Value Chain Analysis for Sustainable Rural Development by: Ivan Idrovo and Marian Boquiren. Contracted by: GIZ-Department of Agriculture-NCI-Philippines

1. SECTION 4: RELATIONSHIPS AND INTERFIRM COOPERATION
Experiences indicate that the formation of market linkages that does not permit close
collaboration between players contributes little to systemic upgrading of the chain and,
consequently, does not result in sustainable benefits to microenterprises and smallholders.
The value chain approach to enterprise development seeks to do more than just link
microenterprises to buyers: It endeavors to facilitate changes in behavior and improve the
quality of relationships between and among players to increase the competitiveness of the
chain, while ensuring a broad distribution of benefits, skills and income at all levels of the
industry. Effective inter-firm relationships can provide the platform to facilitate: a)
upgrading to become competitive; b) greening to promote sustainability of supply chains;
and c) inclusive growth.
Brokering change demands understanding of and working with the interests of all the
different parties concerned, and helping people to see that there may be different ways of
fulfilling their interests. The identification of win-win situations in which all firms can benefit
is a necessary first step in building effective inter-firm relationships.
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2. The quality of relationships and the type of governance between actors play important roles
in facilitating the flow of information, learning, and incentives for upgrading. The power of
the different players involved and their interests will always play key roles in the greening
and process and in the promotion of inclusive growth.
Relationships are not built at “first sight,” but rather need goal-oriented actions to grow and
develop. Collective empowerment (i.e., collective capacity for action) comes about as
people learn that they share a responsibility for one another and by helping each other
create social capital, an essential resource in building win-win relationships. As such, while
value chain development interventions are geared toward supporting the empowerment of
individual players, the process design and subsequent implementation contribute to the
development of collaborative relationships across all functions in the chain.
From the VC projects that we have implemented, the following critical success factors have
been identified as necessary to successful inter-firm collaboration:

Trust
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3. 



Good supplier/buyer performance and credibility (i.e., players have the
competencies to meet basic market requirements and manage partnership)
Openness and reliability
Balanced power dynamics
Good communication and transparency
In addition, commercial benefits derived from the relationships—such as reduced
transaction costs, enhanced business flexibility or improved risk management and safety
nets—must be evident to all players involved and must outweigh the cost of building and
maintaining relationships Over and above these, the players must have common or strongly
compatible objectives or interests, a strong focus on end market requirements, and a good
understanding of markets and the competitors.
There is a need for catalysts to exist at the different levels (functions) of the value chain for
change to reach upstream players. Greening may be initiated by either a processor-exporter
but there is a need for core people within the community itself who are receptive to the
change process and, in turn, catalyse growers and other players in the locality to adopt the
changes. Depending on local conditions, a catalyst at the community level may be a
cooperative or trader. In many project areas, community-level catalysts also need the
municipal government to act as a ‘co-catalyst.’ Involving the municipal government is often
important because the government legitimizes the initiative, draws in other participants and
provides resources that can accelerate the change initiative (e.g., farm-to-market roads,
land for common service facilities, etc.) Getting respected industry players and other
relevant stakeholders (e.g., service providers, government) involved at the earliest time
possible is a key way to build momentum in value chain development initiatives.
The first step in identifying potential catalysts is to get a clear picture of the following at all
levels of the chain:
•
Who influences and controls access to markets (at the community level) and how
they do so
•
Ways to improve capability and capacity so that influence and control can be used to
yield positive benefits for microenterprises and the improvement of the chain in
general without eroding their profit margins
•
incentives and motivations to drive the upgrading and greening process
In filtering catalysts, an important aspect to take into consideration—aside from having
resources and skills—is the presence of a clear business purpose (e.g., needing a stable
supply base, seeking to increase cost efficiencies, etc.) rather than philanthropy-driven
initiatives to ensure a medium- to long-term commitment. It is equally important for
catalysts to have some sense of social responsibility and affiliation with the community.
Other important factors in the identification of catalysts are compatibility and similarities in
philosophy and approach with the other players in the chain.
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4. Movement from market to network relationships increases opportunities for micro
enterprises and smallholders if:
•
Relationships provide smallholders the opportunities to access skills and resources
that will enable them to scale up operations and extend their operations along the
chain
•
Relationships can be used as platforms to build additional product lines or new
markets --- joint innovation initiatives
•
Prices are carefully calculated based on both historical and forecasted trends with a
provision of a regular review to ensure that both parties equitably benefit from the
established relationship.
•
Relationships involve joint planning from which farmers and micro enterprises can
make projections and informed decisions on levels of investments and the
risks/benefits involved.
Network relationships can decrease opportunities of farmers and micro enterprises if:
•
Lead firm collapses and the micro enterprises and smallholders are 100% dependent
on this firm. Selection of lead firms is also crucial as this can significantly shape the
development of micro enterprises and smallholders.
•
No clear understanding standards between parties or among farmers and micro
enterprises resulting to high rate of rejection, discounted prices, etc.
•
Relationships promote further indebtedness of farmers and micro enterprises
through excessive advances and which are then reflected back in the buying price.
Oftentimes, it is important for households to have an alternative market which can
subsidize their daily needs since working with lead firms usually involve fixed
schedules for pick-up/delivery and payment.
•
Farmers and micro enterprises become complacent with “guaranteed markets”
losing drive to invest on innovation and upgrading and seek new opportunities
Key preconditions that entice lead firms to enter into strategic alliances with groups of MSEs
or smallholder farmers are the following:
•
Demonstration of capability to meet basic quality requirements, which implies the
need for some upgrading and a good understanding of the required standards.
•
Access to a significant volume, which calls for well-functioning horizontal
collaboration.
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5. •
Willingness to invest. Lead firms are more inclined to invest when they see that the
communities have invested their own money or assets. This provides a guarantee
that the communities will work towards making the venture a success.
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The product flow is the nervous system of the value chain. Products get from one actor to
another on the basis of contractual arrangements that can be random and informal or
formalized. The more formalized the contractual arrangements are, the more actors can
reduce risks and engage in forward planning. If the contractual arrangements are not
beneficial to both buyers and sellers, the flow of products and consequently the functioning
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6. of the value chain are placed in jeopardy. A good understanding of the product flow and the
underlying contractual relationships is crucial in any value chain analysis.
Firms of a certain size and market share can influence the conditions under which business
partners in the value chain operate. For example, such lead firms can set product
specifications for suppliers, even detailed product blueprints prescribing the production
process and the application of certain technological, environmental or labour standards, and
how much is to be produced, including scheduling and logistics. The dominant actor could
be an end-buyer or retailer in which case one would talk about a buyer-driven value chain.
In other cases, a manufacturer or a supplier of primary materials “drives” the value chain,
making it a supplier-driven value chain. However, there are also value chains where many
firms operate in parallel and no dominant player exists.
Vertical coordination describes how different types of enterprises interact with their input
suppliers (one or more functional level below them in the value chain map) and with the
firms that purchase their output (one or more functional levels above them in the value
chain map). The nature of these interactions defines the governance structure, which
influences the distribution of benefits and, in turn, reflects the distribution of power and
control within the value chain. It is important to understand the types of linkages that could
exist and to determine what type of linkage would be most appropriate for a particular
producer or group of producers at a particular time. The most common types of vertical
linkages that producers might have are:
•
•
Linkages between producers and input suppliers
Linkages between producers and their buyers
The nature and quality of relationships especially the degree of trust influences the
upgrading trajectory of an industry and the way that benefits (and risks) are shared among
players. Trust does not necessarily entail the absence of conflict, but it reduces the threat of
conflict: The presence of trust lowers the probability that one partner will act
opportunistically even if he/she has the opportunity to do so. Similarly, a high level of
satisfaction and trust in a relationship has a positive effect on the degree of cooperation
and, consequently, motivation for upgrading.
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7. Value chain governance refers to power and the ability to exert control over the behavior of
other agents in the system. Typically, a “lead firm” might set, monitor, and enforce the
parameters under which other firms operate. Awareness of the governance structure in the
system can be useful in identifying possible interventions and opening pathways for
greening and promotion of inclusive growth.
The first and most common type of governance is the arm’s length transaction. In arm’s
length transaction or spot transaction, product is bought for cash and delivered
immediately. Transactions are completely market-based. Contracts are verbal and often
anonymous. Information and agreement on prices are all that is required for successful
consummation of the transaction and generally there are many buyers and sellers. In arm’s
length transactions, it is difficult to push the greening agenda as commodities are
undifferentiated, interactions between firms are limited, and technical assistance is not
provided. Repeat transactions are possible but not necessary. Spot transactions stifle
innovation and do not provide incentives for upgrading.
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8. Under balanced relationships, the parties rely on bilaterally developed norms to govern
their joint efforts (Macneil, 1980). Under this form of governance, a mutual desire to
preserve the relationship induces contributions from supply chain partners and encourages
value creation through partner specific investments and implicit social norms (Macneil,
1980).
In terms of value creation, balanced governance is concerned with recurrent transactions
(rather than a single transaction as occurs under market governance), and incentives result
from “commitment to the system” (Heide, 1994, p. 77). This implies that:
a) the incentive systems in relational governance are long term
b) the parties accept that individual transactions are not necessarily profitable in
isolation
c) involvement in a balanced relationship is a reward in its own right with a view to
mutually beneficial long term partnership
Extensive information flows in both directions, with buyer often defining the product
(design and technical specification). Likewise, both sides have capabilities that are hard to
substitute. The parties are committed to solving problems through negotiation rather than
threat or exit. In a balanced value chain, opportunities to identify alternative buyers or
sellers creates more symmetrical power between buyers and sellers, and provides
incentives to negotiate predictable shared standards for quantity, quality and price.
A balanced value chain has incentives for firms to cooperate to make their supply chains
sustainable and to ensure that benefits are equitable by sharing information, jointly
ensuring product targets are met, and respecting contracts that reflect interdependencies.
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9. Smallholders in a directed relationship would usually have one main buyer taking at least
50% of their produce. The buyer defines the product (design and technical specification)
and monitors the farmer’s performance. Buyer provides technical assistance. The buyer
usually would know more about supplier’s costs and capabilities than supplier knows about
buyers. The farmer’s exit options are more restricted than buyer’s. Directed relationships
are sometimes called “sweet prisons”. A directed value chain provides the lead firm with
more access to information, control over supplier production, and power to enforce
contracts.
In a directed value chain, buyers exert significant influence over the quantity, quality, and
price of goods traded in the market, and farmers have limited negotiating power. Regardless
of the “unequal” power structure, a directed value chain may be a lucrative opportunity for
both buyers and sellers. An agriculture value chain, in which one dominant buyer
guarantees a fixed price for specified quantities and qualities of product from smallholder
farmers, may be an excellent opportunity for farmers to improve livelihoods and upgrade
their skills and knowledge of export market demands. However, there may be concerns
about equity and the distribution of benefits to smallholders.
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10. The greening and inclusive growth agenda have more chances to be successfully promoted
in directed relationships with buyers as key catalysts than under arm’s length and balanced
relationships.
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A hierarchical relationship involves the vertical integration of value-added functions within a
single firm. There is limited autonomy to make decisions at the local level. Under
hierarchical governance, formal decision-making authority is provided by a more detailed
contractual arrangement between the parties, which is typically augmented by a system of
incentives and penalties.
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11. This also means that processes and systems are prescribed by an individual firm and which
the whole supply chain has to follow. Greening agenda can easily be implemented across
the whole supply chain provided the firm finds strong incentives to do so.
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Collective action is an important strategy for increasing smallholder opportunities and
participation in dynamic markets. In view of lower transaction costs and more effective
capacities, lead firms often prefer to work with organized farmers rather than individuals,
despite the increased bargaining power that groups enjoy. But many MSEs or smallholder
farmers are wary of engaging in collective initiatives because of bad experiences in the past
and the fear of missing an opportunity to sell at the best price available for their produce.
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12. The absence of strong horizontal linkages significantly reduces the benefits that can be
gained from network relationships.
TEMPLATE FOR ASSESSING RELATIONSHIPS
Relationship Matrix
1. Identify main relationships
2. For each relationship, identify key relationship components
3. Describe current practices for each component with greening and inclusive growth as
main considerations
This is just a sample and non-exhaustive. The descriptions below are common for many
agricultural crops.
Aspects
Description
Farmers and Traders
Supplier
and
Buyer Spot selling and purchasing
Selection/Procurement
Process
No prior commitment or orders but there was some informal
guarantee of business beyond today. Some degree of
recognition of past transactions/relationships.
Price and terms of payments were the main determinants on
whom to sell and from whom to buy. Info dissemination re:
trader with higher buying price spread fast within the
community.
Flexible and subjective pricing and payment terms
Implications: Greening and Inclusive Growth
It may be possible to promote a semblance of inclusive growth
by helping smallholders to improve price competitiveness.
It may also be possible to promote greening using trader’s
informal network of suppliers or Filipino’s concept of suki
system.
However, experiences indicate that traders are
willing to impose additional standards if these come from
their buyers.
Main constraint is that under this system transactions are
usually based on who can give the lowest price for products of
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13. acceptable quality based on local norms/ quality standards.
An opportunity is to build long-term partnerships/
relationships to mutually grow business anchored on the
“suki” relationship.
Information
Transparency
Sharing/ Some degree of information sharing on pricing and costing
and demand trends from traders --- but more for their benefit
or sometimes distorted to serve their interest
Prices vis-à-vis standards are arbitrarily set and which micro
enterprise accepts in exchange for immediate cash.
Implications: Greening and Inclusive Growth
Farmers are typically reliant on traders and 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/rejects and lower prices. To improve
the governance of quality along the chain, there is a need for
harmonization of standards particularly its interpretations. It
may be possible to explicitly factor social and environmental
criteria in the standards as a means of reducing operational
risks, maintain profitability, and meet the growing demand
for sustainably produced goods.
Quality
Control
Inspection
and Visual inspection only which led to mistrust issues.
Automatic deduction to compensate for whatever quality
issues. This provided disincentives for upgrading.
Implications: Greening and Inclusive Growth
Objective and better quality control measures will improve
relationship between and among players. It will also
potentially reduce rejects and reworks and consequently
reduce use of energy and water as well as emissions.
Value added
Cooperation
collaboration
services/ Some learning and skills transfer but limited to local norms
and and capability of traders
Implications: Greening and Inclusive Growth
There is a need to promote Interdependence and partnership.
Both parties can mutually exploit cost, quality, technical, or
marketing advantages via their collaboration.
Basis of Competition/Offer Price
to the Market
Basic Produce
Implications: Greening and Inclusive Growth
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14. Greening can provide the pathway for parties to be able to
transact business under better conditions --- primarily through
specific differentiation factors other than price.
REFERENCES
Boquiren and Idrovo, 2008: USAID Best Practices in Implementation, MicroReport #41:
Facilitating Behavior Change and Transforming Relationships
FHI/World Vision: USAID Integrating Very Poor Producers into Value Chains
GTZ. 2007. Value Links Manual: The Methodology of Value Chain Promotion
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