what value chains are and how they can optimize economic efficiency

First introduced in 1985 by Michael Porter, the value chain concept is understood as the process by which value is added to raw materials via various production processes in order to generate a final product that can be sold for a higher price. The main components of value chains are inbound logistics, operations, outbound logistic, marketing and sales, and services.

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Image Credit: lib.bakeru.edu

 

The way by which value chains are interpreted can take two forms. The first is in the limited scope of the activities that take place within a given business with the intention of producing a particular output. Such activities may be individual in nature or they may be conducted by cooperatives or producers working together in an effort to achieve a common goal. These activities may be also considered vertical integration or functional upgrading. From a more comprehensive perspective, value chains are a complex range of activities partaken by a wide spectrum of actors linked together by the process of bringing raw materials that have or have not been processed to consumers. Such relationships are dependent on coordination and long-term relationships as well as optimization and adding value. The aim, in either case, is the optimization of the flow of a product throughout the production process. This optimization can take the form of identifying and rectifying bottlenecks, the division of labor, reaching economies of scale or reaching established market standards. Achieving these results stimulate economic growth, indicating that the construction of value chains directly impacts competitiveness. Nonetheless, despite adding increasing value, costs are also incurred, marking the need for effective planning and strategizing in the development process.

Several factors contribute to the successful development of value chains. For instance, the presence of and protection of producer organizations can be fundamental. Likewise, strong policy and government programs can play an important role in value chain development by:

  • Providing or creating access to city/farmers markets
  • Supporting the development of green labels
  • Providing timely market info for stakeholders
  • Stipulating a preferential local procurement strategy
  • Technical (e.g. training) and financial assistance (e.g. subsidies)
  • Licensing

In order for effective value chain development to take place,  four strategic requirements must be incorporated:

  1. Market orientation
  2. A homogeneous target group
  3. Closeness/clusters
  4. Organized

Building on the aforementioned elements, three primary strategies can be implemented: processing of the product to create a product with higher value, e.g. producing jam from fruit; focusing on niche markets e.g. organics; or intervening in other parts of the value chain by focusing on a specific component of the value chain, e.g. partnering with social services. Regardless of the method chosen, it is imperative to identify and cater to the demands of the consumers in order to ensure long-term economic solvency. In doing so, not only is a strategy for economic efficiency implemented, but the needs of the market are met to effectively create a market pull.

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