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Value Chain FrameworkStrengthening Value Chains toPromote Economic Opportunities

Our work is never nitewe strive tocreate lasting eects. Fixing on thelong-term progress and well-being o ourbeneciaries motivates us to achieve truedevelopment. And our beneciaries are

our partners, identiying challenges andpriorities and working with us to addressthem.

End MarketsEnd markets determine the characteris-tics o the nal product or service gener-ated. The demands o the end marketdrive quality and standards. End buyersare important sources o demand inor-mation, learning and benets that fowdown the chain. Analysis o end marketsmust demonstrate the potential or com-petitiveness through a combination o

three strategies: producing and deliver-ing goods and services more eciently,dierentiating products or servicesthrough quality standards and brand-ing, and exploiting new market demand.The value chain approach assesses theopportunities in all possible markets intowhich products and services fow.

Business Enabling Environment(Local, National and Global)International trade agreements and

standards tremendously aect the con-straints to and opportunities or industrygrowth. They present opportunities ormarket expansion but can be extremelyexpensive or rms, especially MSEs, and

can easily preclude a developing countryrom being competitive.

The national policy and regulatoryenvironment is critical to the unctioningo markets and enterprises; it should cre-ate incentives or private sector growthand involvement in the policy process.Moreover, poor local government opera-tions and poor enorcement o legal andregulatory regimes increase transactioncosts and risks, limiting investments inrelationships and upgrading. Conversely,conducive local and regional policies can

provide opportunities or rapid improve-ment o the enabling environment.

Inter-frm Cooperation:Vertical LinkagesCooperation among rms through verti-cal or horizontal relationships is criticalor transerring skills and reducing trans-action costs. Vertical linkages are therelationships among rms at dierent levels o the value chain between input sup-ply and distribution to the nal market.

Value chains encompass the ull range o activities and services re-

quired to bring a product or service rom its conception to its end use.

Value chains include input suppliers, producers, processors and buyers;

a range o technical, business and nancial service providers; and the

nal markets into which a product or service is sold, whether local, na-

tional, regional or global. Understanding how industries in which MSEs

participate can become more competitive requires both systematic and

systemic analysis o the actors aecting the perormance o the rms in

the value chain and the relationships among these rms.

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Vertical linkages are critical or moving aproduct rom inception to the market andor transerring benets, learning and em-bedded technical, nancial and businessservices rom rms up the chain to rmsdown the chain or vice versa. Mutuallybenecial relationships among vertically

related rms can improve MSEs access tonew markets, new skills and a wide rangeo services. They can also reduce marketrisk by securing uture sales and createincentives or the adoption o more value-added unctions or activities.

Inter-frm Cooperation:Horizontal LinkagesHorizontal linkages among producers areneeded to reduce the transaction costsincurred by exporters or local buyerswhen working with many small suppliers.Through inter-rm cooperation, such as

buying inputs in bulk or meeting largeorders, horizontal linkages can help smallrms generate economies o scale, whichcan contribute to their competitivenessand bargaining power.

Horizontal linkages among MSEs can takethe orm o ormal or inormal groups,as well as networks that are managedthrough a third party (e.g., lead rm,broker or trader). Similarly, cooperationamong larger rms can be important orcreating industry standards, developingmarketing campaigns or lobbying.

Supporting MarketsSupporting markets are key to rm-levelupgrading and include sector-specic ser-vices (e.g., input and equipment provid-ers), nancial services, business manage-ment services (e.g., auditors and lawyers),and inormation technology (particularlyas it pertains to market inormation accessand dissemination).

Where these services are needed over thelong run, they must generally be pro-vided commercially, either by stand-aloneservice providers or by rms in the valuechain. In this latter case, services tendto be embedded as part o an existingmarket transaction, with the cost o the

service included in the mark-up on thetransaction. New technologies or techni-cal services can have a substantial eecton the competitiveness o the industryand can even change the dynamics ocompetition.

Firm-level UpgradingFirm-level upgrading reers to changesmade by rms to improve their com-petitiveness through product develop-ment and improvements in productionand marketing techniques or processes.Firm-level upgrading requires access to

inormation, technology and nance.Product development and improvementsin production and marketing processesare integral to sustained competitivenessby enabling rms to meet the marketsconstant demand or innovation.

PowerThe wielding o power in relationshipsbetween rms in the value chain shapesthe incentives that drive behavior anddetermines which and how much rmsbenet rom participation in an industry.

Relationships can range rom highlydependent, where one party dominates,to balanced, where all parties involvedhave some power that they can wield. Inany given industry, relationships can coverthe ull range, and these relationships canchange depending on shiting marketdemand.

Learning & InnovationLearning and innovation are key to creat-ing and sustaining an industrys competi-tive advantage since upgrading is depen-dent on knowledge o what the marketrequires and the potential returns oninvestments in upgrading. It is essential

that learning and innovation fow throughthe value chain in order to optimize thesereturns.

The process o acquiring new knowledgeor skills is not necessarily straightorward.Learning and innovating in a systemicsense are closely tied to the incentivesthat encourage or discourage the deliveryand absorption o new knowledge orskills, and the types o mechanisms thatare in place to aect their transer.

Benefts

I industries are to maintain their competi-tiveness, benets must be sucient toprovide incentives or changes in behav-ior patterns that entail taking on new risksand adopting innovations.

Benets are closely related to powerrelationships and learning. In the contexto MSE development, benets are muchbroader than just increases in income,although that is an important part o theequation. Benets can also mean reducedmarket risk (more stable income) andincreased value o assets. Power in value

chains typically translates into benets.The rms able to wield power throughbranding or access to worldwide sup-pliers, and those traders in a chain ableto control inormation, can oten exact alarger share o benets rom producersand suppliers.

Learn More at www.acdivoca.org/valuecha