and relationships that allow access to learning, know-how and skills channels. The analysis of all actors, including buyers and supporting markets (size, diversity and stage of development and coverage) provide insight on how much these actors can contribute to firm-level upgrading.
Combined, the analysis needs to show if there is evidence of a will and incentives to take on risks (which must be commensurate with expected returns) to launch an investment in firm-level upgrading.
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