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Keep Ideas Moving #2 : Value Chain Development
Some people are confused about the jargon ‘Value Chain Development’ due to its vast application–this article would help map such confusion. Let me give you a reminder in the beginning, though : the topic that I’m writing on at the moment does NOT consist of only one tool. Other than its usual practice for single user enterprise, it can also be used in broader industrial perspective. The key (whether you are in an enterprise or using it intra-enterprise), you have to see around, pat a shoulder or two, and start working hand-in-hand with others (Hum, i know you’re not mules, but just see these mules below to get what I mean 
).
The currently developing application of Value chain development is a sector-focused approach that sees how this particular sector is integrated into markets. The outcome of such tool is to identify opportunities and constraints of a sector (in an enterprise’s business units, local, or non-local) and turns such opportunities into competitive edges that increase competitiveness of the sector in the value chain.
It starts with a micro definition of VCD (that is, in a scope of an enterprise):
A value chain is a sequence of target-oriented combinations of production factors that create a marketable product or service from its conception to the final consumption.
And Porter the inventor (1981) says, “going through the chain of organization activities will add more value to the product and services than the sum of added cost of these activities”.
Porter’s original version of VC consists of activities such as design, production, marketing, distribution, and support services up to the final consumer. In its expansion over time, the model can be contained not just within a single firm or divided among different firms, it can as well be implemented within a single geographical location or spread over wider areas.
Now,who are you supposed to work with, and how do I start ? It depends on level of analysis and implementation.
1. Applying value chain between enterprises (vertical / horizontal linkages)
Implementing VCD in a locality scope (between enterprise, associations, cooperatives, and larger industries), ideally such initiatives will be initiated by a business association in one locality, or any forum that focuses in particular sector-at-a-time. Usually value chain analysis and implementation are guided with business consultants or associations–but in case you can build it up with your fellow enterpreneurs around your position in the value chain, why not try? As a matter of fact, The value chain concept can be applied from individual business unit and can be extended to the whole supply chains and distribution networks. So definitely it can start from your self.
By doing value chain analysis, you essentially try to engage with companies around your position in the value chain in two direction and making series of value networks, and forge linkages in either one or two directions below:
- Vertical integration : by engaging with your supplier, buyer, technology provider, human resources provider, etc
- Horizontal integration : by engaging with similar companies that share the same consumer base, but you and the fellow company are at the same time, competing with other companies/bunch of companies. (I know it is weird to ally with your competitor–but if you have mutual understanding (that is, to make your common-end-consumer happy!, of course) , you both may succeed in competing with the other companies(your common competitors).
It is key to understand that all stakeholders along a particular value chain need to cooperate and coordinate their activities to satisfy the needs of the end consumer. If there is one weak link in the chain, the competitiveness of the overall value chain is endangered–especially true in a business environment where local enterprises increasingly compete with foreign other companies.
VCD was initially implemented in agricultural and forestry industry (exactly because such sector deals with long supply chain and various value addition scenarios). Now more and more other industries adopt such framework. Cooperatives is one media where VCD is forged. Greater link within the cooperatives enables them to increase collective bargaining power–and the objective of such collective movement is endless :
- to seek investment or working capital funds,
- to acquire certification and licenses,
- to close deals with larger companies that acts as their buyer (joint-selling),
- to tap Research and Development, or training fund
- to flip ferocious competitiveness into supportive competition
- to collect joint capital/collateral in obtaining credit/trade finance/factor financing
More examples of this linkages (implemented in various countries) can be seen here .
Ok, these diagrams shown in the Journal above, of course, is overwhelming. It should not be, either of your concern (as a single enterprise)–so don’t worry too much about this complexity. But it gives you an overview of how a landscape of enterprise development institutions can be–and would (hopefully) enable you to figure out your business surrounding. And by spotting yourself in the diagram, you can now try to bounce right and left, doing your role in the system. voila.
Doing your role in the system…
Effective inter-firm relationships are considered an essential component in creating and maintaining value chain competitiveness. Both cooperation and competition contribute to upgrading and competitiveness. For example, cooperation among exporters can help them to identify common needs and address those needs, through lobbying, branding or other joint activities. At the same time, healthy competition among exporters can foster innovation and promote upgrading. With each firm vying to offer the best quality, design, reliability or other competitive characteristic, the result will be increased efficiency and competitiveness at the industry level.
Example of Vertical and Horizontal linkages. Source:antipinoy.com
The value chain approach pays close attention to inter-firm relationships because they can make or break the success of a competitiveness strategy.Effective vertical and horizontal relationships promote upgrading, reduce costs and support greater responsiveness to changing markets. Weak inter-firm relationships, on the other hand, can hinder value chain competitiveness by strangling investment, creating technical and cost inefficiencies and limiting the breadth and depth of commercial relationships. Transformation of inter-firm relationships is a common objective in value chain projects designed to achieve the development goals of economic growth and income generation.
One thing to remember for those who are skeptic about ‘walking hand-in-hand with your fellow competitors’ is that the foundation of effective inter-firm relationships is the understanding that all firms can benefit at the same time—that
“win-win” relationships are possible and desirable.
This is in sharp contrast to the belief that firms are operating in a zero-sum game, in which one firm in the relationship can only win if the other firm loses.
Of course, such relationship (like all other ‘relationships’) cannot be forced. When firms lack shared objectives, or when they fail to recognize their shared objectives, or when they’re lacking personal/corporate trust, then the foundation for effective inter-firm relationships is weak.
2. Applying Value chain at the firm level, according to Porter (1985), the primary activities are:
- Inbound Logistics - involve relationships with suppliers and include all the activities required to receive, store, and disseminate inputs.
- Operations - are all the activities required to transform inputs into outputs (products and services).
- Outbound Logistics - include all the activities required to collect, store, and distribute the output.
- Marketing and Sales - activities inform buyers about products and services, induce buyers to purchase them, and facilitate their purchase.
- Service - includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered.
Secondary activities are:
- Procurement - is the acquisition of inputs, or resources, for the firm.
- Human Resource management - consists of all activities involved in recruiting, hiring, training, developing, compensating and (if necessary) dismissing or laying off personnel.
- Technological Development - pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm’s transformation of inputs into outputs.
- Infrastructure - serves the company’s needs and ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance and general management.
Figure-1: Porter’s Value Chain Activities
All of the above items are broken down across the value chain, that is the nodes in one sectors’ production chain made up by systems and subsystem of production processes. This activity–if you remember–is interchangeable to our previous knowledge sharing on Business Model Generation, which is in fact, 25 years younger. At this moment, a lot of people are already skeptic about the original Porter’s VC model (1985), but it is also arguable that the key value creation business elements remain almost same in most industry nowadays. It is still our aim to create value for the costumber, and why not by putting on return on profit for the company as part of production function.
Note : I have to admit that I have not given balanced proportion on two types of VCD. Firstly, because I (who dwell with various issues of Business Enabling Environment in my current work), is more accustomed with birdview of the industry, rather than micro. and Secondly, because personally I think the model ‘Business Model Generation’ is more relevant today rather than Micro-VCD, especially for SMEs–but anyway, here you go. As mentioned in the beginning, the sole objective of this article is only to widen your perspective on your business surroundings, and ignite your curiousity on ‘tapping others’ shouders, and ask
‘how can we work together, for the sake of us both, and for the sake of our customer ?’.
Filling the gap, I hope some other practitioner of Micro VCD can loop in and share insights from their experiences. Cheerio!
For more on value chain, other useful resources are :
1. http://apps.develebridge.net/amap/index.php/Chain_Analysis wiki page on Value Chain Framework. While it consists of mostly industrial level perspective, you can also grab some insight on enterprise level implementation.
2. http://value-chain.org/ A value chain community page where you can get valuable templates, framework, references about value chain. It is especially useful for firm-level implementation.Y
3. Seixas, Berkes (2010) Community-based enterprises: the significance of partnerships and institutional linkages International Journal of the Commons
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