Guidelines on greening agri business -business models2


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Value Chain Analysis for Sustainable Rural Development

by: Ivan Idrovo and Marian Boquiren.

Contracted by: GIZ-Department of Agriculture-NCI-Philippines

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Guidelines on greening agri business -business models2

  1. 1. SECTION 6: A LOOK INTO BUSINESS MODELS A “business model” describes how an individual firm organizes itself and its relationships in order to create and capture value. It tells us how the building blocks of production, marketing, costs and revenues come together to provide a value proposition in the marketplace that differentiates the firm from its competitors. The business model concept is linked to business strategy (the process of business model design) and business operations (the implementation of a company's business model into organizational structures and systems).1 A major difference between conventional and green inclusive business models is the need to capture value in different parts of the value network, most notably for smallholder suppliers and primary producers. Any business model needs to be appropriate for the geography and structure of the supply chain. The choice of business model will depend on the nature of the partner networks, product (perishable, differentiated or bulk commodity) and the nature of the end buyer These same factors determine the nature of economic dependency between chain actors. The business model is in a way a summary or the consolidation of the analysis made on markets, relationships, and chain upgrading. 1 A. (2008) The Business Model Canvas II/MB.-RESOURCE GUIDE ON GREENING AND INCLUSIVE AGRI AND AGRO ENTERPRISES, GIZ-DA-NCI Page 1
  2. 2. Sources: - Linking Worlds: New Business Models for Sustainable Trading Relations between Smallholders and Formalized Markets - New Business Models for Sustainable Trading Relationships - USAID MicroReport: Facilitating Behavior Change and Transforming Relationships - Getting to “Good Enough” in Product Upgrading: Idrovo & Boquiren SDCAsia and the Cardava Banana Value Chain Inclusive green business models designed to assist fair and equitable smallholder inclusion in formal markets need to create win-win relationships which can be characterized as follows: a) Durable: with long-term trading relationships b) Equitable: specifically increasing market access for smallholders with equitable balance of risk, responsibilities, and benefits among the chain actors c) Efficient: improving financial sustainability d) Effective: assisting in guaranteeing purchaser access to consistent supplies of agricultural products that meet or exceed market standards II/MB.-RESOURCE GUIDE ON GREENING AND INCLUSIVE AGRI AND AGRO ENTERPRISES, GIZ-DA-NCI Page 2
  3. 3. e) Adaptable: offering sufficiently flexible procurement standards that enable both buyers and sellers to respond to changing markets and social and environmental conditions f) Credible: recognized as offering real benefits and free of double standards. Below are the key principles to be considered when building the business model: a) Chain wide collaboration on shared competitiveness vision/goals and identified champions for those goals This represents a shift from the traditional firm-based view of business models, to one of chain-wide processes involving multiple actors. Chain wide collaboration ensures that all chain actors are pulling in a similar direction guided by the competitiveness vision. Often, value chain participants are not conscious of how their actions and behavior affect the competitiveness of the whole chain and, ultimately, impact their livelihood. Many value chain actors saw the implications of their actions only from their own perspective and that of their immediate links (e.g., input suppliers or intermediary buyers). It is, therefore, necessary to help producers, intermediaries, and processors understand the entire value chain, not only their specific role in it. Close collaboration is vital for perishable commodities such as fresh vegetables, dairy and meat, which require traceability and have higher food safety risk profiles. Collaboration is also key to upgrading, in terms of quality or sustainability, in the commodity trade. This is increasingly visible in the growing number of certified products, such as organics, Rainforest Alliance, Fairtrade and other certification based systems. In many cases, a greening and upgrading strategy requires several fields of actions that have to be dealt with in parallel by different chain actors. Because each attribute of the finished product originates from a particular point in the chain, the effectiveness of the entire supply chain is essential to the final product’s success in the market. Food safety and quality, for example, are principally assured through the combined efforts of all the value chain participants. Communication along the supply chain is essential to ensure that all relevant food safety hazards and quality defects are identified and adequately controlled at each step within the supply chain. This implies recognition, understanding, and interactive communication of process and product standards among and between downstream and upstream players in the chain. Reaching and implementing agreement often involves identifying a driver or a champion to lead the process. This champion may be from the lead firm, from a dedicated wholesaler, a motivated farmer, co-operative manager and might be a single individual or a group of people. b) Upgrading of Market Linkages Market linkages are common weak points in the inclusion of small-scale farmers in modern markets. There almost always needs to be another link in the supply chain between an individual smallholder and buyer. This intermediary often aggregates II/MB.-RESOURCE GUIDE ON GREENING AND INCLUSIVE AGRI AND AGRO ENTERPRISES, GIZ-DA-NCI Page 3
  4. 4. production from small-scale producers and provides support and associated services to meet the required standards. Market linkages are key to reducing transaction costs. Therefore, to build sustainable business models, attention needs to be paid to intermediary market agents and how they can best perform this function with an eye on maximizing development benefits for smallholders. For farmers and their organizations, these linkages should provide a stable market with clear quality, volume and price signals as well as access to production support and contribution to improved livelihoods. For buyers, these linkages must provide a consistent supply of safe, quality products at a competitive price and with low transaction costs. For the stability between supply and demand, direct communication must exist between the producer, supplier and buyer. Supply chains, with co-investment and knowledge-sharing between producers, suppliers, processors and retailers, are usually built around a small number of large-scale preferred suppliers. Inclusive business models must therefore build in market linkages that put small-scale suppliers on par with, or above, the competitiveness of large scale suppliers. Where direct collaboration is not feasible or scalable, adapted business models are called for. From the producer side, group organization increases farmers‟ incentives to cooperate to compete as one single supplier, by restricting their opportunistic behavior and by mutual control. This type of collective action saves costs for quality and quantity verification and testing. At the level of food manufacturers and retailers, this principle could include a commitment to seek out these organizations of small-scale producers. Where there is distrust of producer organizations, or where investments in producer organization will not result in a stable procurement system, the ability to meet minimum volume requirements, homogeneity in quality of the shipped produce, and meeting terms of payments, then specialized intermediary enterprises or lead farmer models may be the solution. At the level of trading, new models can comprise the upgrading of existing formal or informal intermediaries, or the establishment of new trading organizations and even a “franchisable” social trader model. c) Transparent Chain Governance Producers and small-scale processors are typically reliant on traders and larger processors to dictate quality standards. These standards often seem like moving targets and with poor communication throughout a value chain, can significantly increase market inefficiencies, leading to high wastage and lower prices. Fair and transparent governance refers to the establishment and enforcement of clear and consistent grades and standards, clear commitments to buy and sell certain volumes of certain grade products at certain times, and equitable processes of risk management. Producers need to have access to mechanisms that allow their buyers to be held accountable, and vice versa. Some of the ways to improve the fairness and transparency of supply chains include: II/MB.-RESOURCE GUIDE ON GREENING AND INCLUSIVE AGRI AND AGRO ENTERPRISES, GIZ-DA-NCI Page 4
  5. 5.  A clear and accessible product standards enables the farmer to know what is required to get the top quality prices or can facilitate productivity improvement.  Standards that are developed with participatory voices of the producers rather than unilaterally by buyers are more likely to avoid unintentional exclusion of some producer groups. Bringing together value chain participants can be a good way to developing consensus-based norms/interpretation of standards and ownership of the standards, which would help remove a sense of outwardly imposed requirements. Immediate benefits may include lower transaction costs, owing to less reworks and rejects, as well as a significant reduction of conflicts caused by differing understandings and interpretations of standards.  Transparency of prices through the chain empowers more effective and grounded negotiation even without needing transparency of margins.  Transparency about the impact of changes in pricing and policy through the whole value chain enables decisions makers to consider the sustainability of the whole chain.  Contracting with farmers is another way to bring about transparent chain governance, in which smallholders know the prices they are going to receive for their produce and the terms under which both parties should operate. Inclusive and sustainable business models also seek to make incentives transparent and assist in their accrual to actors responsible for positive change. Examples include incentives for meeting or exceeding quality and quantity goals, contracts that leverage access to credit, access to reasonably priced inputs, etc. The key issue here is the need to align incentives with outcomes. An inclusive and sustainable business model, for example, would link incentives for upgrading to improved market conditions under a profit sharing agreement (i.e. the farmers improve quality which allows the product to be sold to more exacting consumers at a higher price, with part of that price premium returned to farmers and the remaining covering marketing expenses). It is also recommended to start with easier, low-risk improvements that will more quickly yield results. This strategy builds confidence and buy-in among value chain participants, helping them use initial benefits to invest in the next stage of upgrading. d) Equitable Access to Services and Inputs One of the special challenges faced by small-scale producers that often prevent successful participation in more formal (and potentially profitable) markets is the lack of access to financial and non-financial services and inputs. Access to services may be facilitated through the following:  Development of an indigenous community based capacity to develop and provide services. The business development services system may be built on existing trade/marketing structures to facilitate the flow of services and learning to all players in the community supply chains. II/MB.-RESOURCE GUIDE ON GREENING AND INCLUSIVE AGRI AND AGRO ENTERPRISES, GIZ-DA-NCI Page 5
  6. 6.  Promotion of embedded services (e.g., lead firms provide technical assistance to farmers) within the context of improving own and supply chain’s operations. Careful calculations have also to be made to ensure that service delivery did not undermine profitability of business operations of both the value chain-based providers and the micro enterprises. The challenge is to identify these progressive individuals at the community level and how to motivate them to improve their capacities and capabilities in order to provide sufficient support to their peers as a means of improving both their incomes. Building Blocks of a Business Model (Reference: LINK Methodology) 1. Customers Customers are at the core of the business model because, without them, no business can survive. It is important to understand the needs of the customers or customer segments to determine how to best satisfy those needs.     Who are your customers? For whom are you creating value? To whom do you sell your products or services to? Who are your most important customers or customer groups? 2. Value Proposition The value proposition underpins the success of any business model. The value proposition is the reason why customers choose your product or service over another. To identify the value proposition for each customer or customer segment, consider the problem or need that your product or service satisfies. In the context of small holder inclusion, business models beyond a mere economic value are needed. The value proposition should offer a solid combination of economic, social and environmental value to both downstream (whom you sell to) and upstream (whom you buy from) actors. 3. Customer Relationship Describe the type of relationship you wants to establish with each customer segment in order to deliver the product or value proposition. Consider the following aspects:     The channel of communication The consistency of the communication The cost of maintaining the communication The potential to differentiate our company through a distinct customer relationship or customer service. II/MB.-RESOURCE GUIDE ON GREENING AND INCLUSIVE AGRI AND AGRO ENTERPRISES, GIZ-DA-NCI Page 6
  7. 7. 4. Revenue Streams Revenue streams are the source/s of income. A company’s revenue stream is made up of the following elements: A VALUE PROPOSITION that reaches a CUSTOMER (segment) through a certain CHANNEL supported by a distinct type of RELATIONSHIP. 5. Key Resources An organization's key resources describe those physical, intellectual, financial or human resources that are essential to create and sustain the value proposition, deliver it to the market, establish customer relationships and generate income. Types of Resources Physical: infrastructure, machinery, equipment, technology, warehouse Human and knowledge-based: skills, ability, know-how, employees, partners Intellectual Property: brand patents, copyrights, data Financial: Cash flow, access to credit, savings, insurance. Social: Relationships, unions, community, cultural assets. 6. Key Activities An organization’s key activities are crucial for the business to successfully function. Like key resources, they are required to create and sustain a Value Proposition, reach markets, maintain customer relationships, and earn revenues. Sample Categories of Activities        Production Processing Marketing Logistics Management Producer Networks Quality assurance Problem Solving 7. Key Partners Only very few business models can operate without a support network of KEY PARTNERS. Partners can be divided into two groups:  DIRECT PARTNERS with whom the company operates its core business model (e.g. producers, transporters, input suppliers, etc.) II/MB.-RESOURCE GUIDE ON GREENING AND INCLUSIVE AGRI AND AGRO ENTERPRISES, GIZ-DA-NCI Page 7
  8. 8.  INDIRECT PARTNERS who support or facilitate the development of the business model (e.g. financial institutions, research centers, universities, NGOs, public sector agencies, local governments, etc.) 8. Channels Channels refer to how the business reaches and interfaces with its customers. In the case of agricultural products, the sales channel often is equivalent to the logistics supply chain, which transfers the product between the producer and the final customer. Channel Phases Awareness: How do we raise awareness about our products and services? Evaluation: How do we help customers evaluate our value proposition? Purchase: How do we help customers purchase specific products and services? Delivery: How do we deliver our value proposition to customers? After sales: How do we provide post-purchase customer support? 9. Cost Structure The business model’s cost structure describes the costs incurred for the creation and delivery of a value proposition, maintaining customer relationships and generating income II/MB.-RESOURCE GUIDE ON GREENING AND INCLUSIVE AGRI AND AGRO ENTERPRISES, GIZ-DA-NCI Page 8