This is a USAID handout that provides examples of the Cooperation and Competition for Upgrading. It is a framework to assess the current picture and frame a future vision for value chain upgrading.

1. Module 2 Session 2: Cooperation and Competition for Upgrading (CC4U)
A framework to assess the current picture and frame a future vision for value chain upgrading
Vertical Relationship — COOPERATION
HIGH
DEFINITION: When the rules and sanctions are
clear to allow actors to transact with confidence
despite limited interaction.
DEFINITION: When mechanisms, rules, and
information flows exist to drive upgrading and coinvestment vertically from function to function.
CONDITION: Uniform grades and standards,
certified intermediaries and services like warehousing that ensure compliance to standards,
certified/regulated exchange platforms like stock
exchange or commodity exchange, and effective legal infrastructure to transparently define
formal rules and disputes processes.
CONDITION: Norm for many high-performing
value chains that see their suppliers and customers as key to their and the overall system’s
performance and future, which drives co-investment and strong pressure to perform.
DEGREE OF EFFECTIVENESS
EXAMPLE: Mature commodity market with an
exchange and effective warehousing system as
is the case in South Africa with the SAFEX.
EXAMPLE: The coffee value chain/or specific
channel in certain countries leading to cobranding between the communities and the
international buyer. Ethiopian coffee sold into
Starbucks presents a good example.
DEFINITION: When rules are confusing or shifting and information flows weaken joint action to
meet market requirements is considered risky.
DEFINITION: When tight but closed channels
compete with other channels using zero-sum or
monopolistic tactics.
CONDITION: Typical weak or uncompetitive
value chain where actors see the transaction
between buyers and sellers along the chain
as the key focus of competition using primarily
zero-sum tactics.
CONDITION: When a channel or even a chain
are controlled by single firm, ethnic group or
political party allowing that network to closeout
new entrants, compete using zero-sum tactics
and/or drive behaviors based on misaligned informal rules. The result is limited or no upgrading, minimal growth and concentrated benefits.
EXAMPLE: The rice industry in Ghana, where
the negotiations between actors performing
different functions are adversarial, focusing on
specific transactions. This leads to limited information flow or investment along the chain and
results in an uncompetitive industry domestically.
EXAMPLE: The cattle system in East Timor
cattle is dominated by a single ethnic group for
production, which limits effective output relationships by skewing production practices to
achieve social capital aims.
LOW
LOW
Module 2 Session 2 CC4U with Examples
D E G R E E O F C O O P E R AT I O N
HIGH
1

2. Vertical Relationship — COMPETITION
HIGH
DEFINITION: When incentives are aligned at
all functional levels around upgrading against
market of performance criteria.
CONDITION: Norm for many high-performing
value chains as actors do not see their suppliers
and buyers as competitors, but more as strategic partners since they perform functions that
are different and necessary for their success.
DEGREE OF EFFECTIVENESS
EXAMPLE: Kenyan floriculture is an example of
value chain that continues to compete effectively because the various actors do not focus
on competing to win individual negotiations as
the inputs move to production and flowers move
through to being exported.
DEFINITION: Vertical integration can result
in actors competing to take on new functions.
When this results in upgrading, it is effective.
This is typical a transitional period leading to
horizontal competition as it not possible to compete in doing different things.
CONDITION: Often time-bound, this occurs
when a firm cannot access an effective value
chain function so they take on the function, such
as a processor taking on aggregation to ensure
performance remains high and continues to
improve.
EXAMPLE: Processor of cotton asserts control
via strict guidelines of behavior on aggregators,
even at times using staff to take on the aggregator function to ensure effective management of
its suppliers resulting in improved yields, quality
and reliability of suppliers. The processor begins
to offload this function once it is certain the aggregators will follow the rules/code of conduct
required to perform.
DEFINITION: When function-to-function level
competition is driven by win-lose transactions.
CONDITION: When firms take on functions
beyond their core competency, such as input
supply, finance, or aggregation. This can drive
up costs without increasing efficiency or competitiveness. It can also happen when a firm
takes on more and more functions evolving into
an almost monopolistic position, where they can
use zero sum tactics to push other out of business or create high barriers to entry—both of
which reduce the competitiveness of the overall
system.
LOW
DEFINITION: Vertical integration can also result
lower competitiveness of a system when vertical
functions are rolled up into a single firm that either results in the firm being less competitive or
the firm using its size/market position to crowd
out others firms and foster win-lose transactional
relationships with its suppliers and customers.
EXAMPLE: A rice aggregator in West Africa that
uses farmers’ poor cash management as a tool
during harvest time to push farmers into taking
prices well below the market. In practice this is
done by aggregators offering cash at farm gate
when they know the farmer is in desperate need
of cash. The aggregator knows the farmer needs
the cash and has limited bargaining power, so
he can push well below market prices.
CONDITION: Norm for many low-performing
value chains as the focus of competition is on
the transaction and not on operational performance at each functional level.
EXAMPLE: Beef in Zambia is substantially
controlled by a single, vertically integrated firm
that often uses zero sum tactics to limit new
entrants and foster disincentives via aggregators
to upgrade at smallholder production levels.
LOW
Module 2 Session 2 CC4U with Examples
DEGREE OF COMPETITION
HIGH
2

3. Horizontal Relationship — COOPERATION
HIGH
DEFINITION: When there exist no common
threats or opportunities, or the joint threat or
opportunity can be managed through individual
upgrading or new service offering.
DEGREE OF EFFECTIVENESS
CONDITION: This is never a static circumstance, but there are times when joint action is
not required. Typically, this is when the threats
and opportunities present in the system do not
require joint action to be solved, or interconnected systems offer a service that resolves the
threat or takes advantage of the opportunity.
EXAMPLE: Smallholder farmers in Zambia
were having difficulty accessing inputs due to
the very high transaction costs. The input industry responded by re-designing their distribution model that fostered individual farmer action
leading to bulk orders and reducing transaction
costs substantially.
DEFINITION: When firms see the need to work
together on common threats and opportunities.
CONDITION: The norm for high-performing
value chains, this is when firms quickly identify
threats—such as competition from another
industry or policy—or opportunities—such as a
large order that requires the production capacity
of multi-firms/channels—and then respond by
cooperating to address the threat or opportunity.
EXAMPLE: Bangladesh shoe manufacturers
work individually to generate domestic and
export orders, but when a larger export order
comes through they agree to work together to
fulfill the order so the industry as a whole can
improve its brand image.
DEFINITION: When firms fail to see the need
for joint action or see joint action as posing a
greater risk compared to the joint threat or opportunity.
DEFINITION: When firms collude to protect
themselves from threats or capture opportunities at the expense of upgrading – using zerosum tactics or acting monopolistically.
CONDITION: This is more the norm for low-performing value chains when actors do not identify
or address threats and/or opportunities as joint.
For farmers this might be high prices on input or
larger orders for crop. For exporters it could be
competition from another country’s industry or a
large export order.
CONDITION: When rules foster substantial
uncertainty and drive short-term thinking with
an aim to maximize immediate gains, even
at the risk of the enterprise’s survival. Strong
class or ethnic (i.e., friends and family networks/
systems) networks and the formal and informal
rules that support such networks can also drive
such behaviors.
EXAMPLE: In the Kenya avocado industry, the
primary competitive pressure was from other
country industries. The value chain actors would
not engage in joint investments or developing
joint standards or brands that would allow them
to compete more effectively.
EXAMPLE: In West Africa, market queens are
often accused of collusion that stifles competition and drives farmers into recurrent losing
positions.
LOW
LOW
Module 2 Session 2 CC4U with Examples
D E G R E E O F C O O P E R AT I O N
HIGH
3

4. Horizontal Relationship — COMPETITION
HIGH
DEFINITION: When sufficient pressure to
upgrade comes from rules, relationships and/or
other inter-connected systems (service industries, financial industry, media, political, social,
etc.).
DEGREE OF EFFECTIVENESS
CONDITION: There are cases when weak value chains upgrade effectively even though there
are only few or even one firm at a functional
level. Pressure to upgrade comes from within
a cooperative relationship (cooperative, solidarity group, or community business organization)
or from a firm’s own interests. This is a difficult
state to be maintained for long periods without
evolving to a higher degree of competition that
can sustain continued upgrading.
DEFINITION: When upgrading is a basic requirement (the accepted norm) to achieve firm
success.
CONDITION: This is the norm for high-performing value chains where at each functional
level there is competitive pressure to constantly
upgrade.
EXAMPLE: A fruit processor in West Africa
begins losing some of its smallholder suppliers
to a competitor that has engaged in improved
supply chain management practice. The processor improves his supply management tactics
in response to the competitive pressure.
EXAMPLE: In Zambia, in the early stages of
rural private vet services, vet entrepreneurs
engaged in substantial upgrading via client relations and improvements in how they ran their
businesses. There were no other competitors in
vicinity.
DEFINITION: When there is no incentive—or
competitive pressure—to compete on performance.
CONDITION: This is case when the firms do
not see each other as competitors even though
they are selling into the same market or even
the same buyer. For rural populations this can
also be a sign of informal rules that limit or
lower the value of investing in economic activities.
EXAMPLE: A coffee farmer in East Timor sees
a neighbor investing in improved pruning and
reaping good benefits and decides not to take
on that practice.
DEFINITION: When firms compete on issues
that are not related to upgrading, such as price
only, or social capital or access to political
power to outperform their competitors.
CONDITION: This is more the norm for lowperforming value chains when firms are driven
by shorter-term interests and see upgrading
operational performance as providing a lower
return than using zero-sum tactics to beat their
competitor to the sale.
EXAMPLE: In response to a competitor engaging in improved promotional tactics with smallholders, an input firm calls the environmental
protection agency and indicates that the firm is
breaking rules by promoting products in farming
communities.
LOW
LOW
Module 2 Session 2 CC4U with Examples
DEGREE OF COMPETITION
HIGH
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