A G R I C U LT U R E A N D R U R A L D E V E L O P M E N T 52461 Building Competitiveness in Africa’s Agriculture A GUIDE TO VALUE CHAIN CONCEPTS AND APPLICATIONS C. Martin Webber and Patrick Labaste Building Competitiveness in Africa’s Agriculture A G R I C U LT U R E A N D R U R A L D E V E L O P M E N T Seventy-five percent of the world’s poor live in rural areas and most are involved in agriculture. In the 21st century, agriculture remains fundamental to economic growth, poverty alleviation, and environmen- tal sustainability. The World Bank’s Agriculture and Rural Development publication series presents recent analyses of issues that affect the role of agriculture, including livestock, fisheries, and forestry, as a source of economic development, rural livelihoods, and environmental services. The series is intended for practi- cal application, and we hope that it will serve to inform public discussion, policy formulation, and devel- opment planning. Titles in this series: Agribusiness and Innovation Systems in Africa Agricultural Land Redistribution: Toward Greater Consensus Agriculture Investment Sourcebook Bioenergy Development: Issues and Impacts for Poverty and Natural Resource Management Building Competitiveness in Africa’s Agriculture: A Guide to Value Chain Concepts and Applications Changing the Face of the Waters: The Promise and Challenge of Sustainable Aquaculture Enhancing Agricultural Innovation: How to Go Beyond the Strengthening of Research Systems Forests Sourcebook: Practical Guidance for Sustaining Forests in Development Cooperation Gender and Governance in Rural Services: Insights from India, Ghana, and Ethiopia Gender in Agriculture Sourcebook Organization and Performance of Cotton Sectors in Africa: Learning from Reform Experience Reforming Agricultural Trade for Developing Countries, Volume 1: Key Issues for a Pro-Development Outcome of the Doha Round Reforming Agricultural Trade for Developing Countries, Volume 2: Quantifying the Impact of Multilateral Trade Reform Shaping the Future of Water for Agriculture: A Sourcebook for Investment in Agricultural Water Management The Sunken Billions: The Economic Justification for Fisheries Reform Sustainable Land Management: Challenges, Opportunities, and Trade-Offs Sustainable Land Management Sourcebook Sustaining Forests: A Development Strategy Building Competitiveness in Africa’s Agriculture A GUIDE TO VALUE CHAIN CONCEPTS AND APPLICATIONS C. Martin Webber and Patrick Labaste © 2010 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 12 11 10 09 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concern- ing the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. 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Building competitiveness in Africa’s agriculture : a guide to value chain concepts and applications / C. Martin Webber and Patrick Labaste. p. cm. — (Agriculture and rural development) Includes bibliographical references and index. ISBN 978-0-8213-7952-3 (pbk.) — ISBN 978-0-8213-7964-6 (electronic) 1. Agricultural industries—Africa. 2. Agriculture—Economic aspects—Africa. I. Labaste, Patrick, 1952- II. World Bank. III. Title. HD9017.A2W43 2009 338.1096—dc22 2009019928 Cover photographs: Tea-picker in Rwanda by Günter Guni, ©iStockphoto.com / guenterguni; vegetable garden in rural Kwa-Zulu Natal, South Africa, by Trevor Samson / World Bank. Cover design: Critical Stages, based on a template by Patricia Hord Graphik Design. Building Competitiveness in Africa's Agriculture is available as an interactive textbook at http://www.worldbank.org/pdt. The electronic version allows communities of practice and colleagues working in sectors and regions, as well as students and teachers, to share notes and related materials for an enhanced multimedia learning and knowledge-exchange experience. CONTENTS Acknowledgments ix Acronyms and Abbreviations xi Section 1: Introduction and Overview 1 Section 2: Concepts and Definitions of Value Chains and Supply Chains 9 Section 3: Review of Existing Literature on Value Chains and Supply Chains 15 Section 4: Discussion of Individual Tools 25 Tool 1 Choosing Priority Sectors for Value Chain Interventions 29 Case Study 1 Prioritizing Value Chains by Using Comparative Analysis—Value Chain Selection in Mozambique 33 Case Study 2 A Structured Value Chain–Based Approach to Designing a Strategy of Agricultural Competitiveness and Diversification in Mali 37 Tool 2 Designing Informed Strategies across the Value Chain 41 Case Study 3 Understanding the Value Chain and Integrating Information into Strategy—Nigerian Domestic Catfish 49 Tool 3 Conducting Benchmarking and Gap Assessments of Value Chains 55 Case Study 4 Ugandan Floriculture—Benchmarking and Gap Analysis 61 Tool 4 Upgrading and Deepening the Value Chain 69 Case Study 5 Kenyan Green Beans and Other Fresh Vegetable Exports 73 Tool 5 Identifying Business Models for Replication 77 Case Study 6 Identifying and Implementing Replicable Business Models—Mozambican Cashews 80 Tool 6 Capturing Value Through Forward and Backward Integration 85 Case Study 7 Capturing Value through Integration—The Ghanaian Pineapple Industry and Blue Skies Holdings Ltd. 91 Tool 7 Horizontal Collaboration—Creating and Taking Advantage of Economies of Scale 95 Case Study 8 Creating and Taking Advantage of Economies of Scale—The Ghana and Côte d’Ivoire Experiences in Fresh Pineapple Exports 97 Case Study 9 Creating and Taking Advantage of Economies of Scale within the Mozambican Cashew Value Chain 100 Tool 8 Positioning Products and Value Chains for Greater Value and Competitiveness 105 Case Study 10 Value Chain Strategies for Market Repositioning—Rwandan Coffee 109 v Tool 9 Applying Standards and Certifications to Achieve Greater Quality 115 Case Study 11 Ugandan Nile Perch Quality Management and Certification 122 Tool 10 Identifying Needed Support Services for the Value Chain 129 Case Study 12 Identifying Needed Support Services for the Value Chain—Zambian Cotton 134 Tool 11 Improving the Operating Environment by Promoting Public-Private Dialogue 139 Case Study 13 Improving the Operating Environment through Public-Private Dialogue—Botswana Cattle Producers Association 144 Tool 12 Achieving Synergies through Clustering 151 Case Study 14 Achieving Synergies through Clustering—Kenyan Avocados 155 Tool 13 Monitoring Achievements in Value Chain Performance 161 Bibliography 167 Index 179 BOXES 4.1 How to Choose Value Chains for Intervention: The Example of Senegal’s Projet Croissance Economique 31 4.2 Ugandan Benchmarking Constraints in the Coffee Industry 56 4.3 Tanzanian Cotton—Benchmarking Costs 58 4.4 Upgrading the Value Chain—Mongolian Meat Industry 70 4.5 Deepening the Value Chain: Glass Jar Production in Armenia 71 4.6 Replicable Business Models—Rwandan Coffee Washing Stations 78 4.7 Identifying and Replicating Business Models within the Value Chain—Dairy Pakistan 78 4.8 Benefits of Vertical Integration—ZEGA and Zambia’s Horticulture Value Chain 88 4.9 Bulgarian Wine—Integrating Operations to Secure Sourcing of Raw Material 89 4.10 Ecuadorian Cacao—Positioning the Value Chain for Greater Value and Competitiveness 106 4.11 Thailand GAP Cluster—Positioning Products (and the Value Chain) for Greater Value and Competitiveness 107 4.12 Thailand GAP Cluster—Use of Standards and Certifications to Upgrade Value 118 4.13 Ecuadorian Cacao—Improving Quality at the Producer Level to Achieve Higher Market Prices 119 4.14 Ugandan Cotton—Enterprise-Linked Extension Services Model 129 4.15 Sri Lankan Cinnamon 131 4.16 Tanzanian Coffee and KILICAFE: Productive Public-Private Dialogue 141 4.17 Standards for Ghanaian Pineapples 163 4.18 The PAID M&E Framework 164 FIGURES 1.1 SSA’s Share of World Agricultural Exports by Value, 2006 3 1.2 Africa’s Share of World Trade 3 1.3 Maize Yields and Aggregate Fruit Yields Excluding Melons, Africa versus World 5 2.1 Competitiveness Diamond 13 3.1 Power Relations in Value Chains 21 4.1 Value Chain Program Implementation Cycle 27 4.2 Mozambican Cashew Domestic Value Chain 35 4.3 Enhancing Productivity and Value across the Value Chain 41 4.4 Mongolia: Net Revenue per Kilogram of Cashmere for Each Component of the Value System 42 4.5 Pakistan Dairy SWOT Analysis 43 4.6 Competitiveness Diamond Analysis—Key Questions 45 4.7 Map of Nigeria 50 4.8 Nigerian Domestic Catfish Farming Value Chain 51 4.9 Consumers’ Reasons for Purchasing Live Catfish 51 vi CONTENTS 4.10 Consumers’ Views of What Factors Would Increase Their Consumption of Catfish 52 4.11 Nigerian Catfish Farming Value Chain—Possible Actions 53 4.12 Projected Development of the Value Chain for Fresh Catfish, 2005–15 53 4.13 Coordination within the Citrus Fruit and Tomato Value Chains, Comparison among Morocco, Spain, and Turkey 57 4.14 Map of Uganda 62 4.15 Ugandan Floriculture Value Chain and Cluster Map 62 4.16 Value Chain Analysis for Flowers from Uganda 64 4.17 Components of Total Cost of Sweetheart Roses in Uganda and Kenya 65 4.18 Components of Total Cost of Cuttings in Uganda and Kenya 66 4.19 Uganda’s Flower Exports, 1994–2006 68 4.20 Map of Kenya 74 4.21 Kenyan Green Bean Value Chain 75 4.22 Integrated Export Value Chain 75 4.23 Mozambican Cashew Nut Exports since the 1970s 81 4.24 Weaknesses in the Mozambican Cashew Domestic Value Chain 82 4.25 Mozambican Cashew Domestic Value Chain with Small Processors 82 4.26 Firm Value Chain 86 4.27 Improving Value Chains (before Value Added) 86 4.28 Improving Value Chains (with Value Added) 86 4.29 Pineapple Exports 92 4.30 European Pineapple Imports 92 4.31 Ghana’s Fresh Pineapple Exports to the EU 93 4.32 Ghana’s Pineapple Value Chain 98 4.33 Ghana’s European Pineapple Exports 99 4.34 Regions of Mozambique 101 4.35 Mozambican Cashew Exports, 1961–2000 101 4.36 Domestic Value Chain for Mozambican Cashews 103 4.37 Product Positioning—Mongolian Cashmere Industry 108 4.38 Rwanda’s Coffee Product Position, 1990–2000 110 4.39 Rwanda’s Coffee Positioning Goals for 2010 111 4.40 Generic Coffee Value Chain 112 4.41 Results of Rwandan Coffee’s Positioning Efforts, 2005 113 4.42 Rwanda’s Coffee Positioning, 2010 and Beyond 114 4.43 Standards Plotted against Product Value 115 4.44 International and Value-Added Standards 116 4.45 Ugandan Nile Perch Value Chain 124 4.46 ISO 9000 Certification Process 125 4.47 Good Manufacturing Practice and HACCP 126 4.48 HACCP Implementation 126 4.49 Uganda’s Nile Perch Exports 127 4.50 Mapping Actual and Potential Business and Financial Services 132 4.51 Zambian Cotton Exports, 1990–94 135 4.52 Zambia's Cotton Value Chain 135 4.53 Zambian Competition for Cottonseed 136 4.54 The Dunavant Distributor Model 136 4.55 Zambia’s Cotton Lint Exports, 1995–2004 137 4.56 Botswana’s Red Meat Value Chain 145 4.57 Exports of Botswana’s Beef, 1990–2004 145 4.58 Locations of Botswana’s Abattoirs 145 4.59 Recommendations for Botswana’s Red Meat Value Chain 147 4.60 Initial Implementation of Recommendations—Red Meat 148 4.61 Next Steps for Botswana’s Red Meat Value Chain 149 CONTENTS vii 4.62 Kenya’s Cut Flower Cluster 153 4.63 Kenyan Avocado Production, 1994–2007 156 4.64 Kenyan Avocado Value Chain 156 4.65 Kenyan Avocado Value Chain and Cluster 157 4.66 Kenyan Avocado Exports, 1975–2005 159 4.67 M&E Value Chain Model 163 4.68 Sample SPEG Poster Showing Desired Pineapple Qualities—USAID 164 TABLES 1.1 African Trade Growth—Export of Goods and Services 4 1.2 Aggregate Cereal Yield per Hectare, by Country 6 3.1 Key Documents Utilized in the Literature Review 17 4.1 Mozambican Commodities by Price, 2005 34 4.2 Original and Revised Sectors for Intervention in Mozambique 34 4.3 Gap Analysis of the Dominican Cigar Industry versus Cuban Cigars 59 4.4 Illustrative Gap Analysis 60 4.5 Growth Performance of Ugandan Horticultural Exports, 1995–2002 63 4.6 Rose Sales at the Dutch Auction, 2002 63 4.7 Sweetheart Rose Production Cost Structure per Hectare: Uganda versus Kenya 64 4.8 Cost Structure for Cuttings Production per Hectare: Uganda versus Kenya 66 4.9 Driving Forces and a Comparison between Uganda, Kenya, and the Netherlands 67 4.10 Mozambican Cashew Processing Operations 83 4.11 Some Reasons to Consider Vertical Integration 89 4.12 Cost of Packing Material before and after AIA 103 4.13 Cost of Shipping before and after AIA 103 4.14 Rwandan Coffee Production 110 4.15 Rwandan Coffee Production and Prices, 2003–05 113 4.16 Standard and Ordinary Coffee Percentages, 1998–2005 114 4.17 Dunavant Compensation Plan 137 4.18 Sample Checklist of Issues to Address at Various Stages of the PPD Process 140 4.19 Types of Business Membership Organizations and Their Functions 143 4.20 Pursuing Effective Dialogue 143 viii CONTENTS AC K N OW L E D G M E N T S This Guide was prepared by J. E. Austin Associates, Inc., for Antoine and Jean-Luc Bosio. Jean Michel Voisard and Martin the Agriculture and Rural Development Group of the Sus- Donarski also provided valuable guidance and comments. tainable Development Network of the World Bank. The work The authors convened a roundtable of industry experts, was directed by Patrick Labaste, Sustainable Development who provided suggestions and experiences that enhanced this Department of the Africa Region of the World Bank. The Guide. The roundtable participants included: Grahame Dixie, principal author and team leader was Martin Webber, Execu- Richard Henry, Steve Jaffee, John Lamb, Svetlana Meades, tive Vice President of J. E. Austin Associates, Inc. Paul Siegel, Yolanda Strachan, and Uma Subramanian of the This work was funded by the World Bank, by contribu- World Bank Group; Susan Bornstein (TechnoServe); Jeanne tions from the Bank-Netherlands Partnership Program Downing (USAID); Paul Guenette (ACDI-VOCA); Olaf Kula (BNPP), and from the All-ACP Agricultural Commodities (ACDI-VOCA); Frank Lusby (Action for Enterprise); and Programme (AAACP) of the European Union. Lynn Salinger (AIRD). Contributors from J. E. Austin Associates, Inc., included Numerous individuals contributed their expertise and Marcos Arocha, Nayha Arora, Virginia Brandon, Lisa Carse, experience, particularly to the case studies. They shared Grant Cavanaugh, Michael Ducker, David Feige, Michael their own stories, and their analyses and observations. Their Gorman, Carlton Jones, Mollie Logue, Jennifer Lynch, Alicia personal experiences and generous willingness to share their Miller, Kirk Nathanson, Matthew Shapiro, Jane Shearer, stories and conclusions make this Guide a particularly rich Justin Stokes, and Gina Tumbarello. Kevin X. Murphy, source of ideas and information. We sincerely apologize for President of J. E. Austin Associates, Inc., deserves special any omissions, which, of course, are inadvertent, in citing appreciation. World Bank collaborators included Malick contributors. ix A C R O N Y M S A N D A B B R E V I AT I O N S AAK Agricultural Association of Kenya ADAR Agribusiness Development Activity in Rwanda AGOA African Growth and Opportunity Act AIA Agro Industria Associadas AMAP/BDS Accelerated Microenterprise Advancement Project/Business Development Services APEP Agricultural Productivity Enhancement Program BCPA Botswana Cattle Producers Association BDS Business Development Services BMC Botswana Meat Commission BMU Beach Management Unit CAADP Comprehensive Africa Agricultural Development Programme CFA Communauté Financière d’Afrique CTBI Coffee Taxation and Benchmarking Initiative DFID Department for International Development DPL Dipped Products Ltd. DRC Domestic Resource Cost EAGA East African Growers Association EFEG Exotic Fruit Exporters Association of Ghana ESSD Africa Environmentally and Socially Sustainable Development Department, Africa Region (World Bank) EU European Union EurepGAP Euro-Retailer Produce Working Group on Good Agricultural Practices FAO Food and Agriculture Organization of the United Nations FAOSTAT FAO Statistical Database FCFA CFA Franc FDI Foreign Direct Investment FOB Free on board FPEAK Fresh Produce Exporters Association of Kenya GAP Good Agricultural Practices GDP Gross Domestic Product GMP Good Manufacturing Practice GPSCA Gabinete de Promoçao do Sector Comercial Agrário GTZ Gesellschaft für Technische Zusammenarbeit xi HACCP Hazard Analysis and Critical Control Point HAG Horticultural Association Ghana HCDA Horticultural Crops Development Authority IDA International Development Association (World Bank) IFC International Finance Corporation IFPRI International Food Policy Research Institute INCAJU National Cashew Institute KARI/NHRC Kenya Agricultural Research Institute/National Horticultural Research Centre KEPHIS Kenya Plant Health Inspectorate Services KILICAFE Association of Kilimanjaro Specialty Coffee Growers (Tanzania) LINTCO Lint Company of Zambia M&E Monitoring and evaluation MCI Mongolian Competitiveness Initiative MDG Millennium Development Goals MT Metric ton NEPAD New Partnership for Africa’s Development NGO Nongovernmental organization OCAB Office Centrale des Producteurs-Exportateurs d’Ananas et de Bananes OCIR-CAFÉ Rwanda Coffee Development Authority PAID Process indicators, action indicators, investment indicators, delivered results PCPB Pest Control Products Board PEARL Partnership to Enhance Agriculture in Rwanda through Linkages PISDAC Pakistan Initiative for Strategic Development and Competitiveness PoP Point of purchase PSD Private Sector Development R&D Research and Development RCA Revealed comparative advantage SADC South African Development Community SAGCH Southern Africa Global Competitiveness Hub SME Small and medium enterprise SMEX Small and medium enterprise exporters SPEED Support for Private Enterprise Expansion and Development SPEG Sea Freight Pineapple Exporters of Ghana SSA Sub-Saharan Africa SWOT Strengths/weaknesses/opportunities/threats TIP Trade and Investment Program TSC Sri Lankan Spice Council TZS Tanzanian shilling UBA Union Bananiére Africaine UFEA Uganda Flower Exporters Association UFPEA Uganda Fish Processors and Exporters Association UNBS Uganda National Bureau of Standards USAID U.S. Agency for International Development USDA United States Department of Agriculture WCO World Customs Organization ZEGA Zambian Export Growers Association ZPA Zambia Privatization Agency xii ACRONYMS AND ABBREVIATIONS SECTION 1 Introduction and Overview or many years and until quite recently, agriculture fell then moves physically from the producer to the customer; F out of favor with development practitioners, receiv- ing only 4 percent of official development assistance and 4 percent of public expenditure in sub-Saharan Africa and how value increases along the way. The value chain perspective provides an important means to understand business-to-business relationships that connect the chain, (SSA) (World Development Report [WDR] 2008). However, mechanisms for increasing efficiency, and ways to enable as exemplified by the 2008 WDR dedicated to Agriculture for businesses to increase productivity and add value. It also Development, the development community has refocused provides a reference point for improvements in supporting on agriculture as an effective means of fighting poverty, and services and the business environment. It can contribute to we may expect the above pattern to be reversed. The 2008 pro-poor initiatives and better linking of small businesses WDR notes, “[f]or the poorest people, GDP growth origi- with the market. Increasingly, the value chain approach is nating in agriculture is about four times more effective in being used to guide and drive high-impact and sustainable raising incomes of extremely poor people than GDP growth initiatives focused on improving productivity, competitive- originating outside the sector.” This renewal of interest in ness, entrepreneurship, and the growth of small and agriculture has been further enhanced by the recent rise of medium enterprises (SMEs). global food prices. As more and better-funded agricultural Despite the successes of many African exporters in sell- development projects emerge in the next few years, policy ing to new markets, without further improvements to their professionals will require new frameworks for designing and business environments and to the competitiveness of their evaluating investments in commercial agriculture. This export commodities, many SSA countries risk being Guide to value chain approaches provides the user with trapped into producing low-skill, low-value products and actionable methods and tools to design programs and invest- services, struggling to obtain a significant value-added share ment projects that aim to increase the productivity and per- in global trade. It follows that raising the productivity and formance of sub-Saharan African agriculture. increasing the efficiency of agricultural value chains are basic to the success of SSA rural economies and to the growth of incomes of their rural populations. AGRICULTURAL VALUE CHAINS AND AFRICA’S The Comprehensive Africa Agricultural Development DEVELOPMENT AGENDA Programme (CAADP), a program of the New Partnership Value chains are a key framework for understanding how for Africa’s Development (NEPAD), is directly aimed at rais- inputs and services are brought together and then used to ing productivity and increasing the efficiency of agriculture. grow, transform, or manufacture a product; how the product Through this program, the African Union has agreed to 1 increase public investment in agriculture by a minimum of Using concrete examples, mostly from African countries, 10 percent of their national budgets and to raise agricultural this Guide presents, reviews, and systematically illustrates a productivity by at least 6 percent. According to 2008 data range of concepts, analytical tools, and methodologies from IFPRI, African countries and their partners need to centered on the value chain that can be used to design, focus on boosting the supply response to the rise in interna- prepare, implement, assess, and evaluate agribusiness devel- tional food prices in order to continue growing at the same opment initiatives. It presents and comments on various rate. The CAADP will help committed member states effec- conceptual, methodological, and practical approaches to tively respond to the food price crisis and other pressures, improving the competitiveness of agricultural supply and enabling agriculture to contribute substantially to continued value chains. The Guide stresses the importance of value economic growth. chain–based approaches to agroenterprise and agrofood The development and business communities involved in chain development in SSA. It underscores principles of the African agriculture and agribusiness sectors have recently market focus, partnering, collaboration and information experienced a strong resurgence of interest in promoting sharing, and innovation. value chains as an approach that can help design interven- The tools and case studies discussed in this Guide have tions geared to add value, lower transaction costs, diversify been selected for their usefulness in directing and supporting rural economies, and contribute to increasing rural house- market-driven, private sector initiative and action. While the hold incomes in SSA countries. Enhancing value chain com- Guide is designed to speak directly to the needs of the busi- petitiveness is increasingly recognized as an effective nesses and direct actors in the value chains, it also serves as a approach to generating growth and reducing the rural resource for those practitioners, planners, and program poverty prevalent in the region. This is a welcome develop- implementers who work closely with value chain participants ment for practitioners who have long been convinced of the who want to improve the productivity of Africa’s agriculture. need to look differently at agriculture—not just as a means of survival, but as smaller or larger commercial businesses OPPORTUNITIES AND THREATS ASSOCIATED linked to domestic and global markets—and of the need to WITH TRADE AND MARKET GLOBALIZATION identify and tap into new sources of potential growth and FOR AFRICAN ECONOMIES value addition in the sector. Hopefully, renewed engagement will lead to a substantial increase in the flow of financial Fundamental changes in international commerce and resources and technical assistance devoted to supporting finance, including reduced transport costs, advances in market-driven, competitive agroenterprises and agricultural telecommunications technology, and lower trade barriers, value chains throughout the African continent. have fueled a rapid increase in global integration. Interna- However, there is danger that this renewed engagement tional flows of goods and services, capital, technology, ideas, may not last, or may even backfire, if the high expectations and people offer great opportunities for African nations to placed on promoting value chains are not met. Because the boost growth and reduce poverty by stimulating productivity development literature is not clear about the concepts and and efficiency, providing access to new markets, and expand- methods relating to value chains, there is risk that sooner or ing the range of consumer choice. Yet at the same time, glob- later the benefits of the value chain approach will be over- alization creates new challenges, including the need to shadowed by unmet expectations. That in turn could cause increase the quality and sophistication of African goods and the approach to be discarded categorically. Although there is services, to make regulatory reforms designed to take full no single way to mitigate such risks, this Guide aims to offer advantage of global markets, and to introduce cost-effective practical advice and tools to businessmen, policy makers, approaches to cope with the resulting adjustment costs and representatives of farmer or trade organizations, and others regional imbalances (Bolnick, Camoens, and Zislin 2005). who are engaged in SSA agroenterprise and agribusiness The majority of sub-Saharan Africans are low-income, development. This Guide is particularly designed for those and often subsistence, farmers. Sixty-five percent of who want to know more about value chain–based approaches, Africans in SSA live in rural areas (World Bank 2007), and how to use them in ways that can contribute to sound while 75 percent of the SSA labor force works in agricul- operational decisions and results for enterprise and industry ture. Sub-Saharan Africa’s share of the world’s agricultural development, as well as for policy making with respect to exports is approximately 2 percent, and imports represent doing business, stimulating investment, and enhancing trade approximately 2 percent of world trade (see figure 1.1; in the context of African agriculture. FAO 2006). 2 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Since 1970, trade in SSA has grown at three-quarters of terms of trade openness and taken advantage of new export the world’s rate and at only about half of Asia’s rate. Africa’s opportunities. As a region, SSA’s average trade openness in share in world trade actually fell from 4 percent in the 1970s 2005, as measured by exports as a percentage of GDP, was to 2 percent in 2005 (see figure 1.2). One of the most striking 39 percent, an increase of 18 percent from 2002 levels (see phenomena is the gradual marginalization of sub-Saharan table 1.1). Yet within Africa, levels of trade openness fluctu- Africa in international agricultural export markets. Even ate depending on geographic location, resource endow- though SSA possesses 12 percent of the world’s arable land, ment, infrastructure quality, enabling environment, and the region’s share of global agricultural exports has declined other factors. gradually from almost 10 percent four decades ago to Those blocks of countries showing notable increases in around 2 percent today (FAO 2006). On the import side, trade openness are: non-oil-producing countries (36 percent the opposite pattern emerges: sub-Saharan Africa is the change since 2002); SSA excluding South Africa and Nigeria only developing region that has seen its share of world agri- (33 percent change since 2002); and the countries of the cultural imports increase rather than decrease (FAO 2005). Economic and Monetary Community of Central Africa These patterns are manifest in assessments of Africa’s (29 percent). Africa’s oil-producing countries have mea- trade openness1 (measured by the trade to gross domestic sured a 61 percent increase in exports since 2002, but when product [GDP] ratio), which has also liberalized more compared to 1997–2002 levels, this is an 8 percent drop, per- slowly than that of any other major developing region, and haps indicating that recent growth is largely due to volatility SSA has supplanted Latin America as the region least open in world oil markets (especially the drop in trade during to trade (Gupta and Yang 2006). 2002). Relative to other parts of Africa, recent trends of However, the trends are not all negative. In fact, several trade openness show poor performance by countries of the SSA countries have recently improved their standing in West African Economic Monetary Union (–6 percent) and those of the Common Market of Eastern and Southern Figure 1.1 SSA’s Share of World Agricultural Exports by Africa (6 percent). Value, 2006 Still, Africa’s exports remain dominated by primary com- modities, with fuels accounting for about 40 percent and 5% 2% agricultural products approximately 20 percent. SSA has seen 27% a sharp decline in the share of agriculture in its total exports, Africa from more than 60 percent four decades ago to around America 20 percent today (FAO 2005). Only a few countries, such as Asia 50% Zambia and Kenya, have achieved significant diversification Europe of their exports, while the share of manufactured goods in Oceania Africa’s total exports has stagnated at about 30 percent, well 16% below that of other developing regions. In addition, manu- factured exports from African countries have a narrow base Source: FAOSTAT 2006. and low value added; often, they are semiprocessed, raw materials, or products that have preferential access to indus- trial countries. The high commodity prices of recent years, coupled with Figure 1.2 Africa’s Share of World Trade Asia’s rapid economic growth, have helped Africa expand its 25 exports to Asia, which now imports 25 percent of all African exports. The growing economies of India and China alone 20 Asia account for 10 percent of Africa’s exports. As these countries Percent 15 continue to grow and demand more natural resources, 10 African exporters may be poised to increase revenues and 5 Latin America expand their production in concert with the Indian and sub-Saharan Africa Chinese economic growth. 0 1970 1975 1980 1985 1990 1995 2000 2005 Even so, without further improvements to their business environments and the competitiveness of their export com- Source: Reprinted from: Gupta and Yang (2005), “Unblocking Trade.” modities, many SSA countries risk being competitively SECTION 1: INTRODUCTION AND OVERVIEW 3 Table 1.1 African Trade Growth—Export of Goods and Services (% of GDP) Historical Change: Change: Average Historical–2005 2002–2005 Countries and Regions 1997–2001 2002 2003 2004 2005 (%) (%) Sub-Saharan Africa (SSA) 31.5 32.6 33.8 35.9 38.5 22 18 SSA excluding S. Africa and Nigeria 32.6 30.5 34.2 38.2 40.7 25 33 CFA Franc Zone 34.7 37.7 36.1 39.8 43.2 24 15 West African Economic Monetary Union 29.5 33.3 30.5 30.6 31.3 6 –6 Economic and Monetary Community of Central Africa 41.4 43.2 43.2 50.4 55.7 35 29 Common Market of Eastern and Southern Africa 30.4 31.6 31.4 31.8 33.5 10 6 Oil-producing countries 45.7 26.1 33.9 39.6 42.1 –8 61 Non-oil-producing countries 26.7 46.7 50.4 56.6 63.4 137 36 Source: Reprinted from IMF 2005. trapped—selling low-skill, low-value products and ser- more value and increase exports, they must increase pro- vices, with little chance to increase value-added share in ductivity levels. SSA’s agriculture productivity measure of global trade. Without market knowledge, particular US$335 value added per worker (2003–5) is the world’s expertise, or competitive products and services, entire lowest. In comparison, at US$914, world agricultural pro- economies will essentially fail to take advantage of the poten- ductivity averages 3 times the SSA level, and Latin America is tially high benefits of global markets and the increases in nearly 10 times more productive at US$3,057 per worker. global trade flows. SSA economies unable to claim a more African productivity, in terms of yields, is also very low significant share of global trade will find it difficult to (see figure 1.3). achieve the sustainable and accelerated growth rates that Such low levels of productivity hinder Africa’s attempts are necessary to reach the Millennium Development at reducing poverty. SSA’s agricultural value chains need to Goals (MDGs) and significantly reduce poverty on the become more productive and competitive in the global continent. market for agricultural goods, and its value chains need to These threats and opportunities hold particularly true achieve greater value within Africa, as well. Increases in for agriculture, the main export revenue source for many competitiveness can assist those dependent on agriculture SSA countries and the largest income generator for their and agribusiness in increasing their incomes and asset base. populations. Increasing the production of, and export rev- Within Africa, there are large discrepancies between enues from, agricultural goods entails developing marketing countries’ average levels of productivity. Countries such as channels and outlets. Such development is essential to Mali, South Africa, and Zambia have achieved high levels of national strategies to raise incomes and eradicate poverty in sustained growth over the past 17 years (see table 1.2, per- SSA. Increased productivity in terms of value and prof- taining to cereal yields). Others, such as Burundi, the Dem- itability is clearly the way to generate higher incomes in a ocratic Republic of the Congo, Liberia, and Zimbabwe,3 sustainable manner—that is, without further depleting have suffered significant decreases in agricultural produc- SSA’s natural resource base. tivity, which may be the result of insecurity, conflict, climate change, as well as of unsound economic policies. Productivity in terms of net value added is a crucial mea- COMPARISON OF AGRICULTURAL sure of value chain performance. Value chains encapsulate PRODUCTIVITY the sequence of steps, flows, investments, actors, and inter- One way to increase the competitiveness of an industry or relationships that characterize and drive the process from product on the global market is to produce more efficiently. production to delivery of a product to the market. Raising Increases in efficiency are captured by measuring the agricul- the productivity (as well as efficiency) of agricultural value ture value added per worker, which is also a proxy for chains is key to the success of SSA’s rural economies and to agricultural productivity.2 For African producers to capture the incomes of SSA’s rural populations. 4 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 1.3 Maize Yields and Aggregate Fruit Yields abandoned early, state-focused models (that is, government Excluding Melons, Africa versus World ownership of resources and enterprises) and have since recognized that both public and private sectors have vital Maize yields roles to play in the economic-growth partnership. How 6,000 well those respective public and private roles are defined, 5,000 and how competently each sector performs its role, are significant determinants of economic growth. Yield, kg/hectare 4,000 For many years, private sector development initiatives 3,000 and programs have emphasized actions to increase busi- nesses’ access to training, skills development, financing, 2,000 entrepreneurship, business development services, and other important elements. More contemporary focuses have 1,000 included helping small and medium enterprises link with global markets and improving business environments. 0 While these varied initiatives have all proven useful, each by 90 92 94 96 98 00 02 04 06 19 19 19 19 19 20 20 20 20 itself is unlikely to generate significant changes in a coun- Eastern Africa Middle Africa try’s economic performance. Southern Africa Western Africa World average Starting in the mid-1980s, as part of the push toward diversification into nontraditional agricultural export crops Aggregate fruit yields that occurred in the Latin America and Caribbean region 120,000 with the passage of the Caribbean Basin Initiative, a great deal of useful work was done on the “deal-making” approach 100,000 to high-value products, which involves helping businesses identify and penetrate new markets with path-breaking ini- Yield in hectogram/hectarea 80,000 tial shipments. Often this approach was pushed in response to donor agency impatience to demonstrate visible results in 60,000 the short run. However, while buy-sell transactions are the essence of business, over time it has become clear that the transaction- 40,000 based approach does not adequately respond to the desire of large buying organizations to have a consistent supply of 20,000 high-quality, standards-compliant product, nor does it ensure long-term viability. Both the “category management” 0 that drives the food industry and the quest for sustainability that drives development require a shared vision that engages 90 92 94 96 98 00 02 04 06 19 19 19 19 19 20 20 20 20 all partners, planning that spans across seasons and years, as World Eastern Africa well as structured procurement/supply programs that pres- Middle Africa Western Africa Southern Africa (except South Africa) ent win-win situations and sustainable results for a particu- lar food category.4 So in recent years, leading practitioners Source: FAOSTAT data. have refocused on improving access to and participation in a FAO estimate. the more profitable, higher volume value chains, and the efficient supply chains on which they must rely, both as a means to achieving better category management in food OBJECTIVES OF THE GUIDE enterprises as well as forging longer-term partnerships. Worldwide, there has been a great deal of experimentation In the above context, the World Bank has been giving and learning in the search for reliable strategies to achieve increasing emphasis in recent years to challenges associated sustainable economic growth. Recognizing that this growth with agricultural trade facilitation, export promotion, and must be led by sound business strategy and operation and global or regional competitiveness. The Bank hopes to con- driven by market demand, practitioners have gradually tribute to the transformation of African agriculture into a SECTION 1: INTRODUCTION AND OVERVIEW 5 Table 1.2 Aggregate Cereal Yield per Hectare (kg/Ha), by Country Change Change Country 1990 2002 2006 1990–2006 (%) 2002–2006 (%) Angola 320.59 640.12 485.44 51.4 –24.2 Benin 847.85 945.13 1,125.16 32.7 19.0 Botswana 265.38 358.82 341.47 28.7 –4.8 Burkina Faso 600.22 942.68 1,126.59 87.7 19.5 Burundi 1,348.51 1,334.28 1,329.73 –1.4 –0.3 Cameroon 1,241.44 1,683.00 1,408.39 13.4 –16.3 Cape Verde 334.60 148.50 354.72 6.0 138.9 Central African Republic 806.99 1,019.68 1,074.07 33.1 5.3 Chad 559.21 670.89 749.54 34.0 11.7 Congo, Dem. Rep. of 799.85 771.98 785.42 –1.8 1.7 Congo, Rep. of 624.31 785.52 789.92 26.5 0.6 Côte d’Ivoire 884.82 1,719.47 1,776.51 100.8 3.3 Djibouti 1,666.67 1,666.67 1,500.00 –10.0 –10.0 Eritrea 164.65 405.58 146.3 Ethiopia 1,351.29 1,589.49 17.6 Gabon 1,643.33 1,282.05 1,539.79 –6.3 20.1 Gambia, The 1,003.92 960.27 1,222.62 21.8 27.3 Ghana 989.20 1,349.03 1,334.48 34.9 –1.1 Guinea 1,455.05 1,706.55 1,435.77 –1.3 –15.9 Guinea-Bissau 1,530.74 1,067.26 1,625.25 6.2 52.3 Kenya 1,561.77 1,488.47 1,674.82 7.2 12.5 Lesotho 1,038.89 1,618.22 653.52 –37.1 –59.6 Liberia 1,028.57 919.79 550.00 –46.5 –40.2 Madagascar 1,945.30 1,967.29 2,511.19 29.1 27.6 Malawi 991.55 1,045.69 1,106.78 11.6 5.8 Mali 726.38 792.38 1,067.48 47.0 34.7 Mauritania 869.85 1,010.00 782.36 –10.1 –22.5 Mozambique 473.91 809.63 902.31 90.4 11.4 Namibia 457.32 412.58 433.56 –5.2 5.1 Niger 310.28 411.48 605.23 95.1 47.1 Nigeria 1,147.92 1,255.24 1,464.11 27.5 16.6 Rwanda 1,042.65 1,028.48 1,117.79 7.2 8.7 Senegal 795.02 651.61 879.03 10.6 34.9 Sierra Leone 1,201.67 2,118.88 1,485.22 23.6 –29.9 Somalia 793.04 769.65 589.28 –25.7 –23.4 South Africa 1,876.60 2,770.70 3,142.96 67.5 13.4 Sudan 455.74 487.17 718.07 57.6 47.4 Swaziland 1,277.64 993.65 546.77 –57.2 –45.0 Tanzania 1,506.24 1,290.58 1,513.62 0.5 17.3 (Table continues on the following page.) 6 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Table 1.2 Aggregate Cereal Yield per Hectare (kg/Ha), by Country (continued) Change Change Country 1990 2002 2006 1990–2006 (%) 2002–2006 (%) Togo 746.84 1,130.97 1,135.12 52.0 0.4 Uganda 1,497.63 1,638.75 1,522.93 1.7 –7.1 Zambia 1,352.06 1,412.97 1,837.12 35.9 30.0 Zimbabwe 1,625.41 458.47 713.52 –56.1 55.6 Source: FAOSTAT data. profitable economic endeavor by focusing on increased pro- SSA’s agricultural farmers, entrepreneurs, and businesses to ductivity, efficiency, and stronger linkages for farmers with reach markets. more lucrative markets. In the framework of the African The literature and practice of development concerning Action Plan, the World Bank/Sustainable Development value chains, both academic and applied, is very substantial Department of the Africa Region (AFR-SDN) has further (see section 3). Special mention must be made of the con- engaged in generating and disseminating knowledge con- siderable body of work that is being developed by and with cerning the potential development of high-value agricul- the sponsorship of international agencies. The U.S. Agency tural supply chains as a means to increase and diversify rev- for International Development (USAID) has developed enues in rural areas of SSA. many useful materials centered on value chain analysis, and This Guide to value chain approaches is part of that its work is well reflected in its modular value chain training effort, designed to provide the user with actionable methods program, the Value Chain Wiki (http://apps.develebridge. and tools based on value chain concepts that can help design net/amap/index.php/Value_Chain_Development) and by interventions to increase the productivity and performance its ongoing value chain work. Germany’s Gesellschaft für of SSA agriculture. A wide range of tools and approaches— Technische Zusammenarbeit (GTZ) has also pioneered traditionally considered to be relevant mostly to sophisti- excellent work on value chains (for example, ValueLinks), as cated private businesses as they develop their own strategies has the United Kingdom’s Department for International and implement their own business plans—are, in fact, prov- Development (DFID) (for example, Regoverning Markets), ing to be useful to development planners and practitioners and several other agencies. The World Bank and International when it comes to designing subsector, commodity, and Finance Corporation (IFC) have also made available other value chain strategies. toolkits and guides with complementary purposes and focus This Guide is intended for use by a number of audiences. areas. This Guide provides a specific implementation focus Most directly, it provides planners, decision makers, and on value chain applications in agriculture and agribusiness in implementers with practical tools for creating effective value the African context. and supply chain development programs. It also provides public and private stakeholders with a common framework ORGANIZATION OF THE GUIDE for designing strategies and prioritizing decisions on sector The Guide is organized as follows: and subsector competitiveness. Policy makers, business lead- ers, members of the development community, researchers, ■ Section 1 introduces the Guide, its objectives, and its scope. and practitioners can use these methods and approaches to ■ Section 2 includes the definition of value chains, a promote the development of traditional and nontradi- description of their structure, and background on using tional value chains in sub-Saharan Africa. and analyzing value chains. To introduce the individual tools, approaches, and case ■ Section 3 reviews existing literature on value and supply studies, the Guide also discusses several key topics that the chains, including current theories and applications. tools embody or take into account. In this regard, however, ■ Section 4 discusses individual tools used in value chain the important “take-away” from this document is not the analysis. identification of common topics, but rather the insights and practical applications that value chain–based approaches pro- This Guide begins by examining core concepts and issues vide for adding value, creating opportunities, and enabling related to value chains. A brief literature review then focuses SECTION 1: INTRODUCTION AND OVERVIEW 7 on five topics of particular relevance to African agricultural 5) Improving the business and policy environment value chains, which can contribute to effective implementa- 6) Monitoring results in value chain development tion tools and approaches. These are: Each tool is followed by descriptions of one or more ■ Trust and cooperation actual cases. These cases illustrate the tool’s application, ■ Governance and are coupled with embedded mini-cases for additional ■ Market power perspective. Roughly 60 percent of the examples are from ■ Innovation and knowledge Africa, while the rest come from Europe, Latin America, ■ Focus/intervention points and Asia. These topics pertain to conditions and challenges faced by value chain participants and practitioners. They resonate NOTES throughout the many cases described in this Guide. The core of the Guide presents methodological tools and 1. The trade ratio is widely used as a measure of integra- approaches that blend important value chain concepts with tion into the world economy. Caution is needed, however, in the topics discussed and with sound business principles. interpreting it as an indicator of policy openness or com- The accompanying cases illustrate the application of the petitiveness, because countries that are large or distant from tools. The tools and case studies discussed in this Guide major markets tend to have low ratios regardless of whether their policy regime is open. Similarly, small countries typi- have been selected for their usefulness in directing and sup- cally have a high trade ratio even with protectionist policies. porting market-driven private sector initiative and action to Oil exporters also may have high trade ratios despite restric- implement improvements in agricultural value chains. tive policy regimes. This Guide offers 13 value chain implementation tools, 2. Value added in agriculture measures the output of the presented within the implementation cycle of a value agricultural sector less the value of intermediate inputs. chain program. The cycle typically consists of six stages, Agriculture comprises value-added from forestry, hunt- corresponding to different entry points for using the value ing, and fishing as well as crop cultivation and livestock chain approach, depending on the specificities of the situa- production. Data are in constant 2000 U.S. dollars. tion and problems to solve: 3. Between 2001 and 2002, Zimbabwe’s yield fell by two- thirds. This low yield for 2002 accounts for the growth 1) Designing strategies and business plans (and obtaining between 2002 and 2006 despite a general trend toward lower and using information) yields over the last five years. 2) Developing robust new businesses 4. For a recent discussion of sustainability in supplier-buyer 3) Supplying the market (aligning supply to match market relationships, see The Ties That Bind: Making Buyer-Supplier opportunity) Relationships Stick, USAID’s Business Growth Initiative, J. E. 4) Reaching the market (market positioning and market Austin Associates, Inc. https://www.businessgrowthinitiative. opportunities) org/ResourceCenter/Pages/TechnicalBriefs.aspx. 8 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE SECTION 2 Concepts and Definitions of Value Chains and Supply Chains DEFINITION OF CONCEPTS as well as marketing—and also on the allocation of the incremental value. hains composed of companies (or individuals) that C interact to supply goods and services are variously referred to as productive chains, value chains, fil- ières, marketing chains, supply chains, or distribution chains. By contrast, the term “supply chain” is used internation- ally to encompass every logistical and procedural activity involved in producing and delivering a final product or ser- vice, “from the supplier’s supplier to the customer’s cus- These concepts vary mainly in their focus on specific products tomer” (Feller, Shunk, and Callarman 2006). Since the pri- or target markets, in the activity that is emphasized, and in mary focus of supply chains is efficiency, the main the way in which they have been applied. What they have in objectives are usually to reduce “friction” (for example, common, however, is that they all seek to capture and describe delays, blockages, or imbalances), reduce outages or over- the complex interactions of firms and processes that are stocks, lower transaction costs, and improve fulfillment and needed to create and deliver products to end users. Moreover, customer satisfaction. they all strive to identify opportunities for and constraints The issue is not so much about which concept is superior against increasing productivity. or preferable, since they are complementary and their effec- Although it is impossible to draw clear distinctions tive implementation can deliver improved business results.1 among these often overlapping concepts, it is still worth- It must be noted, though, that practitioners of the supply while to provide some basic definitions and highlight some chain approach often fail to consider to what extent cost of the differences. Typically, “value chain” describes the full reduction and inefficiencies in supply chain logistics actu- range of value-adding activities required to bring a product ally add value, and if so, who benefits. On the other hand, or service through the different phases of production, includ- value chain proponents sometimes forget that effective value ing procurement of raw materials and other inputs, assem- chains must rest in efficient supply chains. bly, physical transformation, acquisition of required ser- “Clusters” represent collections of firms and institutions vices such as transport or cooling, and ultimately response that perform many of the functions segmented and to consumer demand (Kaplinsky and Morris 2002). As such, described in both the value chain and supply chain literature. value chains include all of the vertically linked, interde- Clusters themselves display horizontal and vertical links pendent processes that generate value for the consumer, as among enterprises that produce a single or closely related well as horizontal linkages to other value chains that provide product or service, which in turn may combine to satisfy the intermediate goods and services. Value chains focus on value demand of a particular value/supply chain. The literature on creation—typically via innovation in products or processes, clusters stresses the benefits of enterprise agglomeration and 9 geographic proximity, which can generate economies of popularity has been reinforced by many important business scale and positive externalities such as lower costs of inter- strategy themes, including core competencies, comparative mediate inputs or services, better access to skilled personnel, and competitive advantage, outsourcing, vertical and hori- or greater attractiveness to external procurement agents. zontal integration, and best practices. Improving clusters typically requires more emphasis on the Businesses (individually and in groups, such as clusters) local environment (both policies and institutions, public have focused on value chains while searching for alternative and private) and context in which it operates. ways to remain competitive. Value chain approaches have Generally the “chain” concept, whether value or supply, been used to guide product and process innovations, such places less emphasis on the enabling environment, while as specialty or organic coffee, that final customers or “cluster” analysis often neglects the necessary linkages to receivers value. Further, there is increased awareness that specific target markets that exist outside the cluster. procedures within a firm might not affect its own compet- Another related concept is the Francophone filière (liter- itiveness unless other firms adopt similar or linked prac- ally “thread” in English). “Filière” is used to describe the tices. Recognizing that partnerships and joint programs flow of physical inputs and services in the production of a aimed at better category management and sustainability final product, and is essentially similar to the modern value need not be a zero sum game has paved the way for busi- chain concept in its emphasis on vertical and horizontal nesses to use collaborative value chain concepts to identify coordination (Kaplinsky and Morris 2002). Filière studies efficiencies and competitiveness both within and among do not have a single unifying theoretical framework, and its firms, acting on opportunities to build win-win relation- practitioners have borrowed from different theories and ships. Recent technological developments that permit high methodologies for their analyses. The concept is often used levels of information sharing have reinforced businesses’ as synonymous to commodity chain or subsector. The filière capacity to upgrade value chain productivity and supply was initially used to study contract farming and vertical chain efficiencies. integration in French agriculture in the 1960s. It was, soon More recently, governments and donors, realizing that thereafter, applied to agriculture in developing countries, upgrading the performance of individual firms can best be such as the model implemented to develop the cotton sec- achieved in the context of market-based rewards for tors in West and Central Africa. Over time, filière analysis improved performance, have shown significant interest in focused more on how public institutions affect local pro- value chain analysis and implementation. In their effort to duction systems, and how “interprofessional associations” devise interventions that can help reposition entire indus- can help glue together direct and indirect economic actors, tries, build business competitiveness, and spur economic that is, those who handle the product of interest versus growth, governments and donors can use value chain–based those who contribute ancillary goods or services. approaches as robust tools to protect threatened links, facil- All of the commodity system concepts discussed—whether itate upgrading of others to generate greater returns, and to chain, cluster, or filière—underscore the importance of link- promote foreign direct investment (FDI) programs. Addi- ages to gain value and advantages to compete in global mar- tionally, value chain analysis has been used to examine con- kets. The term value chain is primarily used in this Guide, as straints in the enabling environment in which the chains it is inclusive and incorporates supply logistics, value addi- operate. Value chains have also been used as a tool for SME tion, transactions, and market linkages. We use other terms development, with new methods of linking SME suppliers occasionally (particularly supply chain) where we believe that and service providers to the value chains of lead processors the Guide’s conceptual focus or a specific case warrants. or marketers. More importantly, value chain analysis sheds light on the size of the firms participating in each link, how they are par- HOW VALUE CHAIN ANALYSIS HAS BEEN USED ticipating or could be participating in the chain, and oppor- Interest in value chains is not new. Businesses have been tunities to facilitate or improve those linkages. This is par- using value chain analysis and implementation principles ticularly crucial in agriculture, where governments and aid for years to formulate and implement competitive strategies. agencies are confronted with the challenge of including Corporations use value chain analysis to answer questions small farmers in modern value chains so that they can ben- such as, “Where in the value chain should my business be efit from the globalization of markets. The value chain con- positioned to improve its performance?” The value chain’s cept is therefore not only relevant to deal with growth, but 10 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE also with the equity dimension of the modernization of the ■ How do financial (and sometimes economic) costs rise as agrifood systems. the product moves along the value chain? ■ How does market value rise as the product moves along? ANALYZING AND EVALUATING VALUE CHAINS ■ Where is there the most potential for growth in sales or profitability? Value chain analysis rests on a segmentation of the different ■ Who are the most important actors within the value activities and mapping of interactions that may generate chain and how do they behave? costs or value in the production and sale of a product or ■ To what extent is trust and cooperation evident at each service. Although it is also concerned with structure, con- step in the chain? duct, and performance, it differs from traditional commod- ■ What is the share of volume and value associated with ity system or industry analyses in some important ways:2 different types or cohorts of actors? ■ Where are the apparent choke points or bottlenecks in ■ It focuses on net value added instead of just overall rev- the value chain? enue and gross physical output. ■ What is the overall size of the value chain of interest? ■ It is concerned with cost build-up and value accretion, as ■ How does this value chain connect to others, and what well as the distribution of burden or benefit in both. possible synergies exist? ■ It recognizes that linkages between productive activities ■ How has the value chain been evolving over time? and actors vary according to the specific product type ■ How is the value chain governed, and who holds power and target market, even if the main actors are the same. or influence? ■ It recognizes that economic activity is very dynamic, ■ In what ways is the value chain regulated from outside, or necessitating adjustments in strategy and tactics con- self-regulated? stantly as circumstances change. ■ What is the institutional framework of the value chain ■ It recognizes that there are different kinds of value chains (for example, producer or trade associations)? (buyer-dominated, supplier-dominated, balanced, or ■ What factors in the enabling environment hinder or sup- directed) depending on which actors or activities have port chain growth and prosperity? the most leverage, information, and power. ■ What is the potential for improving or upgrading any of ■ It looks not just at physical flows, but also informational the above? flows. ■ It seeks to better understand the constraints and oppor- tunities within each segment, as well as the context in LIMITATIONS OF VALUE CHAIN ANALYSIS which the chain operates. As mentioned, there are many ways to analyze a value chain. There are many ways to analyze or evaluate a value chain. For example, value creation can be disaggregated between Analysis can stem from research of secondary information, each link in the chain, as well as within each link. Some chains such as government or industry data, to interviews with are merely a directional map (such as the one in figure 4.25), industry participants. It can also be derived from participa- which is, in itself, valuable for beginning to understand the tory market assessments and market observations. Once the actors and processes that intervene to create value for partic- information is gathered, numerous tools and processes help ular consumers. However, agencies and other sponsors that interpret and inform the resulting analysis. commission value chain analysis often find that the analysis In general, an in-depth value chain analysis considers the as carried out is insufficient and cannot be used to guide following questions (SNV 2004): them in making informed decisions—particularly in decid- ing on actions that will greatly impact value added, rather ■ What are the target markets that the value chain of inter- than merely reducing costs. est serves? Indeed, many of these analyses have a common weakness: ■ What/where are the main competing value chains? the tendency to focus excessively on cost efficiency or break- ■ What are the product types, forms, and presentation that outs of cost components. While efficiency in production is each target market seeks? increasingly becoming a necessary condition for penetrating ■ What are the pathways from source to each end-market? global markets, it will not ultimately be the only factor that ■ What are the value chain’s comparative advantages? determines sustained participation and increased incomes for SECTION 2: CONCEPTS AND DEFINITIONS OF VALUE CHAINS AND SUPPLY CHAINS 11 value chain participants. The following sections contain Government regulations, international standards, trade examples of some related analytical weaknesses and chal- regulations, and market forces typically shape the business lenges. environment. Michael Porter’s diamond for depicting the major competitiveness factors, shown in figure 2.1 below, is a useful framework for assessing a value chain’s business Value chains are not fixed or static environment (the diamond is discussed further in section 4, It is important to recognize that value chains are not fixed in tool 2.) terms of composition, relationships, or market positioning, and that there is a competitive need to alter and improve the A simple cost analysis will not do value chain in light of strategic choices that businesses can make regarding the markets in which they compete. While a Some value chain analyses merely depict a cost build-up per value chain’s purpose is to link production to the target activity without mapping the actors involved or identifying market advantageously, it is the private sector that decides the value that is captured at each link of the chain. An eval- which markets and where to compete—and alters the value uation of a value chain based only on an analysis of cost chain accordingly. Value chain analysis too often focuses sim- structure at various stages in the value chain is not sufficient ply on improvements within the given value chain, rather to assess the competitiveness position of the value chain— than on how value chains can be shifted to target different, because it disregards the market and value addition side of more attractive markets and business strategies. the equation. In some cases, it can even result in misleading conclusions. Creating a cost build-up, and benchmarking it against Market dynamics matter competitors, will obviously provide ideas on areas for Value chains can be helpful instruments for serving the improvement. But the analysis will probably not shed light needs of a particular market sector, but focusing on a static on which activities generate more value, whether the product value chain can also mask the need to segment and cus- can be produced at a competitive price for other markets, tomize products for different markets. The key elements of how well the chain is integrated, or how easily information building sustainable competitiveness are a solid under- flows throughout it. More importantly, a simple cost build- standing of market dynamics and a thorough analysis of the up will tend to focus on interventions that improve on costs, attractiveness of potential market segments and the compe- rather than on the broader and more comprehensive value tition. Businesses must choose which products and which chain approach that looks at repositioning the whole chain markets can be served competitively and base their goals into more lucrative markets and products. and strategy on good market analysis. Shifting value within a value chain, rather than Quality and service are also important creating more value Similarly, excessive focus on delivering a product (especially As mentioned earlier in this section, donor agencies and a commodity) may hide opportunities to deliver a package governments have sometimes used value chain analysis to of products and services that the market or customer will identify and protect threatened links along chains. Addi- find desirable. Too often, a value chain analysis is not tionally, some stakeholders continue to look at value chain designed to help businesses and planners weigh choices analysis as a zero sum game focused on shifting value from about delivering product quality, information, and service. one link of the chain to another. This cutthroat perspective obscures opportunities to upgrade the whole system to the benefit of all value chain participants. Considering the environment in which a value chain operates IMPLICATIONS OF THE OPERATING Often, value chain analysts do not properly consider the ENVIRONMENT: BEYOND THE VALUE CHAIN business environment in which the value chain operates. In doing so, the analysis can fail to identify potential interven- While value chain analysis is extremely useful, its weaknesses tions for improved business and value chain performance. highlight the fact that many other important considerations 12 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 2.1 Competitiveness Diamond Context for firm strategy and rivalry Factor • A local context that encourages investment and sustained upgrading Demand (input) conditions • Open and vigorous competition conditions among locally based rivals • High quality, specialized • Sophisticated and inputs available to firms: demanding local Related and - human resources supporting customer(s) - capital resources industries • Unusual local - physical infrastructure demand in specialized - administrative infrastructure • Presence of capable, locally-based suppliers segments that can - information infrastructure and firms in related industries be served globally - scientific and technology • Presence of clusters instead of isolated • Customer needs infrastructure industries that anticipate - natural resources those anywhere Source: Michael Porter, 2009. are necessary to increase the net value generated for the of higher unit value; (2) more volume of products of the entire chain or some of its participants. It is important to same value; (3) a different mix of products; and/or (4) deliv- understand market dynamics, competitive forces, and the ery of a given set of products into more diverse markets. operational environment that can affect the value chain’s Product innovations such as new varieties, new formu- performance and growth. lations, new presentations, or entirely new manufactured Yet at the same time, there is a need to focus on funda- products are one way to add value. Process innovations mentals. Every target market and value chain role has key such as changes in technology, production or manufactur- elements and drivers that are important for competing suc- ing practices, certification, traceability, identity preserva- cessfully. Interventions to build competitiveness should not tion, or branding are another major way. New business attempt to make quick, comprehensive improvements models and their business-to-business relationships are a throughout an entire value chain. Rather, a competitiveness- third. All such innovations can benefit from inward as well building strategy should target priority elements for as externally provided investment, technical support, or improvement. In other words, improvements should not be mentoring. made irrespective of a strategy that has set goals and objec- tives and is based on identified opportunities, given the value chain’s relative position. It is crucial to identify success NOTES factors and driving forces in the target markets in question 1. In fact, Feller, Shunk, and Callarman (2006) argue pre- and subsequently benchmark these elements against top cisely for the need to stop thinking of supply chains and performers and competitors. value chains as different entities, but rather, for integration While reductions in production or transaction costs are of the two. always desirable, competitors can and will easily imitate 2. Some of these differences were adapted from Kaplinsky them. Value chain interventions should therefore concen- and Morris (2002), “A Handbook for Value Chain Research,” trate at least as much, if not more, on achieving: (1) products p. 46–47. SECTION 2: CONCEPTS AND DEFINITIONS OF VALUE CHAINS AND SUPPLY CHAINS 13 SECTION 3 Review of Existing Literature on Value Chains and Supply Chains his section, through a review of value chain litera- This literature review emphasizes five topics, currently T ture, provides a summary of and commentary on the state of knowledge and available information on several main topics currently being discussed by researchers the focus of much consideration, that are of particular relevance to African agricultural value chains and that can contribute to effective implementation tools and approaches: and practitioners regarding how value chain–based imple- ■ Trust and cooperation mentation is framed, focused, and realized. The literature ■ Governance review emphasizes key topics from value chain development ■ Market power and identifies the bases for appropriate tools used to guide ■ Innovation and knowledge decision making and action in the agricultural sector. While ■ Focus/intervention points not specific to Africa, the topics below are highly applicable to African agricultural value chains and are woven throughout These topics pertain to conditions and challenges faced the tools and cases presented in section 4. by value chain participants and practitioners and can help This section highlights a number of issues, patterns, and answer questions such as: topics; the discussion of their contexts and relevance estab- ■ Why do certain firms find it in their interest to cooperate lishes a good background for understanding the implemen- or develop win-win relationships? tation tools that follow. Although the documents reviewed ■ Why do certain firms have the most market power and here indicate the remarkable breadth of work that has been the ability to determine price to their advantage? done on value chain development, they are only a small por- ■ What is a strategy for maintaining market share? tion of the available literature. This section is not intended ■ How does a supply or value chain get pulled by market to comprehensively review the entirety of value chain liter- demand? ature; the reference documents presented and cited here ■ How is innovation allowed to flow among members of were selected for their coverage of the topics most relevant a chain? to the tools and approaches presented in this Guide. The Guide’s bibliography includes a comprehensive list These common topics were extracted or developed from of the resources consulted. Those documents, specifically various works. A partial list (and their emphasis) is shown mentioned below, are highlighted for their usefulness in dis- in table 3.1 We particularly note: cussing topics, models, theoretical considerations, lessons learned from past program implementations, operational ■ A Handbook for Value Chain Research, Kaplinksy and implications, and illustrative examples. Morris, International Development Research Center. 15 ■ Global Commodity Chain Analysis and the French Filière ■ “Exporting Out of Africa: The Kenya Horticulture Success Approach: Comparison and Critique, Raikes, Jensen, Ponte Story,” by Jaffee and Okello, World Bank. Royal Dutch Veterinarian and Agricultural University. ■ “Globalization of the Agro-Food System: Success and ■ Globalization and the Small Firm: A Value Chain Challenges for Promoting Africa’s Horticultural Exports,” Approach to Economic Growth and Poverty Reduction, by Gabre-Madhin and Minot, International Food Policy Downing, Field, Kula, United States Agency for Interna- Research Institute, 2004. tional Development. ■ “Guide to Commodity-Based Export Diversification and ■ Governance in Global Value Chains, Humphrey and Competitiveness Strategies for African Countries,” by Schmitz, Institute of Development Studies at the University Stryker and Salinger, Associates for International of Sussex. Resource Development. ■ Implementing Sustainable Private Sector Development: ■ “High Value Agricultural Products for Smallholder Mar- Striving for Tangible Results for the Poor: The 2006 Reader, kets in Sub-Saharan Africa: Trends, Opportunities, and Miehlbradt, McVay, Tanburn, International Labor Research Priorities,” by Temu and Temu, ICTA. Organization of the United Nations. ■ Programme de Développement des Marchés Agricoles— ■ Info-Cadena: Instruments to Foster Value Chains, Springer- AgMarkets Sénégal, GEOMAR International Inc. Heinze, German Agency for Technical Cooperation (GTZ). ■ “The European Horticulture Market: Opportunities for ■ Integrating SMEs in Global Value Chains: Toward Partner- Sub-Saharan African Exporters,” edited by Patrick ship for Development, Kapinsky, Readman, United Labaste, 2005. National Industrial Development Organization. ■ AMAP BDS Knowledge and Practice Task Order: Lexicon In table 3.1, each document’s technical focus is distin- General, Dunn, United States Agency for International guished according to focus on private sector development Development. (PSD), value chain, and agribusiness. Documents with an ■ Commodity Chains and Global Capitalism, Gereffi, Africa focus are indicated specifically. Korzeniewicz, 1994. Undoubtedly, academics, international organizations, ■ ValueLinks Manual, GTZ. bilateral development institutions, and nonprofit organiza- ■ Regoverning Markets: Small Scale Producers in Global tions have done a great deal of work related to these common Agrifood Markets, UK Department for International topics. There is broad agreement on the importance of these Development. identified topics and concepts. But the nomenclature is still ambiguous and not universally accepted. Attempts have been For references specifically focusing on sub-Saharan made to define and provide a lexicon, but inconsistencies per- African agricultural value chains, we turned most frequently sist. The concepts and definitions used in this Guide result to commodity-specific or program implementation reports. from experience, generally accepted expert terminology, and, These reports were useful for African perspectives and for in some cases, ad-hoc definitions that will be made explicit. understanding key geographic aspects of value chain pro- gram implementation. Some of the most pertinent reports CREATING TRUST that provided African perspectives were: At the heart of value chain development is the effort to ■ “Successes and Challenges in Promoting Africa’s Horti- strengthen mutually beneficial linkages among firms so cultural Exports,” by Gabre-Madhin and Minot, World that they work together to take advantage of market oppor- Bank, 2003. tunities, that is, to create and build trust among value chain ■ “Partnerships for Agribusiness Development, Agricultural participants. Nearly all of the documents on value chain Trade, and Market Access: A Concept Note for NEPAD,” development contain this notion of the importance of by TechnoServe, November 2004. interfirm cooperation and creating economies of scale ■ “The Market for Non-Traditional Agricultural Exports,” through increased coordination. by Hallam, Liu, Lavers, Pilkauskas, Rapsomanikis and Most value chain–based initiatives work with a range of Claro, Commodities and Trade Division, FAO, 2005. business types to strengthen both vertical linkages (between ■ “Etude sur la Compétitivité des Filières Agricoles dans firms that buy from and sell to one another) and horizontal l’Espace UEMOA,” Union Economique et Monétaire linkages (between firms that serve the same functions in the Ouest Africaine (UEMOA). value chain). These interfirm connections are especially 16 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Table 3.1 Key Documents Utilized in the Literature Review Relevant value chain topic covered Innovation Affiliated Value chain or agribusiness Geographic Technical Market and or donor resource document focus focus Trust Governance power knowledge Intervention Author (s) organization Addressing Marketing and Processing General Agribusiness √ √ Westlake FAO Constraints That Inhibit Agrifood Exports: A Guide for Policy Analysis and Planners Agri-Supply Chain Management: General Agribusiness √ √ Roekel, Willems, World Bank To Stimulate Cross-Border Trade in and Wageningen Developing Countries and Emerging Economies AMAP BDS Knowledge and Practice General VC √ √ √ √ √ Dunn USAID Task Order: Lexicon Commodities, Diversification, and General Agribusiness √ √ √ Humphrey FAO Poverty Reduction Commodity Chains and Global General VC √ √ √ Gereffi, Korzeniewicz Capitalism Competitive Strategies for General Agribusiness √ USAID Agriculture-Related MSES: From Seeds to Supermarket Shelves Compilation of Insights on the Online General VC √ √ Roduner, Gerrits SDC Debate, Value Chains in Rural Development (VCRD): The Role of Donors in Value Chain Interventions “Customized Competitiveness” General Agribusiness √ Reardon USAID, MSU Strategies for Horticultural Exporters: Central America Focus with Lessons from and for Other Regions Etude sur la Compétitivité des Filières Africa VC √ √ √ Faivre Dupaigre, ECOWAS Agricoles dans l’Espace UEMOA Baris, Liagre Exporting Out of Africa: The Kenya Africa Agribusiness √ √ English, Jaffee, Okello World Bank Horticulture Success Story Globalization and the Small Firm: A Value General VC √ √ √ √ Downing, Field, Kula USAID Chain Approach to Economic Growth and Poverty Reduction Globalization of the Agro-food System: Africa Agribusiness √ Gabre-Madhin, Minot IFPRI Success and Challenges for Promoting Africa’s Horticultural Exports Governance in Global Value Chains General VC √ √ Humphrey and Schmitz IDS The Governance of Global Value Chains General VC √ √ √ Gereffi, Humphrey, Rockefeller Sturgeon Foundation (Table continues on the following page.) 17 18 Table 3.1 Key Documents Utilized in the Literature Review (continued) Relevant value chain topic covered Innovation Affiliated Value chain or agribusiness Geographic Technical Market and or donor resource document focus focus Trust Governance power knowledge Intervention Author (s) organization Guide to Commodity-based Export Africa Agribusiness √ Stryker, Salinger AIRD Diversification and Competitiveness Strategies for African Countries A Handbook for Value Chain Research General VC √ √ √ √ √ Kaplinksy and Morris IDRC High Value Agricultural Products for Africa Agribusiness √ Temu and Temu ICTA Smallholder Markets in Sub-Saharan Africa: Trends, Opportunities and Research Priorities Implementing Sustainable Private Sector General PSD √ √ Miehlbradt, McVay, ILO Development: Striving for Tangible Tanburn Results for the Poor: The 2006 Reader Integrating SMEs in Global Value Chains: General VC √ √ √ Kapinsky, Readman UNIDO Towards Partnership for Development Participatory Market Chain Approach General VC √ √ Bernet, Devaux, — Ortiz, Thiele Promotion of Commercially Viable General Agribusiness √ Lusby, Panlibuton USAID Solutions to Subsector and Business Constraints Strategies for Diversification and Adding General VC √ Humphrey and Oetero UNCTD Value to Food Exports: A Value Chain Perspective Successes and Challenges in Promoting Africa Agribusiness √ √ √ √ Gabre-Madhin, Minot World Bank Africa’s Horticultural Exports Trade, Micro and Small Enterprises, and General VC √ √ √ Barber and Goldmark USAID Global Value Chains: microREPORT #25 Upgrading Global Value Chains General VC √ √ √ Humphrey ILO Value Chain Analysis for Policy-Makers General VC √ √ √ Schmitz ILO, Inst. Dev. and Practitioners Studies Value Chains and Their Significance for General VC √ √ √ Akin, Fries USAID Addressing the Rural Finance Challenge Note: VC = Value Chain. — = not available. important to consider when examining how agile a value ■ Contractual relationship chain can be regarding market developments, or how able it is ■ Inspection to link to markets. Positive outcomes undoubtedly result when ■ Degree of dependence there is a strong market drive for linkages, strong investment ■ Technical assistance from many businesses in the chain, and a market system in ■ Communication place to replicate improved models and practices (ILO 2006). ■ Price determination More specifically, interfirm cooperation refers to the joint ■ Credit extended action between two or more firms in a value chain. It includes ■ Outsourcing payment terms horizontal and vertical linkages between firms and can be formal or informal. Examples include information sharing, The literature frequently emphasizes the idea that bulk purchasing of inputs, contract farming, and industry building trust by rewarding collective action among stake- branding campaigns. Unfortunately, value chain participants holder participants is crucial for upgrading a value chain. frequently do not work cooperatively, and market conditions Indeed, working within value chains requires establishing sometimes propel firms to adapt cutthroat measures while relationships in order for participants to gain the “win- competing for highly segmented market rents. win” perspective. When trust, learning, and benefits are Too often, many participants in a value chain choose not shared among firms (vertically and/or horizontally), there to collaborate among themselves due to lack of leadership, is a greater likelihood of generating collective efficiency mistrust of competitors, weak information, or lack of scale. and scale. Increased trust has also proven to lead to greater Without a strategic direction for the value chain and effective specialization by the value chain, as well as eventual out- management of its economies, a cutthroat and zero-sum men- sourcing that provides cost advantages (adapted from tality can take hold among value chain participants, who then Moran [2001]). For instance, less time and money need to ignore or cannot see the benefits of cooperation, including the be invested to monitor performance when suppliers can mechanisms that foster it. Competition is, of course, useful, be trusted to meet quality, quantity, and time require- but that usefulness is limited if it blinds the participants to ments. High-trust situations enable lead firms within the productive collaboration and incentives. For example, if a lead value chain to assist each other in achieving common exporting firm or monopoly is able to concentrate its buying objectives. power, it can rely on multiple suppliers for inputs and ignore Value chain development initiatives have orchestrated price incentives for service and quality. Given its situation, the stakeholder meetings by providing neutral outsiders to help lead firm might restrictively determine the price, erect barriers build trust among the participants. Oftentimes, removing to entry, and prevent the dissemination of information or the zero-sum mentality among value chain participants opportunities to innovate. requires more objective assistance and successful early ini- A situation that prevents collaboration (beyond simply tiatives to trigger change. An outside and neutral facilitator transactional relationships) can leave producers/suppliers can drive home the concept of participating in a mutually competing among themselves for less lucrative rents and with beneficial commercial relationship, but it remains necessary little opportunity to capture more value. In such low-trust that the value chain participants drive the entire process. value chains, the lead firm(s) may perpetuate its short-term More recently, observers have questioned the sustain- advantage by switching (or threatening to switch) suppliers in ability and utility of non-profit-motivated organizations constant pursuit of cost advantages. and government agencies acting as market advisors to In this respect, the level of development of the value chain value chain participants. Their argument states that, for is important. In many instances in SSA, value chains lack the sustainability purposes, market conditions, rather than required ingredients for trust building merely because of government agents or nonprofit professionals, should their lack of effective performance, which in turn leads actors determine the role that participants take and the relation- to opt for opportunistic and risk mitigation behaviors. ships that are formed. There is substance to this criticism, but Characteristics of value chain relationships that have the depending on the focus of the development intervention, a largest effect on the level of trust between participants facilitative role of a neutral broker may be very often criti- include (Kaplinsky and Morris 2002): cal in order to stimulate or create markets in underserviced areas, or where market demand has not yet been recognized ■ Length of trading relationship (ILO 2006). However, the general consensus among prac- ■ Ordering procedures titioners is that a good exit strategy must accompany such SECTION 3: REVIEW OF EXISTING LITERATURE ON VALUE CHAINS AND SUPPLY CHAINS 19 approaches from the very beginning, or else distortions or objective of value chain development is to engender dependencies will result. informed, incentive-producing governance targeted at achieving high-value results. In many sub-Saharan Africa cases, certain key actors—the GOVERNANCE: WHAT TYPE OF POWER lead firms or “governors of value chains”—have the capabil- RELATIONSHIP EXISTS, AND IS INFORMATION ity and power to define and set the parameters of contracts SHARED? and subcontracts in their supply chains. For example, they “Governance” is a description of the dynamic distribution of can define chainwide product and process standards, quan- power, learning, and leadership in standards and strategy- tities, and conditions of delivery. This power may be based setting among a value chain’s firms. While the term can have on ownership of well-established brand names, proprietary many meanings, in this instance we use it to describe the technology, or exclusive information about different product sharing of information and systematic standards promoted markets, which enable the firm to act as a system integrator by the “governing” entity in a value chain. (Altenburg 2006). Governance can be characterized along a continuum of The governing entity is often a lead firm that is closer to four types of relationships that center on information and the market or business environment that the value chain the use of market power (Dunn 2005): inhabits. Leadership or being a “lead” firm implies success, efficiency, a competitive composure, or direct informa- ■ Market relationship: Arms-length transactions in which tion. As such, working with lead firms is often the most there are many buyers and many suppliers. Repeat trans- efficient and effective way for a development program or actions are possible, but little information is exchanged market partner to reach a large number of chain partici- between firms, interactions are limited, and no technical pants. The advantages are an easy entry point, a possibly assistance is provided. guaranteed market or reliable supplier, leveraged technical ■ Balanced relationship: Both buyers and suppliers have expertise, and marketing connections. The disadvantages alternatives, that is, a supplier has various buyers. There are that the lead firms too often seek exclusive producers, are extensive information flows in both directions, with resist replication, and limit competition, while small value the buyer often defining the product (that is, design and chain participants risk becoming too dependent on one technical specifications). Both sides have capabilities that lead firm (ILO 2006). are hard to substitute, and both are committed to solving In economics, a competitive lead firm is said to arise in a problems through negotiation rather than threat or exit. contestable market. Contestable markets are ones in which ■ Direct relationship: Main buyer takes a large percentage monopoly/monopsony-type market distortions do not arise of supplier’s output, defines the product (that is, design despite dominance of the value chain by few (or even one) and technical specifications), and monitors the supplier’s firm(s). These firms do not exercise their ability to manipu- performance. The buyer provides technical assistance late prices because low barriers to entry guarantee that new and knows more about the costs and capabilities of the firms will quickly enter and return the market to equilib- supplier than the supplier does about the buyer. The rium prices. Hence, the threat of competition is sufficient to supplier’s exit options are more restricted than those of induce competitive pricing. In the context of African value the buyer. chains, contestable markets are particularly important in ■ Hierarchical relationship: Vertical integration of value- the West African cotton sector, where the pricing power of added functions within a single firm. The supplier is monopolistic, often parastatal firms, is ostensibly checked owned by the buyer or vice versa, with the junior firm hav- by the threat of competition. ing limited autonomy to make decisions at the local level. MARKET OR BARGAINING POWER (BUYER Governance ensures that interactions between firms VERSUS PRODUCER) along a value chain exhibit some level of organization rather than simply being random. Value chains are governed when All approaches to value or supply chains identify the crucial the parameters requiring product, process, and logistic qual- impact of power relations among different actors. Power ification that are set have consequences up or down the value relations determine how economic gains and risks are dis- chain, encompassing bundles of activities, actors, roles, and tributed among value chain actors (see figure 3.1) and to functions (Kaplinsky and Morris 2002). Of course, one what extent dominant firms may set and enforce standards 20 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 3.1 Power Relations in Value Chains International brand name and retailing companies (“buyers”), therefore, define the rules of the game in partic- Threat of ular industries and appropriate the largest share of the gains new from those industries’ production. In the developing world, entrants buyer-driven value chains are often characteristic of labor- intensive industries like agriculture, clothing, and furniture. The typically low barriers to entry on the production side of Competitive buyer-driven value chains mean that a multitude of suppli- Bargaining Threat of power of rivalry substitute ers compete for very low rents. Essentially, the buyer has an within an customers industry products advantage because these numerous producers compete to offer goods and services at the lowest cost. Quality and other standards tend to be imposed by the buyer or appear as entry requirements to the buyer’s geographic marketplace Bargaining (for example, GlobalGAP, formerly EurepGAP). power of suppliers Producer-driven value chains are often characterized by knowledge intensity, relatively higher levels of technology or Source: Michael Porter, 2007. skills, scarcity, high levels of marketing, or capital-intensive production practices. These high-level factors, scarcities, and differentiations produce barriers to entry for competi- with the aim of raising entry barriers for competitors and tion. These barriers to entry include the large amounts of achieving market foreclosure. The concept of “governance capital needed for investment and, therefore, entry, limiting of value chains” implies that “there are key actors in the the number of producers. Similarly, environmental factors, chain who take responsibility for the inter-firm division of such as location, can present physical barriers. The products labor, and for the capacities of particular participants to of producer-driven value chains often require high research upgrade their activities” (Kaplinsky 2000). and development (R&D) expenditures or have been “Market power” refers to the idea that one firm in the branded with costly marketing efforts in order to increase market may be able to exert significant influence over the barriers to entry and protect market shares. goods and services traded or the price at which they are sold. Examples of producer-driven value chains are perhaps Governance plays a large part in determining and explaining most readily seen in complex technology industries, such as various firms’ market power. However, commercial compe- the commercial airline, automobile, or computer industries. tence, market forces, and technical capabilities also deter- But they are also often present in agricultural sectors when mine the market power of value chain participants. freshness standards and protected varieties are important, A commercial transaction’s price is determined by the when there is high product differentiation, when packaging bargaining power of the transacting entities. In economics, and logistics are complicated, or when R&D and other bargaining power refers to the ability to set prices or wages, knowledge elements in production or processing are critical. usually arising from some sort of monopoly, monopoly-like In such situations, the producer can capture a higher profit position, or non-equilibrium situation in a market. The eco- because sales are high margin and based on factors such as nomic actor with greater bargaining power has the greater quality management or differentiation, rather than on decision-making freedom. Typically, value chains feature two strictly cost-based competition. Examples from the agricul- types of bargaining power relationships: buyer-driven and tural sector include: bananas produced by the leading multi- producer-driven. nationals, organic products like cotton, branded products Buyer-driven value chains refer to a market context where like processed and packaged agricultural products, quality- producers have few options for selling their goods or services. differentiated products like specialty coffees, or high-value These chains typically have low barriers to entry at the pro- processed products like essential oils. ducer level, or they may have locational/logistics limitations Power and governance in value chains are common top- to whom the producer can sell (for example, “captive” tea ics in the literature, but their relation to the prospects of producers for a tea estate or cotton producers for a ginner). upgrading value chains in developing countries is inconclu- This type of market condition is referred to as a “buyer’s mar- sive. The literature seems to recognize that, in reality, value ket” (if not a monopolistic one). chains are not purely buyer driven or producer driven, and SECTION 3: REVIEW OF EXISTING LITERATURE ON VALUE CHAINS AND SUPPLY CHAINS 21 that they can and do change. Indeed, the creation of com- 1. Process upgrading: Increasing efficiency (that is, more petitive advantage by elements of the value chain is a means output for same level of inputs or same output for lower to alter the power balance among actors within the chain, or level of inputs), achieving standards and certifications in relation to competing chains. (for example, organic, HACCP, and ISO). 2. Product upgrading: Improving product quality, new product development, new varieties, or line extension. INNOVATION, INFORMATION, INFORMATION 3. Functional upgrading: Operating at a new level in the SHARING, AND KNOWLEDGE value chain. In competitive markets, innovation helps maintain or grow 4. Intrasectoral upgrading: Operating in a new market market share or profits and can be a route to competitiveness channel within the same value chain. and the development of competitive advantage. Innovative 5. Intersectoral upgrading: Producing a completely differ- production and processing can create cost efficiencies and ent product in a completely different value chain. improved services that translate into higher margins or more competitive pricing. Innovations in logistics can also provide The concept of upgrading explicitly recognizes relative cost efficiencies, as well as improved service. In terms of endowments and, hence, the existence of value. Upgrading value chain development, innovation must be viewed as nec- approaches emphasizes issues of knowledge creation, trans- essary for overall chain competitiveness by capturing more fer, and appropriation. Critical questions are raised regard- value or upgrading the value chain. The production factor of ing the manner in which knowledge flows along value “know-how” is one core factor regarding the upgrading of chains, firms acquire information and upgrade processes, value chains (Porter 1998a). A value chain’s access to infor- firms “unlearn” certain capabilities as they specialize, types mation (for example, regarding market trends) can itself be of knowledge are transferred by technology proprietors, and a competitive advantage. firms disclose their core competencies. However, this field The way that knowledge is transferred is determined by requires substantial further research. the information flows or linkages between firms within a value chain. Targeted transfer of knowledge by the lead firms, using backward linkages, is usually seen in the devel- INTERVENTION ENTRY POINTS AND INITIAL opment of product specifications (for example, quality, FOCUS preferences, or certifications) and other expectations (for By “entry point” we refer to the elements of the value chain example, price, quantity, or time) that are communicated by structure, relationships, market linkages, or strategic or the lead firm to its suppliers. This relationship is often part operational objectives that provide effective leverage points of an “embedded services” relationship between buyer and for working with or influencing the value chain actors. producer. In such relationships, firms or producers pay for Many documents, including many project reports, describe the services of technical assistance or innovation in the price elements of value chain operation or strategy around which they get for their products. an initiative can take root, and methods that various types In general, learning processes among firms are most of development shareholders use to work with value chains. effective where they are located close to one another and are The choice of an initiative’s entry points, partners, tools, therefore able to benefit from a high level of communica- and approaches strongly depends on the characteristics of tion, networking, and other exchanges of information. If the the value chain, its participants, the business environment, rate of innovation is lower than that of competitors and many other factors. (whether firms or competing value chains), this may result It should be axiomatic that interventions be based on in declining market share and value added; in extreme cases well-considered needs or strategies of the value chain and it may also involve negative growth. Thus, innovation has to its participants, rather than a “solution looking for a be placed in a relative context—pace compared to competi- value chain.” tors—that can be referred to as upgrading. Upgrading refers to the innovation that increases firm and/or value chain competitiveness. According to the Accel- CONCLUSION erated Microenterprise Advancement Project (AMAP)/ Business Development Services (BDS) lexicon developed by As mentioned, we have selected topics for emphasis that are USAID, there are five categories of upgrading (Dunn 2005). highly pertinent to upgrading and improving value chain 22 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE targeting, linkage, and operation and that are the current focus trends, competitive forces, and business principles that are of much innovative thinking and practice. These topics are common to value chains in the global economy. The particularly applicable to Africa’s agricultural value chains. specifics of any value chain initiative are nonetheless highly These topics resonate throughout the many cases contextual. described in the following section of the Guide. The Guide’s The second portion of this Guide discusses methodologi- tools and approaches make use of the thematic principles cal tools and approaches that incorporate important value that this section has highlighted, as well as several other chain concepts with the topics discussed and with sound intervention ideas. business principles. The accompanying cases, mostly from Improving value chain competitiveness in Africa presents Africa but also from the Americas, Asia, and Europe, illustrate challenges, but is, of course, subject to the same worldwide the application of the tools. SECTION 3: REVIEW OF EXISTING LITERATURE ON VALUE CHAINS AND SUPPLY CHAINS 23 SECTION 4 Discussion of Individual Tools INTRODUCTION AND OVERVIEW THEME TWO: DEVELOPING ROBUST NEW BUSINESSES his section presents 13 value chain implementation T tools. They are presented in six themes within a pro- gram implementation cycle. Figure 4.1 illustrates how the focus of each tool and theme relates to a program Tool 4: Upgrading and Deepening the Value Chain Describes ways to add efficiency, improve product qual- ity, and add new operations to increase value added implementation cycle. The themes, and a brief explanation of within the value chain. the tools that fall within them, are shown below: Tool 5: Identifying Business Models for Replication Focuses on opportunities to implement sound business models repeatedly within a value chain. The ability to THEME ONE: DESIGNING STRATEGIES replicate these business models is useful in increasing AND BUSINESS PLANS—OBTAINING value-added volumes, intermediation, and access to ser- AND USING INFORMATION vices and inputs. Tool 1: Choosing Priority Sectors for Value Chain Interventions Helps practitioners consider: Which are the priority THEME THREE: SUPPLYING THE MARKET— value chains? Which ones should be supported? Why ALIGNING SUPPLY TO MATCH MARKET does comparative advantage matter, and how can it be OPPORTUNITY assessed? How should public, private, and collective per- spectives and interests be harnessed? Tool 6: Capturing Value through Forward and Backward Tool 2: Designing Informed Strategies across the Value Chain Integration Offers analytical methods for understanding the value Explains how vertical integration can help businesses chain and integrating the information into sound strat- ensure supply or otherwise control inputs, capture more egy along various points of the chain. value, achieve economies of scale, and/or ensure access to Tool 3: Conducting Benchmarking and Gap Assessments of information. Value Chains Tool 7: Horizontal Collaboration—Creating and Taking Describes how to measure and compare a value chain’s Advantage of Economies of Scale performance (whether in relation to itself, similar value Provides approaches to create economies of scale that chains, or to best practices) as a means of gaining insight help to increase production, ensure quality, improve into appropriate strategic choices. access inputs, and achieve more market power. 25 THEME FOUR: REACHING THE MARKET— Each of the tools presents value chain–based actions MARKET POSITIONING AND MARKET that can form part of a competitiveness-focused agricul- OPPORTUNITIES ture development initiative. Figure 4.1 presents a sequenc- ing in which these tools will typically be employed over the Tool 8: Positioning Products and Value Chains for Greater Value life of a project. and Competitiveness The tools were selected to provide a broad range of inter- Describes how competitiveness positioning considera- ventions across and within the value chain and its operating tions can enable businesses to choose wisely, market value environment. The thoughtful reader will recognize that chain business models, and provide strategic direction to many other tools are available and could be described, or many value chain actions to improve competitiveness. that any one of the included tools could be considered in Tool 9: Applying Standards and Certifications to Achieve Greater much greater depth. Several of these could easily command Quality their own volumes—for example: Describes how meeting (and exceeding) the quality and performance standards of desired markets can help ■ Market-based approaches (segmentation, marketing, achieve entry, market share, and higher unit values for a and promotion) value chain’s products. ■ Logistics as a tool ■ Managing the distribution chain THEME FIVE: IMPROVING THE BUSINESS ■ Branding (that is, connecting differentiation with stan- AND POLICY ENVIRONMENT dards and with service qualities) Tool 10: Identifying needed support services for the value chain ■ Workforce and skills competitiveness Discusses how improving the depth and breadth of ser- ■ Jumpstarting value chains vices offered to a value chain can help member firms to be commercially sustainable and improve operations. However, this Guide provides a highly functional entry Tool 11: Improving the Operating Environment by Promoting point to the field of value chain analysis and is well illus- Public-Private Dialogue trated by examples specific to African agribusiness. Describes how value chains can improve their operating While the Guide’s emphasis is on implementation, environments by engaging the public sector and other actions are likely to be most effective when underpinned by actors in effective public-private dialogue. sound information and analysis. Therefore, we begin with Tool 12: Achieving Synergies through Clustering three largely analytical tools relating to choosing priority Demonstrates how cluster-strengthening and cluster- sectors, designing informed strategies, and conducting bench- development initiatives can help value chain participants marking and gap assessment. achieve results that an emphasis solely on core value The base of practical analysis provided by these three chains may not be capable of generating. tools is an important input or prerequisite for many of the implementation tools. Each tool is followed by descriptions of one or more THEME SIX: MONITORING RESULTS IN VALUE actual cases that illustrate the tool’s application. Embedded CHAIN DEVELOPMENT mini-cases offer additional illumination.1 Most of the Tool 13: Monitoring achievements in value chain performance examples are from Africa, others are from Europe, Latin Explains how monitoring and evaluation methods can America, and Asia. We return to the same cases as appropri- help value chain participants track implementation ate when describing different tools, which serve to highlight progress, evaluate value chain performance, and identify the multiple dimensions of a single value chain and the rich the impacts of initiatives. set of opportunities value chain initiatives can offer. 26 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.1 Value Chain Program Implementation Cycle The value chain framework: A program implementation cycle showing the sequences in which various tools can be employed over the course of a projecta Thematic approaches to value chain program implementation Designing strategies and business plans— Developing robust, new Reaching the market—positioning and obtaining and using information businesses market opportunities Tool 1: prioritizing value chains Tool 4: value chain value addition Tool 8: product positioning Tool 2: value chain strategy Tool 5: replicable businesses Tool 9: standards and certifications Tool 3: benchmarking models Tool 11: public-private dialogue Selecting of Opportunities to Market Implementation Impact Tool 10: support services economic sector increase value chain opportunities assessment Improving the enabling or subsector and competitiveness value chain analysis environment VALUE CHAIN PROGRAM IMPLEMENTATION CYCLE Thematic Supplying the market—aligning supply to Monitoring the value chain approaches match market opportunity Tool 13: monitoring performance to value chain Tool 6: integration program Tool 7: economies of scale implementation Tool 12: clustering a The value chain implementation cycle is adapted in part from Action for Enterprise’s Value Chain Approach and J.E. Austin’s Associates, Inc.’s productivity and value enhancement model (see figure 4.3). Source: J. E. Austin Associates, Inc. NOTE any specific story does not diminish the case’s relevance, since its inclusion in this Guide is to illustrate approaches 1. Since these are actual, “living” cases, they will evolve from and methodologies that are found within the described the time of this writing. Some may have even experienced events, and not just to document success stories. reversals in their competitiveness progress. The evolution of SECTION 4: DISCUSSION OF INDIVIDUAL TOOLS 27 TO O L 1 Choosing Priority Sectors for Value Chain Interventions his tool describes how investors, governments, approach is, in fact, a commendable approach to filtering T donors, and other organizations can prioritize among the value chains when considering invest- ment possibilities. The process can help businesses and alternatives. INITIAL LIST domestic or foreign investors to determine where they can invest most profitably and can help planners in the public To begin, it is helpful to compile a list of combinations of sector and development partner organizations to select product category, target market, and resulting value and which value chains to support. supply chains that could become more competitive and thus In most cases, the process will start with an initial list of enhance economic growth, exports, and/or incomes of potential value chains based on a general definition of prod- intended beneficiary groups. Narrowly speaking, and often uct category and target market(s), followed by various types perhaps too simplistically, competitiveness in such cases is of market analyses, an evaluation of the operational and simply interpreted as being able to sustainably export at a strategic opportunities and their potential impact, and a profit, or to compete favorably against imports (in a way willingness assessment of the chains’ leaders and other that increases productivity and, hence, the incomes of stakeholders to work toward improving their collective affected populations). competitiveness. There are many sources from which an initial list of This process does not necessarily need to be carried out products can be compiled. These include consultation with in a linear fashion. In fact, involving various stakeholders experts, previous assessments, products in industry sectors in the early stages of the analysis is an excellent means of that have been identified as national priorities, and sectors gauging (and building) their willingness to invest time and being supported by other initiatives. resources in the resulting initiatives. In addition to these sources, quantitative tools that rely on In the case of governments and donors, the process the concept of comparative advantage are often used to refine assumes that the program has not prescribed beforehand and prioritize the potential list of products and value chains. which value chains it must support. Such preselection should The comparative advantage concept focuses on the relative be avoided. Selecting before testing can distort incentives and efficiency of producing different goods in the home country project dynamics among stakeholders, effectively limiting or region compared with the rest of the world. It must be the project’s prospects for a meaningful impact. emphasized, though, that the fact that a product possesses The discussion within this tool is not intended as an comparative advantage does not necessarily mean that it can exhaustive list of criteria upon which value chains can be pri- be produced and sold at a profit under prevailing economic oritized. It should be considered a guide for businesses, plan- conditions. Many other elements need to be in place— ners, and practitioners to identify which value chains offer including appropriate marketing links and input supply the best opportunities to invest profitably, encourage eco- channels, financing mechanisms, uniform product quality, nomic growth, and enhance competitiveness. Each business and many other demand requirements. In other words, com- or practitioner can add criteria depending on their particu- parative advantages can be built into competitive advantages. lar focus. Additional typical criteria include involvement of To identify products or chains with a comparative advan- small and medium enterprises, variability of returns, gender tage, practitioners have often used the revealed comparative considerations, and environmental impact. A multicriteria advantage (RCA) index. The RCA denotes relative efficiency 29 indirectly, based on trading patterns that emerge from actual nontradable inputs used to produce one unit of each partic- market transactions. RCAs identify the extent to which an ular good. Given these requirements, it is difficult to assemble exporting country captures world market share in a particular such detailed data for all but a few commodities in a limited area relative to the degree at which it captures export market number of countries. DRCs, though, are often the preferred share for all traded goods.1 An RCA greater than 1.0 indicates indicators of comparative advantage when the focus of atten- a comparative advantage for that item, while an RCA lower tion is restricted to a few commodities and/or trading areas. than 1.0 identifies a comparative disadvantage. However, since DRCs are estimated on the basis of certain The RCA is, however, imperfect because it embodies not production conditions, their results most likely do not apply only the fundamental economic factors affecting relative effi- countrywide (Norton and Balcazar 2003). And once again, ciency but also government policies and institutions that may transport costs and availability are not formally reflected, distort markets. The usefulness of RCA indexes is also limited yet can be quite important. because they indicate past performance but do not take into Box 4.1 demonstrates how an initial list was chosen for a account current market dynamics and likely future trends project in Senegal. and conditions in those markets. Nor does the traditional The RCA and DRC approaches provide useful but incom- RCA take sufficiently into account the key role of transport plete information and guidance. Thus, they must be tested availability and cost for many exportable products. As long as using a sensitivity analysis—testing different assumptions these imperfections and limitations are recognized, RCAs can to see how and to what extent the outcomes change—and be helpful as analysis tools, since data are generally available considered in the light of other important decision criteria. in the trade record to gauge comparative advantage. Among these criteria are market strength, domestic capacity, An alternative measure of comparative advantage is the and level of commitment. Domestic Resource Cost (DRC) coefficient, which compares the cost of domestic production with world prices. The DRC MARKET ANALYSIS measures the dollar cost in domestic resources of earning or saving a net dollar of foreign exchange. Therefore, values Market analysis to examine the nature of demand—its size, below 1.0 indicate a comparative advantage and values above tendencies, segments and potential niches due to seasonality 1.0 a disadvantage. To the extent that a country persists in and other factors, price tendencies, customer preferences, producing commodities whose DRCs are greater than one, current competitors, market access, and other requirements— its resources are being poorly utilized. The country would is particularly important in prioritizing product/value have little chance of increasing exports of those items or chains. A market analysis allows the investor, business, or increasing domestic production to substitute for imports, planner to identify whether attractive opportunities to since they are inherently noncompetitive on world markets. improve and upgrade a given value chain exist, using market Therefore, policies that encourage the production of products conditions as the benchmark of what needs to be achieved. without a comparative advantage tend to drag down the country’s agricultural growth rate and opportunities for DOMESTIC CAPACITY AND ECONOMIC IMPACT employment creation. Perhaps more importantly, DRCs can be compiled in Once an initial list of potential product/value chains has such a way that disaggregates cost data by productive stages been vetted by confirming market opportunities, program along the chain. Presenting data in this manner illustrates implementers can evaluate the capacity to respond com- how income is distributed among the different links in the petitively to those opportunities, as well as the extent to value creation process and allows for the analysis of other which upgrading and change are needed to be able to pro- weaknesses and inefficiencies in each link. Tool 2 demon- duce according to market requirements and customer strates how to use and benefit from this information. preferences. This evaluation involves the analysis of insti- A drawback of DRCs is that the data required to calculate tutions, technology, service providers, policies, and other them are often not readily available for many commodities. production conditions, in addition to the investments The calculation of DRCs requires data on domestic prices, needed to take advantage of the identified opportunities. international prices, government subsidies, and taxes for the An assessment of capacity also provides guidance as to specific commodities being evaluated, as well as the shadow important program intervention points, where the oppor- price of foreign exchange. In addition, these indicators tunities available within the target value chain can be require information about the proportion of tradable and leveraged or unleashed. 30 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Box 4.1 How to Choose Value Chains for Intervention: The Example of Senegal’s Projet Croissance Economique Before a detailed analysis can be performed to deter- were given priority. The team looked for subsectors mine the most appropriate subsectors on which to with perceived competitive advantage, perceptions focus interventions, planners must generate a list of of high impact on rural incomes and employment, possible subsectors from which to choose. The selec- or export market potential, including sectors poten- tion of items for the list can be conducted informally— tially benefiting from the U.S. African Growth and for example, brainstorming the obvious sectors in a Opportunity Act (AGOA). Cashews, mangoes, dairy, country or basing the list on the most widely grown and bissap (hibiscus tea) were identified through crops. Or the process can be more rigorous such as in these criteria. Senegal, where a more deliberate approach was taken to 3) Sectors with private sector appeal: Finally, the team identify the list of possible target subsectors. looked at subsectors that were of interest to private Senegal’s Projet Croissance Economique is a five- enterprise, were already a focus of the private sector, year program supported by USAIDa that began in 2005. or that had a high likelihood of attracting private The aim of the project is to help Senegal stimulate domestic and foreign direct investment. Banana accelerated growth, competitiveness, and trade. Its ini- production for export was already targeted by pri- tial work has focused on improving the value chains of vate sector investors, and export of neem seed to the a number of products produced in Senegal in order to United States (where it can be used as a raw material achieve greater production and productivity, higher for organic agriculture inputs) was promoted by a prices, and increased exports. The project’s approach is foreign investor, so those subsectors were also con- to ensure that Senegalese stakeholders are engaged at sidered priorities. every juncture along the production process so that 4) Applying additional criteria: Supplementing the improvements are sustainable. criteria highlighted above were cross-cutting themes At the start of the project, the government of Sene- like poverty reduction, women’s empowerment, and gal, donors, and a consulting firm collaborated to create employment creation. The final short list that was an initial long list of possible value chains on which to created included six subsectors: mangoes, cashews, focus interventions. This initial list included many sub- bissap, fonio (a small millet), woven textiles, and sectors, but through a sequential refinement process, fisheries. the list was shortened to six subsectors. This process 5) Value chain analysis and feasibility analysis: Next, involved five stages: a value chain analysis and feasibility analysis were conducted to verify soundness and opportunities, to 1) Mandatory sectors: If the government prioritized determine which three of the initial six subsectors development of a subsector, it was automatically would be selected for the interventions, and to guide given strong consideration. These priority subsectors the nature of the particular value chain emphasis were identified based on government policies that within each sector. Cashews, bissap, and mangoes emphasized the subsectors because they were consid- were the initial choices. ered vital to the country, had high value added, or were import substitutes. Using these criteria, cotton This project is now in its fourth year. As it has pro- and horticulture-related products were priorities. gressed, changes in market opportunities have caused 2) High economic impact sectors: Next, subsectors the list of selected subsectors to be expanded to include with extensive economic impact on the country bananas, gum Arabic, neem, and dairy. Source: Carlton Jones and Martin Webber, J. E. Austin Associates, Inc. a Implemented by a consortium including International Resources Group and involving J. E. Austin Associates, Inc. Further, given the market analysis and the opportunities TESTING COMMITMENT identified, practitioners are able to construct scenarios of It is essential to take into account the commitment of the the economic impact (profits, jobs, increased exports, and chain’s leadership and stakeholders when deciding which wages) that the proposed changes would have. value chains to prioritize. Stakeholders must be willing to TOOL 1: CHOOSING PRIORITY SECTORS FOR VALUE CHAIN INTERVENTIONS 31 invest time and resources to achieve the identified opportu- ■ Add to or refine the list using quantitative tools, such as nities for upgrading. Their motivation will rest on many revealed comparative advantage and domestic resource factors, including their understanding of the likely returns, cost coefficients, to assess comparative advantage. the time and level of investment required, perceived risk, ■ Conduct market analysis to identify if attractive oppor- and the leadership of opinion leaders and champions. It is tunities to improve and upgrade a given value chain generally a good idea to include stakeholders in the process exist. as early as possible and conduct workshops to discuss the ■ Evaluate the capacity to respond competitively to those current conditions of the product/value chain. Their com- opportunities. Construct scenarios of the economic mitment to the process can be gauged by their repeated impact that the proposed changes could achieve using attendance, expressed enthusiasm, and commitment to multiple assumptions about profits, jobs, increased resources. Their level of responsiveness will help practition- exports, and wages among other variables. ers prioritize value chains. ■ Make the stakeholders part of the process as early as pos- sible, especially through workshops to discuss the cur- A STEP-BY-STEP SUMMARY OF TOOL 1: rent conditions of the product/value chain and to test CHOOSING PRIORITY SECTORS FOR their willingness and commitment to the process. VALUE CHAIN INTERVENTIONS ■ Start the prioritization process by compiling an initial list NOTE of products/chains whose competitiveness could further 1. The formula for calculating the RCA index of a given be enhanced. Sources for an initial list include experts, product (p) is RCAp = (xp/Xp)/(xt/Xt); where Xp are total sector reviews, previous assessments, national priorities, world exports of product (p), xt stands for total country and sectors supported by other initiatives. exports, and Xt for the world total of all kinds of exports. 32 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE C A S E S T U DY 1 Prioritizing Value Chains by Using Comparative Analysis—Value Chain Selection in Mozambique Carlton Jones and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION BACKGROUND n the early 2000s, Mozambique was set to receive Inter- Mozambique is a largely rural country located on the south- I national Development Association (IDA) loan funds from the World Bank for a targeted agricultural pro- gram. In preparation, the parties agreed to carry out a study eastern coast of sub-Saharan Africa. After gaining indepen- dence from Portugal in 1975, Mozambique adopted a socialist economic system and later plunged into a civil war to identify the agricultural sectors with the greatest compar- that lasted over 16 years. Peace was established in the early ative advantage, as a method to prioritize from among a wide 1990s, providing a foundation for economic recovery. range of possible sectors. This case study uses the first tool to More than 75 percent of the population relies on agri- decide which specific value chains in Mozambique are the culture for their livelihoods, although less than 20 percent best candidates for intervention. It illustrates how the DRC of the arable land is cultivated, and yields of all major can help decision makers select among value chain options. cash crops are low. Seventy percent of the population lives on less than US$1 per day, and one-third suffers from chronic hunger. POINTS TO CONSIDER Table 4.1 presents the major Mozambican commodities When reviewing this case, it is important to consider the fol- (2005). lowing points: In 2005, an agricultural economist was commissioned to perform an analysis for a targeted agricultural program to ■ What are the steps involved in comparative analysis? be implemented with loan funds from the World Bank, ■ Which method of comparative analysis was employed, which culminated in a report entitled “Economic Analysis and why? of Comparative Advantage for Major Agricultural Cash ■ How do differing assumptions change the outcome of Crops in Mozambique.”1 the analysis? ■ How does information from the analysis shape future CREATING AN INITIAL LIST interventions? ■ What limitations are there in a DRC-type analysis? How Before the comparative study could be conducted, a list was can the analysis be supplemented? generated that included possible sectors for intervention. 33 Table 4.1 Mozambican Commodities by Price, 2005 Production price Production volume Rank Commodity (Int $1,000) (mt) 1 Cassava 443,169 6,150,000 2 Maize 168,490 1,450,000 3 Indigenous cattle meat 78,296 37,856 4 Pulses 54,382 205,000 5 Groundnuts in shell 53,156 110,000 6 Rice, paddy 42,815 201,000 7 Indigenous chicken meat 40,472 34,698 8 Sorghum 38,305 314,000 9 Cashews 38,108 58,000 10 Coconuts 23,967 265,000 11 Tobacco leaves 21,879 12,000 12 Vegetables, fresh 19,703 105,000 13 Fruit, fresh 18,344 115,000 14 Cow milk, whole, fresh 16,049 60,350 15 Indigenous pig meat 12,977 12,815 16 Bananas 12,826 90,000 17 Hen eggs 12,156 14,000 18 Potatoes 11,604 80,000 19 Tea 11,366 10,500 20 Oilseeds 8,789 30,000 Source: FAOSTAT data. The original list was prepared by World Bank staff and THE ANALYSIS focused on sectors linked to domestic priority crops. As previously described, there are two principal means to The list was vetted by the Office of Commercial Agricultural determine the comparative advantage of an agricultural Sector Promotion within GPSCA (Gabinete de Promoção do sector: RCA and DRC. Of the two, the RCA method is the Sector Comercial Agrário), a department of the Mozambique easier to use because it relies on trading patterns that Ministry of Agriculture. GPSCA felt that potatoes and paprika emerge from actual market transactions to indirectly were very relevant in the Tete Province. The World Bank and indicate relative efficiency; the data required are typically GPSCA agreed to remove tobacco and flowers from the list and readily available. However, the RCA method requires data replace them with these sectors (see table 4.2). on international market transactions that were not avail- Table 4.2 Original and Revised Sectors for able for Mozambique. Also, the RCA method paints a pic- Intervention in Mozambique ture of past performance but does little to take into account future trends. Original list Revised list DRC and RCA are helpful tools, but they alone should Cashews Cashews not determine which value chain is selected for interven- Rice Rice tion. These tools should be used in conjunction with other Tobacco Potatoes analyses and scenarios that when combined make the best Flowers Paprika case for desired and successful outcomes. Cotton Cotton The parties decided to employ the DRC method (see Export fruits, Export fruits, figure 4.2). (bananas and grapefruit) (bananas and grapefruit) DRC is highly dependent on selected cost and other Sugar Sugar assumptions that, when changed, can affect outcomes. For Source: J. E. Austin Associates, Inc. example, real outcomes may vary in cases where unpredictable 34 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.2 Mozambican Cashew Domestic Value Chain Indian brokers Exporters Exporters Industrial processors Processors Raw nut brokers Wholesalers Traders Small traders Level at which DRC analysis Smallholder cashew producers was conducted Farm Source: J. E. Austin Associates, Inc. costs determine value chain profitability. In such instances, total value added to the product, so local processing is flexible cost assumptions allow stakeholders to glean the cor- desirable for exporting raw nuts. Cashews also provide a relation between outcomes and actual costs. Assumptions significant profit (32.8 percent) to producers. regarding other variables, such as location, access to inputs, or ■ Rice: At present, neither of the local rice varieties extension and training, will similarly affect the accuracy of (Chokwe and Zambezia) are financially or economically DRC estimates. profitable, but with technical assistance and credit Note: The value and limitations of this particular DRC access schemes, this could be changed. The Chokwe and analysis came into focus more recently as investment flooded Zambezia DRCs are both higher than 1.0; with inter- into the sugarcane subsector of Mozambique, despite its being ventions they could achieve coefficient below this value. tagged in the following findings review as fundamentally ■ Potatoes: Although they command low prices, potatoes uncompetitive in the study region. This subsequent investment are profitable and have a comparative advantage thanks highlights the fact that a given DRC is specific to a region and to low production costs. The potato DRC is 0.36, but a moment in time. DRCs do not tell us about competitiveness with interventions to improve yields via better inputs, it on a national level, which was the driver of that later invest- could be improved slightly. ment, nor do they tell us how the competitiveness of one region ■ Paprika: This crop is somewhat profitable for farmers, will change over time. but better pesticide and fertilizer interventions could increase profitability. Yields could be increased with the FINDINGS further extension of credit schemes that allow for more input purchases. Paprika profits are lower than those of The results of the sector comparison are below. Note that DRC tobacco and potatoes, which are the two competing values below 1.0 indicate a comparative advantage, and values crops in the region. However, paprika has a comparative over 1.0 indicate that resources are being poorly utilized: advantage at the farm and export levels. Its DRC is .58. ■ Cashews: The cashew sector possessed the highest com- ■ Cotton: In comparison to other agricultural crops, cotton parative advantage, with a DRC coefficient well below is not profitable due to relatively high family labor require- 1.0, at 0.10. Local processing contributes two-thirds of ments. However, in some cases, cotton is slightly profitable, CASE STUDY 1: PRIORITIZING VALUE CHAINS BY USING COMPARATIVE ANALYSIS 35 and is the only option for growing a cash crop. This CONCLUSIONS AND FUTURE STEPS profitability is very fragile, however, as it depends on world Markets with the best comparative advantage were identi- prices for cotton, which fluctuate. Cotton’s DRC is .76. fied based on well-considered cost and other assumptions. ■ Export fruits (bananas and grapefruit): Grapefruit is However, the user or interpreter of DRC analysis should highly profitable in economic and financial terms. Bananas, bear in mind the importance of recognizing that when on the other hand, are barely profitable in financial terms assumptions are changed, the relative desirability of out- and generate an economic advantage only when taxes are comes may change as well. DRC analysis provides impor- eliminated. Grapefruit’s DRC is .15, banana’s is .40. tant insights and a basis for comparing the profitability of ■ Sugar: Sugar is not economically profitable but possesses value chains but should not be the sole tool used for sector a slight financial profitability because of domestic subsi- selection. Complementary analytical tools should be dization. Sugar has the highest DRC at 17.04. It is hoped employed to ensure that differing outcomes are identified that, through existing interventions, it can be lowered to and considered. For instance, DRC does not take into .99 by the year 2012. account market opportunities. Combining a market assess- Of the seven sectors and eight cash crops studied, cashews ment with DRC analysis facilitates more informed deci- possessed the lowest DRC (.10), with the grapefruit follow- sions on agricultural interventions. ing close behind (.15). As the World Bank continues supporting agricultural The study noted that several sectors (rice, potatoes, paprika, projects in Mozambique, more DRC analyses can be con- and bananas) could have different profitability and DRC levels ducted to ensure the data sets remain current, especially if technical assistance or different sets of inputs were available. with respect to labor costs. Recommendations for future This highlights how DRC can be a useful tool, but should not analysis include working with the Ministry of Agriculture’s be the only determinant for sector selection. DRC use should Policy Analysis Department to validate and/or update pro- be weighed in light of the assumptions used to complete the duction costs and prices used in the previous comparative analysis. Even though cashews have the lowest DRC, it could analysis report. It will also be worthwhile to extend the be determined through further analysis that, for example, the analysis to other cash-producing agricultural sectors such as relative cost of intervention for another product might make livestock, fiber, and fuel crops and to conduct regional level that other crop a preferable fulcrum for interventions. studies to show impact in areas where agricultural projects are underway (Gergely 2005). OUTCOMES The Mozambican Ministry of Agriculture refers extensively NOTE to this report for planning and analysis. The report also 1. The analysis was conducted and the report was prepared serves as a useful reference for further exploratory research. by Nicolas Gergely. 36 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE C A S E S T U DY 2 A Structured Value Chain–Based Approach to Designing a Strategy of Agricultural Competitiveness and Diversification in Mali Carlton Jones and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION consulting firm, to assist with the project’s sector review component, which used five modules to assess Malian agri- n 2005, the government of Mali, with the support of a I US$46.4 million loan from the World Bank, launched the Agricultural Competitiveness and Diversification Project (PCDA) in hopes of diversifying the country’s agri- cultural competitiveness. Each module built on the previous and helped practitioners progress from a comprehensive list of sectors to those with true marketability, competitive advantage, and comparative advantage. This process also cultural income into markets with clear competitive advan- took into account the demand in existing end-markets, tages for Mali. The project team identified target sectors for identification of new potential end-markets, regional climate support by comparing Mali’s agricultural sector using a and growing factors, production capacity, access to finance, series of analytical tools with a broad range of data. and infrastructure, and other determinants. Through this process, the team identified value chains for export markets, which provide a basis for import substitu- tion, improve livelihoods for Malian small growers, and Module 1: Defining Mali’s broad portfolio of contribute to Mali’s GDP. agricultural value chains Step 1:1 Create a comprehensive list of agricultural value POINTS TO CONSIDER chains in the country, including informal ones. When reviewing this case, consider the following questions: Step 1:2 Categorize each value chain using criteria that defines its particular storage and/or delivery ■ How did the PCDA team’s approach to sector selection needs, such as perishable, semiperishable, durable, differ from other analytical approaches? transformed, semitransformed, or processed. ■ If time and resource are factors, which steps are necessary Step 1:3 Classify each value chain based on potential end- and which can be set aside? markets, such as export markets for consumption or processing, regional markets for consumption, or local markets for consumption. APPROACH TO VALUE CHAIN ANALYSIS Step1:4 Summarize the structure of the various value AND SELECTION chains by organizing the categories defined earlier, The government of Mali and the World Bank enlisted incorporating upstream-downstream relation- the Geomar International Group,1 a Canadian-based global ships and key factors of value addition. 37 Module 2: Analyzing market demand and market duration, social impact, market appropriateness, entry conditions existing professional organizations, and existing Step 2:1 Create a market demand data sheet for every value programs. chain listed in module 1, providing a comprehen- Step 4:2 Create a matrix that identifies priority sectors. sive snapshot of that chain’s viability and market Put priority levels from the final stage of step 4:1 opportunities. in columns, and categorize the rows based on var- Step 2:2 Chart opportunities in each end-market for all ious end-markets. Insert sectors into their respec- identified classifications. For example, identify tive boxes, thus identifying the sectors with the European markets for perishable product/value highest probability for success and impact. The chains intended for export markets, including matrix can be used to balance strategies for a vari- value and quantity. Do the same for other end- ety of sectors. markets and sector classifications. Step 4:3 Organize the priority sectors by area using the regional analysis conducted in module 3 that shows which value chains should be implemented Module 3: Analyzing the competitiveness in which regions of the country. This table also of potential Malian offerings provides an at-a-glance view of the crops that can Step 3:1 Determine the production potential for each sec- be grown in several regions. tor using information from the first two modules. Step 4:4 Create a reference index showing growth and eco- Add data on number of producers, production, nomic impacts for certain priority value chains, farm yields, unit price, and revenue. highlighting all indicators used during the previ- Step3:2 Analyze regional potential based on comparative ous modules of the analysis. advantages. Map the key production regions to determine target areas for select agricultural Module 5: Competitiveness planning: putting the products, highlighting geographic advantages analysis into action (for example, access to water or growing sea- sons); constraints (for example, distance from Step 5:1 Determine which approach will improve the com- main markets, distance from Bamako for trans- petitiveness of the sectors in question. In this port, pollution, or poor climate); and producible instance, the team recommended that Mali’s com- crop sectors. petitive strategy include short-, medium-, and Step 3:3 Create subregional identification sheets that pre- long-term objectives, each with pragmatic and sent annual rainfall, temperature, sun exposure, obtainable interventions. and humidity for each subregion to determine the Step 5:2 Address the issues with solutions, taking into con- suitability of crop selection. sideration the constraints highlighted in module 3 Step 3:4 Illustrate the growing months and seasonal mar- and their associated investment needs. For exam- ket demands for all products to show areas of ple, “Improve technical skills and human produc- opportunity for producers based on their produc- tivity by introducing new technologies and train- tion cycles and periods of crop availability. ing facilities.” Step 3:5 Conduct an analysis that shows constraints and Step 5:3 Wrap the entire strategy together by providing subsequent interventions that would improve implementation guidelines and a framework that value chain competitiveness. encompasses standard, specific activities that fall under four stages: provisioning, production, logis- tics, and marketing. Overlap these stages with Module 4: Defining priority sectors cross-cutting activities. Step 4:1 Prioritize value chain criteria by triangulating the interests of various stakeholders. Rank the LOOKING AHEAD priorities for each value chain based on produc- tion sophistication, number of solvent operators The value chain strategy that the team recommended to that could be integrated into the strategy, strategy Mali is currently being implemented. About 10 value chain 38 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE competitiveness strategies and action plans have been government, but also for all stakeholders taking part in the developed and are being implemented. In committing to implementation of PCDA. these strategies and actions, Malians will have invested in a strategy that takes into account the many elements of value chain analysis that have often been overlooked in previous NOTE strategies. This, in itself, will prove to be beneficial in 1. Geomar International Group was acquired by SNC- increasing the institutional knowledge, not only for the Lavalin in 2006. CASE STUDY 2: DESIGNING A STRATEGY OF AGRICULTURAL COMPETITIVENESS AND DIVERSIFICATION IN MALI 39 TO O L 2 Designing Informed Strategies across the Value Chain strategy is an integrated set of choices about the A Figure 4.3 Enhancing Productivity and Value across markets a firm or set of firms should serve; how to the Value Chain compete in each market; and how to allocate resources to the most valuable production, marketing, and support activities. In increasingly integrated regional and global markets, firms don’t merely compete against firms— Operational value chains compete against value chains. Increasing pro- productivity Strategic ductivity and competitiveness requires a comprehensive productivity strategy. In vertically integrated industries, firm strategy and Supply chain management value chain strategy are synonymous. However, in frag- mented supply chains, buyers, suppliers, and intermediaries Human capital investment must work together to increase their productivity and to raise the value of the end product. Business environment improvement This section outlines a selection of fundamental analytical tools for understanding the quality and efficiency of a cas- Source: J. E. Austin Associates, Inc. cading series of activities that increases value added.1 A vast set of tools exist that can be used to describe, analyze, and chain.2 The graphic above and the more detailed explanations evaluate the value chain. Several are highlighted here to below outline a framework and key questions that can be used demonstrate the types of analysis and information that typi- for analysis and evaluation in guiding the development of a cally guide the strategies and actions to enhance the produc- comprehensive, integrated value chain strategy. tivity of a value chain (see figure 4.3). Since the analytical tools outlined below are point-in-time assessments, they Assessing the overall status of the value chain should be updated on a frequent basis to ensure that any An awareness of the distribution and flow of profits in the changes in the market dynamics or performance of the busi- value chain is fundamental to understanding the relation- ness are quickly integrated into a new strategy. ships among and behaviors of each segment, as well as the opportunities for increasing productivity and profit across ENHANCING VALUE CHAIN PRODUCTIVITY the chain of activities. Information should be collected at Competitiveness is determined by the productivity (value per each segment of the chain: for instance, the number of enter- unit of input) with which a firm or value chain uses its human, prises; number of employees; unit labor costs; unit input capital, and natural resources. Productivity depends on the costs; unit sales, marketing, and distribution costs; annual value, uniqueness, and quality of a product, in addition to the volume sold; annual sales revenue; unit price; and net profit. efficiency with which it is produced. Productivity can be strate- Figure 4.4 illustrates a standard value chain, or value system gic, as well as operational, in nature. The overall productivity of analysis and graph. This analysis is the quantitative building a value chain can be segmented into various components, each block for understanding the cascade of value-added activities of which can be analyzed and addressed in concrete, tangible in a particular industry. By summarizing the price build-up ways to increase the overall return to businesses within the for each activity in the chain, the graph tracks the distribution 41 the general, qualitative starting point for any competitiveness Value Chain Data strategy or other analysis for decision-making purposes (see figure 4.5). While the SWOT analysis is not a very precise At each segment of the chain, the following infor- tool, it is a good way to provide a general characterization of mation should be collected: the current state of the industry, identify issues, and generate discussion. It is particularly useful as a neutral facilitation ■ Number of enterprises tool to focus an initial discussion on the perceived state of the ■ Number of employees value chain or to perform initial brainstorming on the poten- ■ Unit labor costs tial opportunities and risks. ■ Unit input costs SWOT analysis is simple and can be used at differing lev- ■ Unit sales, marketing, and distribution costs els of focus (examining a single firm, a segment of the chain, ■ Annual volume sold ■ Annual sales revenue or the chain overall). It is also a good way of identifying ■ Unit price areas to examine in greater detail. Thus, it is an excellent ■ Net profit analytical starting point. It is important to identify the right focus for the SWOT Source: J. E. Austin Associates, Inc. analysis and to keep the discussion on point. SWOT analysis is not an effective tool for identifying alternate strategies, nor is it terribly rigorous. It is, therefore, most valuable when supported Figure 4.4 Mongolia: Net Revenue per Kilogram of by other forms of analysis rather than as a standalone tool. Cashmere for Each Component of the Value System Once a broad overview of the structure and characteris- 140 tics of the value chain has been established, a more in-depth US$ Value system components 120 understanding of the drivers of productivity is required to 100 uncover the highest-value strategies to raise productivity in the value chain. 80 60 Using the competitiveness diamond 40 20 The Competitiveness Diamond3 is a more rigorous analyti- cal tool for evaluating an industry or value chain. The Com- 0 Herder Wash & Spinning Knitting Wholesaler Retailer Boutique petitiveness Diamond framework has been validated by dehair label numerous analytical and case studies and is now used by Source: Nathan Associates Inc. and J. E. Austin Associates, Inc., for USAID. industries and governments worldwide to assess industry clus- ter competitiveness and to develop strategies for improving of net revenue for one unit of a good from raw material to competitiveness. It is structured around four pillars: point of sale. It is important to note that this graph does not incorporate costs at each activity, and so does not give any 1. Factor (input) conditions: skilled labor, infrastructure, insight into the market economics and profitability of each and others activity. It is useful when mapping the roles of each segment 2. Demand conditions: size and type of accessible demand and the incremental value that the market assigns each role 3. Related and supporting industries: presence of supplier based on additional inputs and services to the product. and supporting industries The example in figure 4.4 depicts the build-up of the net 4. Context for firm strategy and rivalry: conditions for con- revenue of one kilogram of Mongolian cashmere from herder ducting business to retailer. Over 60 percent of the value of the end product is captured by the knitting, wholesaling, and retailing activities. Within each sector and across the economy, these four pil- lars interact to form a foundation for building a competitive system of firms. For developing economies like those in SWOT analysis Africa, building a competitive value chain starts with under- Complementing the value system analysis above, a SWOT standing the demand for products and services in key mar- (strengths, weaknesses, opportunities, and threats) analysis is kets and then organizing and investing in the factor inputs 42 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.5 Pakistan Dairy SWOT Analysis Strengths Weaknesses • Large population and high per capita • Consumers are price sensitive and ignorant consumption of dairy products, ahead of of quality requirements. other regional markets in Asia. • Significant cost variation in milk production • A high ratio of agricultural land to agricultural across sizes and types of farms. population. • Poor quality of milk. • Large aggregate supply and breed potential of • Middlemen operating without regulations indigenous cattle/buffalo. leading to significant value destruction. • Regular culling of less productive/ • The existence of the bandi system (under unproductive animals. which the middleman predetermines the • Internationally cost-competitive farm types producer’s sale price for the entire year at already exist in Pakistan. the rate most beneficial to him). • Willingness of processors to develop • Low animal productiviy, no breed management, infrastructure linking them to the farmer and little productivity support services to because of consumer preferences against farmers. reconstituted milk. • Farmers not organized, general lack of able • Larger and smaller processors are willing to management structures in sector. invest given the right support. • Poor quality of animal health care and • Central geographic location with easy breeding services. Support structure and access to large, potential regional markets. industry are not well developed to support Opportunities animal productivity. • Consumption can be increased with the right • Seasonality leading to fluctuations and emphasis on nutritional value, quality, and uncertainty in feed supply and quality. price. Capitalize on traditional nutritional • Underdeveloped cold chain to consumers. value placed on milk and related products. • Poor physical infrastructure. • Exploit potential to improve animal yield • Small-scale and fragmented animal holdings. through better feed availability and breeding. Potential to maintain/establish feasible, • Lack of remunerative producer price for milk. larger farms. Interest in investing in larger • Low utilization of installed capacity of dairy model farms. plants. • Induce productivity and quality specific farmer • Lack of a well-defined national policy for cooperation around collection and possibly dairy development. milking, and support efficient collection at Threats larger scales. • Farmer cooperation around collection and • Develop extension services model based on central milking is expensive and difficult to NRSP to promote farmer cooperation. manage. • Encourage large farm types as well as give • Lack of breed management at the macro level incentives to subsistence farmer to invest in and low potential of indigenous animals. productivity. • Unregulated imports of dairy products and • Emergence of commercial dairy farms on a additives. large scale. • Vested interests in perpetuating the • Large aggregate production of milk. Develop dependence on imports of dairy commodities. rural and urban markets to sell milk and dairy manage. products from adjacent milk pockets. • Joint ventures based on large potential and access to regional markets. • Government interest and willingness to contribute. • Build on consensus to develop and implement quality standards. • Consolidation and improvement in retail segment in large cities. Source: J. E. Austin Associates, Inc. TOOL 2: DESIGNING INFORMED STRATEGIES ACROSS THE VALUE CHAIN 43 (supply) to best meet the needs of those markets. Only by ■ Of the spectrum of potential customers in each key mar- accessing and understanding the specific needs of the market ket for the chain, which customers is the chain best posi- can the commercial sector utilize its resources in the most tioned to target? efficient way that creates the most value for both the producer and the customer. As a more in-depth understanding of the A number of analytical tools can be employed in answer- market is developed and the supply is upgraded accordingly, ing the questions above: the value chain then must concentrate on upgrading its sup- pliers and supporting industries and working with the gov- ■ Market segmentation and assessment ernment to improve its business environment. ■ Customer profiling In contrast to the SWOT analysis, the Competitiveness Dia- ■ Customer benefit analysis (product attribute gap analysis mond is an analytical tool that poses very specific questions to based on customer perceptions) the economic leadership about a specific industry. It can also ■ Mapping the consumption chain (from sale to point of be used as a framework for evaluating an overall regional or consumption) national economy. Figure 4.6 outlines many of the key ques- tions to be posed when conducting a diamond analysis. Assessing operational productivity Once the competitiveness of a value chain has been under- A second way to improve value chain productivity is stood, value chain analysis must then delve more deeply to through operational productivity, improved technology, highlight the underlying drivers of competitiveness: strategic manufacturing, and service processes within specific seg- productivity, operational productivity, supply chain manage- ments of the value chain. Operational productivity focuses ment, human capital, and the business environment. Only at on the efficiency of each appropriate segment of activities this level of assessment is it possible to uncover the invest- on its own. By introducing new technology that improves ment and actions required to increase the performance of the processes and management systems, key players in the value chain in regional and international markets. chain can lower their costs and raise the productivity of their businesses, and the value chain overall. Assessing strategic productivity The following questions are useful in evaluating the operational productivity of a specific segment of the value The primary means of increasing value chain productivity is chain and developing strategies to enhance it: by choosing appropriate markets and products and by adding new product features and service components that ■ How do our costs compare to the price for the product in enable companies to increase the value of their product and, different markets (that is, which markets are profitable to hence, its price. This “strategic” or “market price–related” serve based on the current cost structure)? Are we productivity can be as important as “operational” produc- excluded from competitively serving key markets tivity in determining competitiveness. In practice, under- because of our cost structure? standing the strategic position of a firm or value chain in ■ How do the costs of the value chain compare to other key markets helps to orient and focus investment on the competing value chains? highest value activities. By (re)positioning products in new ■ What are the key trade-offs between cost and quality for markets or to new customers or by adding additional value the product? (real and perceived), companies increase their sales and ■ Who is in control of the cost drivers? profits per unit of capital and labor. Positioning is further ■ What are the opportunities for lowering costs without discussed in tool 8. compromising quality? When evaluating a value chain’s strategic productivity, the key questions to consider are: Analytical tools that can assist in determining the answers include: ■ Which product segments are currently being offered by the companies in the chain? Do they represent the full ■ Per unit economic cost-driver analysis (fixed versus vari- range of segments that could be offered? Do they repre- able costs within each activity) sent the highest-value segments in the industry? ■ Cost-trend analysis (historical and projected changes in ■ Which markets are currently being served by the companies cost drivers) in the chain? Do they represent the highest-value markets? ■ Per unit activity-cost benchmarking 44 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.6 Competitiveness Diamond Analysis—Key Questions Context for firm strategy and rivalry • Does industry rivalry drive innovation? • Are company strategies sophisticated? • How are firms choosing to compete? • Is strategy mainly about price? • Does the industry cooperate to position itself better in world markets? • How productive is the management-labor relationship? • Is competition fair or based on influence? • Are there parastatals and monopolies? Factor • Is the industry protected from international (input) competition? Demand conditions • Does company strategy in this industry tend to conditions be reactive or proactive? • What is the quality of private-public dialogue? • What is the strategy on distribution channels? • What is the strategy on e-commerce? • How many competing firms are there? • Does the industry involve commodities or • To what extent is the specialized products? • How directly exposed is the competitive advantage based on industry to the most basic factor conditions? sophisticated and demanding o Climate consumers? o Cost and productivity of • Do consumers or buyers land anticipate trends in global o Location demand? o Availability of basic inputs • Are there sections of the local o Abundant or low cost labor Related and market that provide supporting sophisticated signals? • Advanced factor conditions? industries • Do foreign buyers send signals o Highly skilled labor force or provide feedback to monitor o Efficient logistics the pulse of change in the o Information systems • Are there competitive and high industry? o Knowledge resources, R&D, quality suppliers? • Is the industry selling via technology • Is the financial sector efficient e-commerce? o Access to capital resources and effective? • What is the size and o Infrastructure • What about business services? segmentation of local demand? • Are there strong business associations? • What about strong ties with research institutions? • What sort of result-oriented, private-public partnerships are there? • What is the quality of education and training providers? • Are standards and certifications met? Source: Michael Porter, adapted by J. E. Austin Associates, Inc. Assessing the quality of supply chain management other industries—is a third way to fully understand the underlying drivers of competitiveness. Supply chain man- Focusing on supply chain management in terms of costs of agement is different from operational productivity. It focuses raw materials, transportation logistics, communications, on the flow of goods and information along the chain of and information technology—aspects of the chain that have activities, the efficiencies of these flows, the transactions generated great efficiencies in manufacturing, retailing, and TOOL 2: DESIGNING INFORMED STRATEGIES ACROSS THE VALUE CHAIN 45 that facilitate value added, and the economic relationships accurate. Upgrading the technical and management skills of that underlie each set of transactions. an entire value chain requires close cooperation of the firms Questions to consider when evaluating the supply chain along the chain and the supporting government and aca- include: demic institutions. The following questions can be considered when assess- ■ Is the relationship among buyers and suppliers in the ing the level of human resources across the spectrum of value chain cooperative or adversarial? activities in a value chain: ■ How effective is the flow of information along the value chain (market trends, changes in price, external cost ■ What incentives are present to encourage firms to pressures)? How aware are the producers of the down- invest in the technical and management skills of their stream market dynamics of the industry (market trends, employees? demand conditions, pricing)? ■ Do firms have difficulty retaining trained talent? ■ How sensitive is the overall cost structure to the cost of ■ What supporting educational services are available raw materials? to firms locally to increase the skill levels of their ■ How do logistics services affect the cost of raw materials staff? (industry certifications, IT training, technology and intermediary products? application) ■ What is the availability of supporting services (financial, ■ How well do the academic institutions know the needs of logistics, administrative) across activities in the value industry? Is the curriculum aligned with the specific skill chain? requirements of the industry? ■ How long does it take for a product to go from initial ■ Are there industry standards for industry skill levels? Do production to end-market? How does this compare with the academic institutions teach to these standards? competing value chains? ■ How do the skill levels of the value chain’s workforce compare to competitors along key skills categories? Analytical tools that can assist in determining the answers include: Analytical tools that can assist in determining the answers include: ■ Supply chain analysis: o Distribution of players across chain activities ■ Industry workforce assessments to evaluate the demand- o Farm-to-market mapping: number of transactions and supply-side conditions for labor in the industry and and time required across the labor market in general. ■ Benchmarking other supply chains ■ Skills segmentation, classification, and benchmarking ■ Mapping of support services across the supply chain analyses for the value chain against competitors. ■ Mapping of information flows along the chain ■ Bridge analyses5 to assess the strength of linkages between ■ Supplier assessments industry and academic institutions. Assessing human resources across the value chain Assessing the business environment The next driver of value chain productivity is the quality of The quality of the business environment ultimately serves a human resources available for the chain to tap.4 Thus, a gate-keeping function, and often a negative one. Productivity fourth way to improve productivity is by investing in human increases are achieved at the firm and value chain levels by resources. This may involve enhancing motivation, manage- improving the quality of business strategy and operations— ment, and training at the firm level, both by upgrading for example, by forming new partnerships with international the overall education system and through utilizing special- firms in their value chains that provide access to markets, tech- ized institutes. nology, finance, and know-how. Interventions designed to Improving the overall quality of the workforce is often enhance productivity will differ by value chain and will require seen as the mandate of government and the educational insti- a different balance across the four components (strategic pro- tutions, outside of the direct control of industry. Similarly, ductivity, operational productivity, supply chain management, specific technical and management skills are viewed as the and human resources) discussed above. However, a factor concern of specific firms or industries. Neither perception is common across all value chains and components is that the 46 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE business environment contributes importantly to the ability of consumption chain mapping to understand the current firms to succeed in enhancing productivity. These “business strategic positioning of the value chain, as well as poten- environment” factors, also called the microeconomic founda- tial markets and product offerings. tions of growth, are perhaps especially important in the con- ■ Assess operational productivity of the value chain. A text of Africa,6 they include: the level of bureaucracy and red variety of tools are available to analyze the operational tape; the extent to which the rule of law is enforced and com- productivity and performance of the value chain includ- mercial courts are functional; the quality of infrastructure; the ing per unit economic cost-driver analysis (fixed versus level of financial sector modernization and regulation; levels variable costs within each activity), cost-trend analysis, of trade access; and the ability of the country to attract foreign and per unit activity-cost benchmarking. investment and to ensure the proper functioning of land mar- ■ Assess the quality of supply chain management. To gauge kets (through reliable registries) and labor markets (through the efficiency in the flow of goods along the chain, the policies that encourage job creation, labor flexibility, and over- following tools can be useful: farm-to-market mapping all productivity). (number of transactions and time) and distribution of Numerous methodologies and analytical tools exist to players across the chain, supply chain benchmarking, evaluate the business environment of a particular value mapping of supporting services, mapping of informa- chain.7 In most cases, the analytical tools are targeted at a tion flow along the chain, and supplier assessments. specific area of the business environment. The following are ■ Assess the human resources across the value chain. To a few general tools that can be used: assess the quality of the value chain workforce, the fol- lowing tools can be used: Demand- and supply-side ■ Regulatory impact analysis analyses of the labor market for the value chain, skills ■ Mapping of the time and cost of bureaucratic processes segmentation and benchmarking analyses with competi- ■ Per unit costing of rent-seeking activities across the value tor value chains (including labor productivity, number of chain skilled graduates), or the 10 bridges analysis8 of the link- ■ Total annual costing of weaknesses in infrastructure rel- ages between industry and academia. evant to the industry ■ Assess the business environment. Numerous tools are already well developed to assess the business environment Means by which businesses can participate in improving of a value chain. Among the most tested are regulatory the business environment are described in tools 10 and 11. impact analyses, mapping of time and cost of bureau- cratic processes at each stage of the value chain, per unit A STEP-BY-STEP SUMMARY OF TOOL 2: costing of rent-seeking activities along each segment of DESIGNING INFORMED STRATEGIES the value chain, and total annual cost of weaknesses in ACROSS THE VALUE CHAIN infrastructure. ■ Conduct a value chain product unit financial analysis and SWOT analysis. First, understand the distribution and flow of resources and profits along the chain. Collect NOTES key data at each segment of the value chain, and graph 1. This value chain productivity framework was developed the unit costs, unit revenue, and unit profit for each step. by J. E. Austin Associates, Inc., for use in developing and To complement the financial and operational data, con- implementing industry strategic agendas with public and duct a SWOT analysis in a participatory manner with private sector leaders. value chain leadership to qualitatively characterize the 2. Productivity is the efficiency by which a firm uses its state of the value chain. natural resources, labor, and financial resources. It is measured ■ Conduct a Competitiveness Diamond analysis. For the in terms of output per unit hour of labor, capital-output ratios, value chain, assess the strengths and weaknesses of each of and total factor productivity. These drive returns to labor and the four pillars of the competitiveness diamond: 1) demand capital, which in turn drive wage levels and overall prosperity. conditions; 2) factor inputs; 3) context for firm strategy 3. Often referred to as the “Porter Diamond,” the diamond and rivalry; and 4) related and supporting industries. and many of its applications were developed by Michael ■ Assess strategic productivity of the value chain. Use ana- Porter of the Harvard Business School. lytical tools such as market segmentation and assessment, 4. Many tools and methodologies have already been devel- customer profiling, customer benefit analysis, and oped to evaluate and address this area. A detailed consideration TOOL 2: DESIGNING INFORMED STRATEGIES ACROSS THE VALUE CHAIN 47 of workforce issues is largely beyond the scope of this Guide. in the influential World Economic Forum Global Competi- Perhaps they can be addressed more fully in a subsequent tiveness Report with 80 percent on the national business volume. For more detailed information on workforce devel- environment and 20 percent on “the quality of business opment, readers are directed to the extensive body of litera- strategy and operations.” ture available publicly on the World Bank Web site. 7. Annual reports on the conditions of the business envi- 5. Derived from J. E. Austin Associates, Inc.’s “10 Bridges ronment in specific countries, such as the World Bank Approach,” a methodology for building workforce compet- Doing Business and the Global Competitiveness Report, itiveness through university-industry collaborations. provide useful examples as they use many of the survey and 6. Dr. Michael Porter, the thought leader of business com- analytical tools at the economy level. petitiveness, weights his “Business Competitiveness Index” 8. Analytical tool developed by J. E. Austin Associates, Inc. 48 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE C A S E S T U DY 3 Understanding the Value Chain and Integrating Information into Strategy— Nigerian Domestic Catfish Michael Gorman and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION brings Africa export earnings of US$2.7 billion annually, “these benefits are at risk as the exploitation of African nat- espite government support for major investments in D some 40 additional public fish farms and hatcheries, aquaculture expansion has been a slow process in Nigeria, because private sector fish farmers have faced major ural fish stocks is reaching its limits, and aquaculture pro- duction has not realized its full potential” (EurekNews and BBC News). constraints, including lack of supporting feed and seed companies. Dixie and Ohen (2006) conducted a market THE TOOL: MARKET ASSESSMENTS study to better understand these private sector constraints and opportunities. Value chain participants must consult the market when Nigeria is the fifth largest aquaculture producer in the determining how to increase profits, reach new markets, world. In Nigeria, domestic fish is a preferred protein that innovate, and increase productivity. There are seven widely rivals red meat in consumer demand. Domestic demand for accepted means of developing market analysis that con- fresh catfish has grown as Nigerian incomes increase. Nigeria tribute to identifying opportunities to capture more value. has become one of the largest importers of fish in the devel- They are detailed in the Market Assessment Methods box oping world, bringing in some 600,000 metric tons (mt) below (Engelmann and Swisscontact 2005). annually. There is a growing awareness of aquaculture in In Nigeria, a market survey was used to gather quantitative Nigeria, with more than 100 private commercial fish farms and qualitative information about buyers, sellers, volumes, currently in production. prices, market trends, market share, and market segments, At the New Partnership for Africa’s Development along with qualitative information on competitors. The (NEPAD) 2005 “Fish for All Summit,” Nigeria’s president rationale behind this approach was that surveys can accu- Olusegun Obasanjo stated that, “if Africa’s per capita con- rately represent the opportunities and demand characteristics sumption of fish is just to be kept at its present level, of the markets studied. Value chain participants can use sur- though grossly low and unacceptable, then fish production veys to identify broad problems in a market, such as lack of must be increased by over 250 percent by 2015. This knowledge about a particular service, limited understanding unhealthy situation calls for urgent action and indeed of its benefits, or failure to assign appropriate value to outside poses a great challenge to all of us.” President Obasanjo fur- assistance. This type of information is useful for establishing ther remarked in his closing address that although fishing new products or services within the value chain. 49 Market Assessment Methods The following methods are derived from Engelmann from local markets on transactions, interactions, and Swisscontact (2005). processes, and embedded services. Observations are also a simple tool to cross-check information ■ Secondary research refers to the use of data that obtained from other sources. have already been collected, analyzed, and made ■ Interactive workshops or meetings can be used to available for other purposes. Value chain partici- validate and deepen previously gathered informa- pants may find such research useful for identifying tion. They can generate ideas for addressing con- sectors experiencing growth, as well as for under- straints or opportunities in the market. In addition, standing government regulations and policy. these workshops may lead to a common approach in ■ Group discussions permit value chain participants solving market problems among all of the value to explore issues in general terms, then seek more chain participants. specific information by using focus group discus- ■ Product concept testing aims to gauge the demand sions. for a service or product that the value chain does not ■ In-depth interviews provide qualitative and quanti- yet produce and about which the value chain cus- tative information on the value chain and are partic- tomers have no knowledge. ularly useful for different participants of value chains ■ Market and consumer surveys are useful (as evi- to understand their complementary relationships. denced by the Nigerian case study) to obtain an ■ Market observation can be used by value chain par- accurate picture of serviceable aspects of the market ticipants to obtain qualitative and quantitative data for the product or service. Figure 4.7 Map of Nigeria Madagascar (1.8 percent). Egypt’s aquaculture growth and development has been the most significant because it has increased production levels from 85,000 tons in 1997 to 376,000 tons in 2002, a 35 percent average annual growth rate. By 2006, farmed catfish accounted for approximately 50 percent of Nigeria’s domestic annual fish production. The catfish industry provides approximately US$75 million in revenues at the farm gate and accounts for nearly US$180 million in consumer spending. The sector contributes to the employment of nearly 25,000 people, with the majority (over two-thirds) employed as restaurant workers. Aquacul- ture and Nigerian farm-raised catfish have also been identi- fied as a growing source of income for Nigerian farmers. To ensure success, any new investments or expansion of Source: World Bank. production must be driven by market demand and consumer preferences. This case study features the information gathered BACKGROUND from a domestic market assessment for the farmed and fresh catfish value chain conducted by Dixie and Ohen (2006) to Africa produced 7.31 million tons of fish and seafood in 2002 demonstrate the value of market information in determining (Dixie and Ohen 2006). On the continent, aquaculture devel- future investments and/or interventions in a value chain. opment has been most notable in Egypt, where a combination of tradition, market demand, available and well-managed THE NIGERIAN CATFISH VALUE CHAIN water resources, marketable species, and private sector initia- tive resulted in dramatic growth during the 1990s. The top The domestic market demand for fresh and smoked Nigerian three African producer nations were Egypt (accounting catfish is outstripping the supply. Tastes and preferences for for 85.6 percent of the total), Nigeria (6.5 percent), and catfish have been increasing due in large part to the availability, 50 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE cost, consumer preference for white meat, perceived health Figure 4.8 Nigerian Domestic Catfish Farming Value benefits over substitute products, and some popular catfish Chain dishes served by restaurants (Dixie and Ohen 2006). Restaurants Consumers serve 70% of Production catfish sold According to Dixie and Ohen (2006), the value of Nigerian cat- fish produced and sold by aquaculture farmers is about US$75 million, which assumes a production level of about 30,000 tons Retailer Urban of catfish per year. At the retail level, this tonnage rises in value wholesaler to about US$120 million. Restaurant operators capture an additional US$60 million dollars on catfish, for a total of Secondary Processor US$180 million in sectorwide consumer spending. Estimates wholesaler indicate that approximately 70 percent of fresh fish in Nigeria is sold in restaurants, especially in bukas.1 The major cost of Primary production for farmers is European catfish feed, which wholesaler amounts to approximately US$39 million. Nigeria currently relies on imports because a sizeable fish-feed industry has yet to develop. The majority of domestic feed supplies are farm Fish farmer made, with only a few animal feed millers providing domestic commercial feed pellets (Moehl, Halwart, and Brummet 2005). Source: J. E. Austin Associates, Inc. Supply Figure 4.9 Consumers’ Reasons for Purchasing Live Farmed catfish are almost universally sold at the farm to Catfish primary wholesalers, retailers, or buka owners. As indicated in figure 4.8, primary wholesalers have been chiefly respon- 70 sible for developing the trade from the major fish farms in 60 Nigeria. Traditionally, these wholesalers transport live cat- 50 fish to secondary wholesalers who sell to other retailers, Percent restaurants, or consumers. It is worth noting that, in the 40 major production areas, retailers and restaurants are 30 increasingly buying directly at the farm, thus cutting out 20 middlemen and vertically integrating. A new trend in the 10 industry is that the majority of fresh catfish, especially larger 0 fish, are now sold directly to bukas, restaurants, and hotels. Fresh Alive Available Taste/smell Familiarity Source: Dixie and Ohen (2006). Demand Dixie and Ohen (2006) cite Nigerian consumers’ require- perception that after a certain age (normally about 35), red ments and demands with respect to catfish and catfish prod- meat should be given up entirely. Nearly 80 percent said that ucts that are fairly common across regions and markets. As they would use catfish to prepare pepper soup—by far, the indicated in figure 4.9, key consumer motivations for con- most popular use—and about 40 percent said it would go suming catfish were 1) availability, 2) taste/smell, and 3) into other soups or stew dishes. familiarity. Over 90 percent of consumers said that they were increasing their purchases of catfish, and 15 percent identi- Opportunity fied bird flu as affecting their purchases. Comments were made about the health benefits of white meat (for example, According to traders and retailers, product losses (fish death, catfish), and a significant number made reference to a quality loss) and finance are the most common challenges CASE STUDY 3: UNDERSTANDING THE VALUE CHAIN AND INTEGRATING INFORMATION INTO STRATEGY 51 cited by fresh catfish traders and retailers. Fresh and living Figure 4.10 Consumers’ Views of What Factors Would catfish command a retail price twice that of frozen fish. Increase Their Consumption of Catfish Traders and retailers do not use proper storage facilities, do not change the water sufficiently, and often leave the fish in 80 the sun for long periods—all leading to product loss and 70 lower quality, which translate to lower revenues. Traders 60 Percent indicate that limited finance constrains the ability to develop 50 and invest in business operations or expansion. Secondary 40 issues are problems with debt recovery, market location, 30 electricity (mainly for refrigeration), skin damage to the fish 20 (which reduces the sale price), and transport costs. 10 Nigerian catfish farmers report that the marketing of 0 fresh catfish is becoming more difficult because of increas- Cheaper Greater Health New ways of availability issues cooking ing competition. Some farmers in the southeast also recog- nize that the difficulties in selling fish result from a general Source: Dixie and Ohen (2006). lack of organization (for example, farms all try to sell fish on the same day). To control marketing problems, farmers say that they would like to have direct contact with traders fur- (“Value Chain Possible Action #1” in figure 4.11), taking ther down the marketing chain. Farmers have indicated that advantage of the opportunities to vertically integrate opera- information sharing within the value chain is sparse and tions (“Value Chain Possible Action #2”), and developing that there is frustration that primary wholesalers shield more sophisticated marketing and distribution systems in their sources of supply from secondary wholesalers and order to capture more value (“Value Chain Possible Action retailers. In addition, in some locations, retailers feel that #3”). There is also ample opportunity for producers to band they have to pay higher prices than necessary because they together and gain a competitive advantage through are unable to buy direct, or at least need better information economies of scale. Costly inputs can be purchased at sig- about the selling prices at the farm. nificant savings with effective cost-share agreements and in The Nigerian catfish market projections provided by the larger quantities. Also, associations of producers or the surveyors imply that the undersupply of farmed catfish firms linked to them can combine to act in groups to attain may amount to some 5,000 mt per year, which could be the scale and market power necessary to create permanent rapidly addressed by expanding production. The urban marketing links and secure contracts to provide restaurants markets, where farmed fish is primarily sold, will grow by with guaranteed supply and quality. about 3 percent annually purely through population growth. These new distribution systems will have an opportunity Once these sources of demand have been met, additional to increase the marketing of catfish and improve the safe supplies will have to be absorbed by stimulating sales transport of products. The market assessment conducted by through lower retail prices, the addition of value-added Dixie and Ohen (2006) confirms that consumers prefer cat- operations, or exports. Fish farmers and their value chain fish based on its purported health qualities, its cost, and its colleagues will have to take a much more proactive availability, as well as enthusiasm for its taste and prepara- approach to learning about the market and initiating sales tion in popular dishes and as a complementary product to and marketing activities. This is likely to involve conducting beer. There is an opportunity to capitalize on these prefer- their own market research and establishing closer contacts ences in marketing initiatives while simultaneously expand- with retailers, traders, restaurants, and processors. These ing the market supply. will be new activities for producers. Currently, losses during transportation are estimated to be between 10 to 15 percent of value, with practices varying widely across the sector. With better organization, appropri- Interventions in the Nigerian fresh catfish ate postharvest methods suited to Nigerian conditions can value chain be propagated to the retail, trading, and restaurant sectors. The survey results point to many possible value chain ini- Producers or wholesalers should seek technical expertise tiatives. Unmet and clearly increasing market demand and assistance to lower these loss rates and improve the should be addressed by increasing supply from producers quality of the catfish that they distribute. 52 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.11 Nigerian Catfish Farming Value Figure 4.12 Projected Development of the Value Chain Chain—Possible Actions for Fresh Catfish, 2005–15 450 Value Chain possible action Restaurants Consumers 400 #3 serve 70% of catfish sold 350 300 Millions of US$ Value Chain possible action 250 #2 Urban Retailer wholesaler 200 Possible Value Chain actions 1. Increase production 150 2. Vertical integration/ Secondary Processor economies of scale wholesaler 100 3. Marketing 50 4. Supply chain/transport improvements Primary 0 5. Access to working wholesaler 2005 2010 2015 capital Restaurant Retail Farm 6. Cost-sharing for inputs Value Chain Source: Dixie and Ohen (2006). possible action Fish farmer #1 Source: J. E. Austin Associates, Inc. 2007 adapted from Dixie and Ohen 2006. growth opportunities and priority interventions. The Nigerian domestic catfish market is clearly rich with Financing is still not widely available for restaurants and opportunity for increasing sales (see figure 4.12); there are bukas to increase their working capital and expand their numerous constraints and other issues that can be businesses. With growing demand and falling prices, there addressed, and there is room for value chain collaboration is an opportunity to provide financing to promising end- centered on production, investment in transport and market businesses that may pull the value chain toward infrastructure, marketing, commercialization, and vertical higher growth vectors. integration. CONCLUSION NOTE The market assessment survey has furnished important 1. The word “buka” refers to a “canteen or eating house” in information that allows the value chain actors to identify the Hausa language. CASE STUDY 3: UNDERSTANDING THE VALUE CHAIN AND INTEGRATING INFORMATION INTO STRATEGY 53 TO O L 3 Conducting Benchmarking and Gap Assessments of Value Chains BENCHMARKING BACKGROUND are selected are not appropriate, the results will not be use- ful and may even be misleading. t both the company and value chain levels, bench- A marking is crucial. Benchmarking compares the performance of a company or value chain to itself at different points in time, to another value chain in the country, In assessing a value chain’s competitiveness, several key aspects can be usefully examined. First, it is important to benchmark overall value chain performance, meaning how well the actors in the value chain deliver products to the or to a value chain in another country in order to establish the final consumer in comparison to other value chains and current baseline position and provide comparative data to other countries. Once the overall value chain is analyzed, it guide decisions and actions. Usually quantitative indicators can be broken down into key performance components, are used, such as total gross domestic product (GDP), time to such as yields, transport efficiency, market access, unit price, market, pricing data, and others. Qualitative data can also be and many others. These key components and the underly- used, although such information is harder to measure clearly ing processes can then be individually benchmarked to and objectively. identify relative strengths and weaknesses. Industry experts Benchmarking allows practitioners and stakeholders to can identify important, detailed performance and competi- understand the performance of particular value chains in tiveness indicators; once these indicators are quantified, comparison to competitors, and especially to global best comparisons between different industries and countries can performers. Knowing what competitors do differently, and be made. The experts and the value chain leadership can whether these differences are important drivers of value then analyze how the better performance is being achieved. chain performance, gives clues as to beneficial changes that Once benchmarking is completed and differences in per- could be made to improve performance of the value chain. formance have been identified and analyzed, the next step is Benchmarking can be used by all members of the value to determine courses of action. In order to spur action by chain to build a common understanding and vision as the stakeholders, the results of the benchmarking exercise can basis for prioritizing objectives and decisions. Members can be disseminated so that stakeholders understand their posi- benchmark against each other to determine whether their per- tion and become a part of the action process. The informa- formance is up to par and pinpoint areas of improvement. tion should generate dialogue to increase participants’ They can also benchmark the entire value chain against other insights into the need for intervention and achieving con- value chains in the same industry or other global value chains. sensus on decisions and actions. THE BENCHMARKING TOOL What benchmarking does It is possible to benchmark almost anything, so, too often, stakeholders do not adequately narrow down their field of 1. Establishes a baseline of current performance. Once the focus when benchmarking. A scope that is too broad does benchmarking exercise has been completed, a company, not allow for real drivers of performance to be analyzed. an industry, or a country understands its position rela- Therefore, it is necessary to first refine the scope and select tive to its comparators. appropriate comparators. Those conducting the bench- 2. Identifies areas and targets for improvement. If bench- marking must keep in mind that the results should lead to marking against best practices, then differences in per- clear courses of action. Therefore, if the comparators that formance along the entire value chain can be identified. 55 Shortcomings can be examined and steps can be taken to they provide can be general in nature, such data are a useful improve performance. guide for specific discussions and action planning later in 3. Pinpoints potential critical factors for success. Areas for the benchmarking process. improvement can be prioritized. In addition to the “broad strokes,” decision makers and industry leaders need to understand the more detailed basis Steps to effective benchmarking for the value chain’s performance, the structure of the value chain, availability of services, and the value chain’s operat- The benchmarking process is straightforward in nature. It ing environment. This targeted benchmarking is done in generally includes the following steps: several steps, outlined below. ■ Determine what indicators and measures to benchmark ■ Determine the benchmarking target groups Determine what to benchmark ■ Gather and analyze the data First, the value chain’s performance must be accurately and ■ Convert benchmark data into action through: objectively measured in the performance and operational o Managed discussion areas most relevant to its competitiveness (for example, o Prioritization and design availability of inputs, time to export in national ports, and o Implementation local transportation costs). Items that should be bench- Many widely available indexes measure elements of one marked will vary from value chain to value chain based on country’s competitiveness relative to other countries. Exam- priorities determined by the value chain’s strategy. It is ples involve the World Economic Forum’s Global Competi- important to select actionable items for a benchmarking tiveness Report, the World Bank Doing Business Report, the exercise. It is not sufficient just to know that some process World Development Indicators, and a variety of standard or step in the value chain is slow or costly. Selected indica- economic indicators available through governments, uni- tors need to point to why the process is slow or exactly versities, and international organizations. Although the data where costs are added (see box 4.2). This should be measured Box 4.2 Ugandan Benchmarking Constraints in the Coffee Industry Uganda, a major coffee producer, has only recently two or fewer days are required for actual transport begun a concerted campaign to add value to their pro- time. What accounted for the remaining 18 days? duction. Grown in many areas of the country, Uganda’s Lengthy and nonstreamlined border procedures coffee is generally transported to Kampala and sent to accounted for some of the time, but most was taken up Port Mombassa for shipment overseas. with multiple inspections and customs procedures. In 2003, amidst a national decentralization initia- Reports also implied that numerous informal taxes tive, coffee growers and processors were faced with were being levied. The impact on the industry in terms increasing numbers of procedures as individual dis- of product quality, losses, and the risk of missed deliv- tricts imposed levies on investments and shipments eries was significant. within and between the districts. Procedures were not Ugandan stakeholders benchmarked this situation combined or streamlined—indeed, the increasing frag- against those in other countries to see if these delays mentation led to the need to devote substantial time to and costs were normal. Information from coffee petty transactions and, reportedly, an increased inci- exporters in Colombia, Costa Rica, and Vietnam indi- dence of “facilitation payments.” These circumstances cated that instead of 20 days, the norms for delivery to were echoed in other sectors, such as fish and wood port were between 1 and 7 days. products. This information helped the industry and govern- Reports indicated that once a shipment reached ment to recognize the impact of a poor system of regu- Kampala, it was not uncommon for the container to lation and implementation and to focus attention on take a period of 20 days to reach Mombassa—but only putting a streamlined system in place. Author: Lisa Carse, J. E. Austin Associates, Inc., interviews. 56 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE at steps all along the value chain and in the services provided ■ Publicly available reports to the chain. It is important that the entire value chain be ■ Published sources, especially trade publications and included so as to identify bottlenecks and added costs that databases may not be readily apparent. ■ The target comparator value chain (and participant The rationale for using data, and the data points them- companies and clusters) selves, can be gathered from industry and trade publications, ■ Industry experts, consultants, and researchers local government sources, and through surveys. Surveying rel- ■ Suppliers, service providers, and buyers evant firms and industry groups, and participants along the entire value chain, can provide a qualitative component that Utilizing the data enhances understanding of the processes being measured and costs being tracked. How to conduct value chain performance Once the data have been gathered, participants can carry gap analysis is discussed later in this section. The greater the out a careful analysis and draw insightful conclusions. Many level of specificity in the benchmarking activities, the more analytical tools can be used to create clear comparisons and likely it is that the results will lead to practical applications. help identify areas for targeted intervention. Creating a graphical representation, such as the “spider” in figure 4.13, can help decision makers to easily understand certain Determine the benchmarking target(s) strengths and weaknesses in their value chains so that Benchmarkers must determine comparator value chains actions can quickly be targeted in the appropriate areas. (target comparators) and specific performance indicators Figure 4.13 describes the extent of coordination within that will provide the best basis for comparison. The target the supply chains of citrus fruit and tomatoes in Morocco, comparators should be value chains operating in other Spain, and Turkey (Garcia 2003). In order to achieve Eurep- countries, or possibly in different regions of the same coun- GAP certification, it is important for all members of try. Once the home value chain data are obtained, the the value chain to be in close communication to ensure qual- benchmarkers can turn their attention to the targets. ity and other elements required for certification. Morocco Including a knowledgeable outsider can facilitate the and Turkey were benchmarked against Spain in categories process, provide additional perspective, strengthen the objec- that contribute to seamless coordination along the supply tivity of the data, and speed identification of key elements to chain. From figure 4.13, it is apparent that Spain is the best benchmark. In choosing benchmarking targets, it is impor- tant not only to consider countries and industries that demonstrate global best practices, but also regional competi- Figure 4.13 Coordination within the Citrus Fruit and tors or those countries that are operating successfully in a Tomato Value Chains, Comparison among Morocco, Spain, competitive space that the home value chain would like to and Turkey occupy (positioning, see tool 8). The purpose of the bench- marking exercise within the context of the goals and strategy P&P technology of the nation and/or value chain will determine which com- 3 parator indicators are examined; the key point is that the indi- 2 cator should have high relevance as a standard or driver of Transport quality P&P quality performance. Objectives of the benchmarking might include: 1 ■ Operational improvements 0 ■ Reduced transaction costs ■ More advantageous market positioning Storage quality Labelling flexibility Collecting the data—where is the benchmarking information? Storage capacity Spain mean Turkey mean Morocco mean A surprising number of public sources will provide useful information; sometimes the benchmarkers will have to dig Source: Garcia Martinez et al. (2003). more deeply. Some common sources include: Note: Higher value indicates better quality. TOOL 3: CONDUCTING BENCHMARKING AND GAP ASSESSMENTS OF VALUE CHAINS 57 Box 4.3 Tanzanian Cotton—Benchmarking Costs Cotton is a primary commodity produced in and operating at full capacity (with a volume of 50,000 exported by several West African countries. A field tons of seed cotton) with the price of seed cotton at a visit to Tanzania in 2004 examined Tanzanian ginning, level of FCFA 160 per kg, which is the actual price in benchmarking companies against a theoretical West Burkina Faso, Cameroon, and Mali. African cotton company, and against actual costs in Below, the price breakdown of cotton lint produc- Burkina Faso and Cameroon. The theoretical costs tion is set against comparator countries, including the were calculated for a West African cotton company West Africa theoretical model. Comparison among Tanzania, Theoretical Costs in West Africa, and Actual Costs in Burkina Faso and Cameroon US$a/kg of cotton lint W. Africa Actual Actual Tanzania theoretical Burkina Faso Cameroon Collection of seed cotton 0.094 0.083 0.103 0.097 Processing costs 0.082 0.135 0.163 0.134 Financing costs (short term) 0.023 0.038 0.067 0.013 Cost from ginnery to free on board (FOB) 0.100 0.128 0.155 0.162 Subtotal 0.299 0.383 0.488 0.406 Capital costs (on investment) 0.009 0.035 0.036 0.036 Taxes 0.042 Overhead and contingencies 0.009 0.052 0.034 0.053 Dagrisb fee 0.012 0.012 Total intermediary costs 0.358 0.470 0.569 0.507 Purchase cost of seed cotton 0.833 0.755 0.755 0.755 CDF levy (passbook) 0.055 Critical functions (extension, research, seeds) 0.019 0.029 0.047 Total FOB cost 1.247 1.244 1.352 1.308 Minus: value of seeds 0.079 0.038 0.038 0.050 Net FOB cost 1.168 1.206 1.315 1.259 Tanzania has a cost advantage over the theoretical favorable cost position. Tanzania’s net FOB costs are 13 figure and the actual prices from Burkina Faso and percent lower than Burkina Faso’s and 8.5 percent Cameroon. Knowing this allows Tanzania to develop lower than Cameroon’s. an industry growth strategy to take advantage of its Source: Lisa Carse, J. E. Austin Associates, Inc., based on Tschirley, David, Colin Poulton, and Patrick Labaste, ed., 2009, “Orga- nization and Performance of Cotton Sectors in Africa.” World Bank, Washington, DC. a The comparison, in U.S. dollars, is based on the actual exchange rate (US$1 = FCFA504 and TZS1,200) at the time of writing the report in 2004. b Dagris is a company involved in cotton marketing chains that holds shares in cotton enterprises in several African countries. performer, followed by Morocco and Turkey. Turkey falls short their options for which improvements to address first. In this of Spain in every category, while Morocco actually matches case, Turkey needs to make improvements in every category, Spain’s score in several categories. Illustrating this information while Morocco can choose whether to focus on areas in which in this type of graph helps value chain participants to weigh it falls far short of Spain (for example, through improvements 58 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE in market orientation, production flexibility, vertical integra- useful means of quickly starting a benchmarking dialogue tion, vertical coordination, and IT systems), or attempt to gain and a good strategist/facilitator can use the method and dis- a competitive advantage by outperforming Spain in areas cussion to encourage the value chain participants to look where it is already close to achieving that goal (for example, more deeply into the assumptions and conclusions. through improvements in segregation or traceability systems). In the example illustrated in table 4.4, value chain A is Gap analysis is a basic tool that is useful in understanding the country of interest, while value chain B is the best prac- differences among comparator value chains and in helping tices target or global industry standard. The participants value chain participants to identify the areas where interven- identify the indicators that they believe are the current driv- tions and reforms should take place. This analytical tool, ers of their industry’s global competitiveness. Members of when presented graphically as a comparison of elements of the value chain in country A then give themselves scores for value chains (or clusters—see tool 12 for comparison of the how well the chain performs on each indicator. This score is content of cluster maps) can provide strong visual impact in compared to the best practices score, and the gap between understanding and communicating a value chain’s relative the two scores is recorded. strengths and weaknesses. Once the participants recognize the gaps and understand Gap analysis can also be presented in a table format, as the reasons for them, they will be able to make choices for a shown in table 4.3, using data gathered in a benchmarking prioritized strategy change. The gap analysis and the pro- exercise conducted for the cigar industry in the Dominican posed action prioritization can be used as an effective basis Republic. for public-private dialogue along with value chain and firm- Gap analysis can also be based on the perceptions of level decision making (for example, see the cases in tools value chain leaders through an exercise that quantifies what 2 and 8). However, because it is unlikely that value chain members of the value chain already know. In the example actors will be able to effectively manage everything at once, below, members of the value chain use a qualitative bench- decision makers will need to weigh the feasibility of possi- marking exercise to begin to identify both the specific areas ble initiatives, their implementation capacity, and the relative in which they believe the chain lags behind its competitors payoff of each intervention in determining priorities. Value and ideal models or industry trends. This “quick and dirty” chain stakeholders will initially need to target high impact approach to gap analysis is based more on leaders’ percep- gaps and objectives or ones that establish a platform for tions (correct or incorrect) than on hard data. But it is a follow-on steps and successes. Table 4.3 Gap Analysis of the Dominican Cigar Industry versus Cuban Cigars Critical success factors Dominican cigars Cuban cigars Follow-on questions Sales volume 120 million sold 80 million sold At what price point? What are industry profits? Flavor #2 in blind taste tests #1 in blind taste tests What are the key determinants of flavor? Packaging Imported wrapper Local wrapper How important is the wrapper to consumer choice? How does the wrapper affect production costs? Research and Weak (but improving) Strong What institutions are needed to develop development (R&D) R&D capacity? capacity Distribution channels Mostly sells to Davidoff Controls European What kinds of distribution channels are most in line distribution channels with the business and growth model? How can these be developed? Final market Over-reliance on U.S. Strong European Where are current customers? Future/potential embargo of Cuba penetration consumer bases? Industry management Dynamic enterprises State-owned enterprises What are managerial weaknesses? How can they be improved? Marketing Rising image as a Strong “Cuban” brand How can sellers develop an effective and “cigar country” differentiated branding strategy? Source: J. E. Austin Associates, Inc., based on interviews. TOOL 3: CONDUCTING BENCHMARKING AND GAP ASSESSMENTS OF VALUE CHAINS 59 Table 4.4 Illustrative Gap Analysis Driving forces of industry Country A Country B Gap Health qualities 1 5 4 Branding and promotion 2 5 3 Convenience of packaging and availability 4 5 1 Guarantee of quality and standards 3 5 3 Logistics 2 5 3 Source: J. E. Austin Associates, Inc. Note: Rating: 5 = excellent; 4 = good; 3 = average; 2 = below average; 1 = weak or poor. A STEP-BY-STEP SUMMARY OF TOOL 3: publications, and other available material. Knowledge- CONDUCTING BENCHMARKING AND able experts (within the industry and within comparator GAP ASSESSMENTS OF VALUE CHAINS value chains and organizations), buyers, and service providers can be consulted. First-hand visits to observe ■ Determine which value chain performance indicators operations may be warranted. and measures to benchmark. Identify the elements that ■ Gather and analyze the data. A variety of tools are are important. The indicators should point to where available to analyze and communicate benchmark costs, time, quality, service, and value are added along the data. These tools include, but are not limited to, gap value chain to help identify bottlenecks, unnecessary analysis, spider graphs, diamond analysis, and illustra- costs, and upgrading opportunities. tive tables. ■ Determine the benchmarking target groups (compara- ■ Convert benchmark data into strategy and action. tors). Value chains and companies that represent global Accurate data from benchmarking exercises provide the best practices, as well as regional value chains, should be private sector, practitioners, and policy makers with compared against to identify areas of operational improve- relevant indicators highlighting the strengths and weak- ment, ways to reduce transaction costs, quality and service nesses of any value chain. These data can then be used improvements, availability and quality of supporting ser- as a springboard for discussions among stakeholders vices, and ways to improve competitiveness strategies. about which areas of a value chain should be priorities ■ Identify data sources. There may be many sources, for intervention. including studies and research, industry reports, trade 60 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE C A S E S T U DY 4 Ugandan Floriculture—Benchmarking and Gap Analysis Lisa Carse and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION specifically describes the cultivation of flowers and cut- tings, which currently includes the majority of Uganda’s enchmarking and gap analysis serve to establish the B levels of performance of comparator industries, value chains, or firms. In 2002, the World Bank’s “Regional Study on Agricultural Trade Facilitation/Non- horticulture production. The World Bank’s 2002 assistance in studying the Ugandan floriculture sector was intended to help the industry and the government of Uganda assess growth potential and design a strategy for its development. Traditional Export Promotion in SSA: Uganda Horti-Flori- The value of Uganda’s horticulture exports, comprising culture Sector Technical Note 2” benchmarked the cost struc- flowers, plant cuttings, fresh fruits and vegetables, vanilla, ture and other elements of Uganda’s floriculture industry cocoa, and papain, nearly quadrupled from US$10.7 million against those of Kenya, a country with similar natural attrib- in 1995 to US$40.7 million in 2002 (see table 4.5). Floricul- utes, ranked number one in African floriculture exports to the ture exports represented the largest share of Uganda’s Dutch auctions. Therefore, Uganda’s floriculture sector was exports in the horticulture sector. However, experts esti- not only benchmarked against its main regional competitor, mated that Uganda was producing far below its potential. it was also benchmarked against Africa’s best performer in In 2002, commercial floriculture was a major nontradi- terms of total export value. The benchmarking was used to tional agricultural export sector, valued at US$21 million inform a gap analysis—the identification of areas of weakness freight on board (FOB). There were 20 commercial farms in relative to comparators—and create a strategy for future production with a total acreage of 122 hectares. Export volume growth based on Uganda’s competitive position. had increased from 721 tons in 1995 to 3,820 tons in 2002. The Ugandan floriculture industry mainly produces sweet- BACKGROUND AND INDUSTRY DESCRIPTION heart roses and chrysanthemum cuttings. Almost all exports Uganda, a landlocked country in East Africa, has achieved are destined for Europe, with the Netherlands receiving the considerable diversification from traditional agricultural largest share. While most of the flowers produced in Uganda crops such as coffee, tea, and cotton, to nontraditional are sold through the Dutch flower auction (table 4.6), small exports including fish, tobacco, cut flowers, and a wide vari- quantities are also sent directly to Belgium, Germany, and the ety of vegetables. The push toward diversification of the United Kingdom. In 1998, Uganda ranked eleventh among the economy was particularly important in response to falling suppliers of roses at the Dutch auction market; by 2002, it had prices for traditional goods. moved up to sixth place (see table 4.6). Floriculture was first developed in Uganda around 1993, Producers in the floriculture industry in Uganda are so it is a relatively new industry for the country. Floriculture large commercial farms that are vertically integrated and 61 sell directly to importers in Europe. The value chain at the The 2002 assessment included analyses of the Ugandan producer level is consolidated mainly because of the large floriculture value chain and production cost structure, which amount of capital that must be invested in growing flow- were then benchmarked against those of Kenya. The value ers suitable for export and putting a working cold chain chain analysis for roses showed that, due to strong competi- in place (figure 4.15). tion and exchangeability of suppliers, profit margins are very small in the flower value chain (see figure 4.16). Producers receive around 40 percent of each euro spent by a consumer Figure 4.14 Map of Uganda on flowers. At the next step of the value chain, the exporter keeps another 40 percent of the final consumer price, although the exporter pays the associated airfreight costs. When flowers reach the Netherlands, an importing agent unpacks the flowers, rehydrates them, and palletizes them for sale to the Dutch flower auction, which adds a 5 percent fee. Wholesalers and other retailers then add another 15 percent before the final consumer pays the corresponding final price. USING BENCHMARKING: VALUE CHAIN ANALYSIS To help assess Uganda’s competitiveness in floriculture, the World Bank benchmarked part of the Ugandan pro- ducers’ value chain and production cost structure against those of Kenyan producers. Kenya was selected because it is located in the same geographic region (although with slight a difference in climatic conditions, especially the Source: World Bank. altitude for growing similar products) and is a competitor Figure 4.15 Ugandan Floriculture Value Chain and Cluster Map Inputs Production/processing Supporting industries Raw Supermarkets Florists Government materials organizations and natural •Ministry of resources agriculture European wholesalers Fertilizers/ Industrial chemicals organizations •UFEA Packaging Dutch auction materials Educational organizations Electricity •Markerere fuel Transportation providers: truck and airfreight University Labor Other Exporters supporting industries Machinery and •horticulture equipment Large vertically integrated producers Source: J. E. Austin Associates, Inc., from Uganda Horti-Floriculture Sector Technical Note 2, 2004. 62 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Table 4.5 Growth Performance of Ugandan Horticultural Exports, 1995–2002 Value of Value of exports exports (US$ (US$ Average Thousands Thousands Total Annual Annual Annual annual FOB) FOB) growth (%) growth (%) growth (%) growth (%) growth Product 1995 2002 1995–2002 1999–2000 2000–2001 2001–2002 2000–2002 Roses 2.3 14.1 513.04 –8.34 26.32 22.40 13.46 Plant cuttings — 7.03 — 28.21 24.44 25.54 26.06 Fresh produce 0.63 4.24 573.02 0.96 1.27 32.50 11.57 Vanilla 0.24 9.43 3829.17 34.67 183.17 64.86 94.23 Cocoa 0.64 4.97 676.56 –27.86 33.66 84.07 29.96 Papain 4.46 0.71 –84.08 –76.67 –26.53 –1.39 –34.86 Other 2.4 0.2 –91.67 –28.57 20.00 –66.67 –25.08 Total 10.67 40.68 Source: de Vette and Gabre-Madhin 2004. Table 4.6 Rose Sales at the Dutch Auction, 2002 Value Stems Average price Rank Country € mil. € mil. € ct /stem 1 Kenya 148.5 1,027.9 14.4 2 Israel 133.1 866.4 15.4 3 Zimbabwe 67.2 474.0 14.2 4 Ecuador 21.7 75.4 28.8 5 Spain 15.5 168.4 9.2 6 Uganda 12.8 136.6 9.4 7 France 10.0 63.5 15.7 8 Zambia 10.0 79.1 12.6 9 South Africa 9.1 31.1 29.3 10 Tanzania 7.0 55.1 12.7 Others 46.8 299.1 15.6 Total 481.7 3,276.6 14.7 Source: Verenigde van Bloemenveilingen Nederland (VBN), from Uganda Horti-Floriculture Sector Technical Note 2. across many industries. Table 4.7 benchmarks Uganda’s Understanding Uganda’s cost position relative to its com- sweetheart rose production cost structure with that of petitors allows for the development of a strategy. For example, Kenya’s; this is illustrated in figure 4.17 (See table 4.8 and in this case, if Uganda could lower its airfreight costs, and the figure 4.18 for a comparison of the cost structure for cut- costs of inputs, such as fertilizers, chemicals, and electricity, tings production.) through efficiency gains, it could sell more flowers at a slightly Uganda produced more stems than Kenya, but Kenya’s lower price than Kenya. stems commanded a slightly higher price. Uganda was at a In benchmarking the cost structure for cuttings, the most disadvantage in terms of the costs for airfreight, fertilizers apparent conclusion is that Uganda does not have much and chemicals, and electricity and fuel. Net profit in Kenya comparative advantage in relation to Kenya. Again, air- was lower than in Uganda, despite Kenya’s premium of half freight costs and input costs are higher in Uganda, but net a cent per stem. margin is still slightly greater in Uganda. CASE STUDY 4: UGANDAN FLORICULTURE—BENCHMARKING AND GAP ANALYSIS 63 Figure 4.16 Value Chain Analysis for Flowers from USING BENCHMARKING: CLUSTER STRUCTURE Uganda The assessment also benchmarked the structure of Uganda’s floriculture cluster against those of Kenya and the Netherlands 120 (see tool 12 for more information on clustering). The cluster 100 assessment included important elements that are part of a 15% value chain analysis, but also looked at the linked impact on 80 5% cluster participants of driving forces and critical success fac- tors. In table 4.9, Uganda is seen to be the weakest of the three Percent 60 40% countries. The Netherlands was included as a best practice case, against which Kenya performs moderately well. How- 40 ever, both Uganda and Kenya lack the specialized equipment 20 and services needed to reach their potential. Prices for inputs 40% 40% 80% 85% 100% in Uganda are about 10 to 20 percent higher than in Kenya. 0 Also, several flights per day directly link Kenya to Europe and Producers Exporters Auction Wholesalers Final can be used for exporting flowers. Uganda has fewer direct consumer flights to Europe, and exporters must often ship through Source: World Bank Uganda Horti-Floriculture Sector Technical Note 2 Nairobi rather than directly to Europe. Both countries sell (2004). their flowers on the Dutch auction. Table 4.7 Sweetheart Rose Production Cost Structure per Hectare: Uganda versus Kenya (in USD) Difference Description Uganda Kenya (Uganda minus Kenya) Production (stems) 3,750,000 3,250,000 500,000 Average price per stem 0.088 0.094 –0.006 Gross sales 330,000 303,875 26,125 Airfreight costs 71,205 63,503 7,702 Handling costs (NL) 9,821 9,408 414 Handling costs (local) 1,473 2,352 –879 Auction/agent fees 52,800 48,620 4,180 Total marketing costs 135,300 123,883 11,417 Net sales 194,700 179,992 14,708 Packing material 6,250 5,559 691 Fertilizers/chemicals 30,000 25,500 4,500 Electricity fuel 15,000 11,250 3,750 Labor 12,775 16,425 –3,650 Staff/management 20,000 25,000 –5,000 General production costs 5,000 5,000 0 Royalty fee 15,400 15,400 0 Repairs and maintenance 4,000 4,000 0 Operational costs 108,425 108,134 291 Gross margin 86,275 71,858 14,417 Depreciation investments 30,000 30,000 0 Interest loans 18,000 18,000 0 Net margin 38,275 23,858 14,417 Source: World Bank Uganda Horti-Floriculture Sector Technical Note 2 (2004). 64 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.17 Components of Total Cost of Sweetheart ° Develop financial support mechanisms for the industry Roses in Uganda and Kenya ° Develop and carry out investment promotion program 350,000 3. Improve technology and practices 300,000 ° Set up and maintain an effective cold chain management system 250,000 ° Facilitate expansion of fresh management services 200,000 ° Establish the Floriculture Training Development Center US$ 150,000 ° Develop and install a product expansion program 100,000 4. Develop and launch a quality, branding, and marketing 50,000 campaign ° Strengthen Uganda’s position as a quality service 0 provider Uganda Kenya Net margin Fertilizers/chemicals ° Standardize export packaging Repairs and maintenance Packing material ° Develop and launch a floricultural branding program Royalty fee Auction/agent fees ° Develop and implement a marketing program General production costs Handling costs (local) Staff/management Handling costs (NL) Labor Airfreight costs 5. Position the Uganda Flower Exporters Association (UFEA) Electricity fuel for sustainability Sources: J. E. Austin Associates, Inc.; World Bank Uganda Horti-Floriculture ° Prepare and implement industry development support Sector Technical Note 2 (2004). program ° Produce revenue generation and sustainability plan Today, the volume and value of exported cut flowers OUTCOMES continues to grow, reaching 7,596 mt and US$34.72 million Based on the results and findings of the benchmarking in 2006 (see figure 4.19). UFEA supports the industry exercise, floriculture industry leaders worked together to through research, training, and market promotion. Pro- develop the Ugandan Floriculture Competitiveness Plan: ducers are also focusing on quality assurance, standards, 2005–2010. Elements of the strategies presented in the and certification, with several farms already applying for plan build upon the benchmarking exercise. The bench- EurepGAP certification. A majority of the Ugandan grow- marking exercise highlighted shortcomings in several ers have received MPS-ABC certification, indicating that areas, including product diversification, research and they meet standards for EurepGAP’s international environ- development, and transport costs. The plan looks to mental program focusing on pesticide use, recycling, and improve the Ugandan floriculture industry’s performance energy and water use. Therefore, Uganda is not only com- through the accomplishment of five key targets and asso- peting on the basis of lower costs, it has also moved toward ciated substrategies:1 competing on value, as seen by improvements made in quality and standards certifications. 1. Increase export volumes and values Most flowers are now shipped directly to Europe, rather ° Expand in existing markets with existing products than via Nairobi. Approximately 50 percent of the flowers ° Open new markets with existing products are sold on the Dutch auction, with the other 50 percent sold ° Establish a Europe-based unpacking distribution facility directly to wholesalers and retail outlets in Europe.2 Uganda ° Diversify and expand product offerings has also begun shipping small quantities of cut flowers to the United States, which represents a new market opportu- 2. Increase internal and foreign direct investment nity for African flowers. In terms of product diversification, ° Clarify strategic industry status Uganda’s competitiveness plan focuses on continuing to ° Develop and implement a floriculture investment incen- expand exports of sweetheart roses. However, one grower tives package has established a farm at higher elevations to attempt grow- ° Develop an upland expansion plan ing larger-headed, higher-value roses. CASE STUDY 4: UGANDAN FLORICULTURE—BENCHMARKING AND GAP ANALYSIS 65 Table 4.8 Cost Structure for Cuttings Production per Hectare: Uganda versus Kenya (in USD) Difference Description Uganda Kenya (Uganda minus Kenya) Production 30,000,000 27,500,000 2,500,000 Average price 0.017 0.018 -0.001 Gross sales 495,000 484,000 11,000 Airfreight costs 79,750 74,250 5,500 Handling costs (NL) 11,000 11,000 0 Handling costs (local) 1,650 2,750 –1,100 Auction/agent fees 0 0 0 Total marketing costs 92,400 88,000 4,400 Net sales 402,600 396,000 6,600 Packing material 28,000 25,667 2,333 Fertilizers/chemicals 40,000 34,000 6,000 Electricity fuel 30,000 22,500 7,500 Labor 38,325 49,275 –10,950 Staff/management 60,000 60,000 0 General production costs 20,000 20,000 0 Planting material 52,500 52,500 0 Repairs and maintenance 6,000 6,000 0 Operational costs 274,825 269,942 4,883 Gross margin 127,775 126,058 1,717 Depreciation investments 40,000 40,000 0 Interest loans 24,000 24,000 0 Net margin 63,775 62,058 1,717 Source: World Bank Uganda Horti-Floriculture Sector Technical Note 2 (2004), VEK. Figure 4.18 Components of Total Cost of Cuttings in Uganda and Kenya 450,000 400,000 350,000 300,000 250,000 US$ 200,000 150,000 100,000 50,000 0 Uganda Kenya Net margin Electricity fuel Repairs and maintenance Fertilizers/chemicals Planting material Packing material General production costs Handling costs (local) Staff/management Handling costs (NL) Labor Airfreight costs Sources: J. E. Austin Associates, Inc.; World Bank Uganda Horti-Floriculture Sector Technical Note 2 (2004), VEK. 66 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Table 4.9 Driving Forces and a Comparison between Uganda, Kenya, and the Netherlands Uganda Kenya Netherlands Driving forces Society + + ++ Entrepreneur + + ++ Government +/- +/- + Horticulture sector +/- + ++ Critical success factors Minimum set Land and climate + + + Labor + + — Local infrastructure + + + Agricultural input supply - + ++ Water ++ +/- +/- Access to the market +/- + ++ Loans and credits - +/- ++ Additional set Producer associations + +/- ++ Skilled management - + ++ Cargo handling facilities ++ + ++ Promotion organizations - +/- + Horticulture education - +/- + Research and training - +/- + Extension service - - + Sector network Services and production of Seeds and plant material — +/- ++ inputs and materials Soil and water testing facilities - +/- ++ Growing medium - - ++ Packing material - + ++ Consultancy services — - ++ Bookkeeping and accounting — - ++ Certification institute — - + Selection and breeding — - ++ Greenhouse construction — - ++ Greenhouse equipment — - ++ Greenhouse covering material — - ++ Fertilizers and chemicals — - + Specialized transport — - ++ Biological crop protection — — ++ Source: World Bank Uganda Horti-Floriculture Sector Technical Note 2 (2004). CASE STUDY 4: UGANDAN FLORICULTURE—BENCHMARKING AND GAP ANALYSIS 67 Figure 4.19 Uganda’s Flower Exports, 1994–2006 8,000 34.72 40 31.49 7,000 35 30.19 6,000 30 7,596 25.25 7,204 5,000 21.31 25 US$ millions Metric tons 6,284 5,031 4,000 15.9 20 4,615 14.46 14.61 3,000 15 3,710 3,024 9.84 9.72 2,000 10 2,352 6.24 1,862 1,765 1,000 1.57 3.61 1,236 5 721 313 0 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Volume (mt) Value (US$ millions) Source: Reprinted from USAID APEP Program. NOTES 1. Building Uganda’s Global Competitiveness in Agribusiness—The Uganda Floriculture Competitiveness Plan: 2005–2010. USAID. 2. Author interview with Christine Kiwanuka, USAID APEP Program. 68 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE TO O L 4 Upgrading and Deepening the Value Chain ncreasing the competitiveness of the value chain by DEEPENING THROUGH SPECIALIZATION I moving it in a new direction—toward a new market, market segment, or customer; toward increased effi- ciency within the value chain; or toward adding operations Opportunities for specialization rest on the size of the mar- ket for the specialized operation or service, and on the con- fidence that the customers of the specialized business or within the value chain, for example—is referred to as upgrad- operation have that the work will be carried out to an ing. Actions that upgrade or increase the competitiveness of a appropriate quality level with needed degrees of customer value chain can take many forms and include improving service, requisite confidentiality, and on a sustained basis product quality, adding more operations to the value chain, (that is, the specialized business will not fail and disappear). bringing value chain operations into a country from overseas, These criteria are, in many respects, the entry criteria for capturing a new market channel, and entering a separate value chain deepening through specialized operations. value chain (new market) with a similar product.1 Specialization may offer the value chain the opportunity In deepening the value chain, firms address gaps includ- to accomplish otherwise unattainable goals. Risk and invest- ing unmet market demand and value, opportunities for ver- ment costs may now be shared and offset by the cost savings tical or horizontal integration, greater specialization, and that result from cooperation and information sharing. the expansion of services to other value chain members. The gap analysis (described in tool 3) methodology provides a means to identify additional operations that METHODS FOR DEEPENING THE VALUE CHAIN may usefully be added to the value chain. It also provides New entrants/entrepreneurs guidance on how best to prioritize opportunities and adjust or expand operations. Entrepreneurship generates many new entrants, added Adding value is often incremental, but it can often be operations, and captured value in every value chain. In each accelerated by FDI and joint ventures—especially with pre- market, entrepreneurs arise to take advantage of market vious buyers. As well as increasing specialization, adding opportunities and create links with value chains. Such new value also frequently means bringing operations in-country business formation can be encouraged by access to business that were previously conducted abroad. services (such as availability of finance) and by good rela- tionships and familiarity with the needs of the other actors DEEPENING THROUGH ADDING OPERATIONS in the value chain. Actions to deepen the value chain must be driven New investment (domestic and foreign direct) by market opportunities and demands. The addition of operations requires sound market analysis, strategic planning, Foreign direct investment by multinational corporations is and good communication among value chain participants. one of the most common ways that technologies are trans- The value chain must prioritize the possible opportunities ferred to value chains in developing and emerging that it identifies and then act as a unit to add them. In economies. Also, knowledgeable domestic businesses can Mongolia, a competitiveness initiative was able to work with purchase or license new technologies. Bringing quality the meat industry in order to identify possible operations to sorting or product-packaging operations into the develop- incorporate (see box 4.4). ing country, for example, can increase cost efficiency and 69 Box 4.4 Upgrading the Value Chain—Mongolian Meat Industry The Mongolian meat industry has traditionally been Figure 1 Mongolian Meat Export Value Chains oriented toward low-end exports of animal carcasses to Siberia. Through work with the Mongolian Com- petitiveness Initiative (MCI)a, plans were made to Supermarkets Wholesale integrate value-added operations such as quality markets checks, packaging, and marketing into the meat Value Chain industry value chain. These upgrades were intended intervention to reorient firms toward more demanding and lucra- Freight New markets Marketing firms tive export markets. (Middle East) forwarders With USAID and U.S. Department of Agriculture (USDA) assistance, the value chain solicited a former USDA expert in meat regulatory standards to help facilitate improvements in health and sanitary stan- Exporters Packaging and labeling dards. MCI also identified transport options and completed cost studies to confirm the feasibility of export to five Asian and two Middle Eastern mar- kets. Lobbying various associations and government Processors agencies, the project worked with industry to streamline government policies and standards Value Chain intervention Meat inspectors related to agricultural export. Slaughter house In figure 1, both the traditional and a new New “processed” meat export value chain are detailed. In products this figure, the processed meat export channel repre- (Halal meat) sents the opportunity to add value by incorporating Veterinarian Quality Herders additional operations within the value chain. The checks “Value Chain Intervention” arrows represent opportu- nities identified for intervening in the Mongolian meat Traditional export Processed meat channel export channel industry to deepen the value chain. Source: J. E. Austin Associates, Inc. Figure 2 Deepening the Value Chain under Two Scenarios Scenario 1: Exporting unprocessed carcasses to traditional markets Frozen carcass Value Herder Slaughter Exporters exports to chain house traditional markets Freight forwarders Earnings to T 290 T 410 T 281 economy = T 981 Earnings Scenario 2: Exporting processed meat to specific markets Value Herder Veterinarian Slaughter Exporters Processed meats Processors chain house exported to Marketing demanding markets Meat Packaging and inspectors labeling firms Freight Earnings to forwarders economy = T 1605 Earnings T 290 T 30 T 480 T 500 T 305 Source: Nathan Associates, Inc., and J. E. Austin Associates, Inc., for USAID. (Box continues on the following page.) 70 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Box 4.4 Upgrading the Value Chain—Mongolian Meat Industry (continued) Figure 2 quantifies the value that can be added by packaging, labeling, and marketing operations to the deepening the value chain. In this instance, the addition Mongolian meat value chain provides gains of nearly of veterinary services, meat inspection, processing, 40 percent in earnings from the meat industry. Source: Michael Gorman, J. E. Austin Associates, Inc. a The Mongolian Competitiveness Initiative was implemented by the consulting firms Nathan Associates and J. E. Austin Associates, Inc. Box 4.5 Deepening the Value Chain: Glass Jar Production in Armenia Armenian agricultural products include grain crops, juice or preserves, for example) are not satisfactory for vegetables, and fruits. The latter two are mainly exported quality- or image-conscious processors. While critical in processed form; vegetables are most often canned, of the quality of locally made bottles, processors cited while the fruits are processed into juices, jellies, jams, price pressure as the reason requiring them to con- compotes, leathers, and fruit fillers, which make up the tinue to purchase locally. This greatly hampered the majority of the produce packed in cans and jars. The lack ambitions of producers of food and beverage prod- of availability of proper quality screw-top jars and the ucts, who were unable to use Armenian-produced need to import them from Europe raises costs for this packaging as a differentiating factor. type of processor/exporter. (Armenia also has important Recognizing a gap in the glass container market, two wine and brandy industries that require glass bottles.) companies made major investments in 2004 in glass jar In 2003, Armenia had very restricted glass jar pro- manufacturing to serve the Armenian market. duction capabilities. Existing production capacities had The bigger investment was by Saranist, which is also few molds, and, therefore, were able to produce only a trying to penetrate the Georgian market. Saranist limited number of standard designs. Armenia’s land- established a new, modern glass manufacturing factory, locked situation and high transportation costs make the Arm-Glass Company. The second manufacturing import of glass bottles and jars very expensive, which investment was by Glass World Company (GWC). restricts opportunities for export of Armenian produce. GWC has modernized its production line through a The fact that quality, locally manufactured screw- US$30 million investment, importing advanced, high- top jars were not available was a constraint to adding technology equipment and installations from Western value. There are four big canners in Armenia and sev- Europe. Both Saranist and GWC have long been estab- eral smaller ones. The quality of Armenian-made glass lished in Armenia—Saranist since 1990 and GWC (for- containers and the ability to customize them (jars for merly Armkhrustal) since 1964. Source: Michael Gorman, J. E. Austin Associates, Inc., interviews, Web sites. product competitiveness while also adding value to the vertical integration (by a value chain or by a firm with the product value chain and the local economy. value chain)—enables value chain deepening. In many parts of the world, vertical integration is achieved through acquisi- tion of another firm along the value chain (see also tool 6). Vertical integration The formation of new organizations, such as farmers Existing firms also frequently identify opportunities to incor- associations, service-provider associations, and marketing porate new technologies or operations into their structures. organizations, also provides opportunities for otherwise Recognizing opportunities to add value, achieve efficiencies, or fragmented producers or other businesses to combine their improve quality—for example, by adding operations through resources to add operations to a value chain. TOOL 4: UPGRADING AND DEEPENING THE VALUE CHAIN 71 Commercial joint ventures A STEP-BY-STEP SUMMARY OF TOOL 4: UPGRADING AND DEEPENING Sharing the risk of incorporating new operations into the THE VALUE CHAIN value chain or investing in a new technology is an appropri- ate measure in some environments. Fresh produce prepara- ■ Analyze market demand or value chain operations that tion, packaging, and logistics centers are frequently good can be serviced through upgrading or deepening. candidates for a joint venture, for example. In another ■ Review the logistics, technical capacity, and investment example, the tea cluster of Sri Lanka worked closely with the needs for upgrading and deepening. University of Moratuwa to jointly develop and commercial- ■ Attract FDI that will facilitate technology transfer. ize color separator technology, which could be used to ■ Encourage value chain actors to consider vertical upgrade the quality of tea supplied to the local Sri Lankan integration. Partners and facilitators in this integration auction. The cluster was able to leverage university may include intermediate and downstream busi- resources to develop a new separator at one-fifth the cost of nesses, and organizations such as farmers associa- the old separators, which were imported from abroad. tions, service-provider associations, and marketing organizations. CONCLUSION ■ Identify and develop facilitators for upgrading or deep- ening. This investment can be supported through sound Many actions can be taken to increase the competitiveness business services (for example, technical capacities, of and to add value to a product’s value chain. These access to skills, access to finance) and by good relation- upgrading activities are often achieved in part by deepening ships and familiarity with the needs of the other actors in the value chain through means such as adding operations to the value chain. the value chain, vertical integration, bringing operations ■ Explore commercial opportunities for collaboration into a country’s value chain, or investing in new technolo- between academia and industry. gies. These actions are often facilitated by the opportunities created by FDI, association-provided services, new invest- ment, vertical integration, and public-private partnerships. Successful value chains add value to and deepen their NOTE operations while responding to market conditions to 1. “AMAP BDS Knowledge and Practice Task Order achieve growth and increase profitability. Lexicon,” USAID. 72 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE C A S E S T U DY 5 Kenyan Green Beans and Other Fresh Vegetable Exports Carlton Jones, Michael Gorman, and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION chain, promoting specialization among chain participants, and increasing chain cost efficiencies. ossessing a perfect agricultural climate for off-season P vegetable production and export to Europe, Kenya has been providing European tables with vegetables for nearly 50 years. Kenya’s success has been due to market BACKGROUND: KENYAN GREEN BEANS segmentation, servicing niche markets, and investing in Kenya has been exporting vegetables1 to the United Kingdom marketing. The industry has constantly refocused its efforts since the 1950s. Reasons for Kenyan success have varied on exporting higher unit-priced products. Products not fit- with the changing market forces of the highly competitive ting the profile have been dropped, and the industry has also UK and European markets. Kenya’s original success in expanded into products of greater value such as pre-packed exporting vegetables was based on its climatic and geo- and mixed vegetable packs. For example, mixed vegetable graphic competitive advantage. Producing temperate prod- packs command a price of US$8.90 per kilogram (kg) ver- ucts year round and being well served by northbound air- sus extra fine beans at US$4.14/kg., fine beans at freight (thanks to the Kenyan tourism market) proved US$3.30/kg., and Asian vegetables at around US$2.00/kg. lucrative for Kenyan vegetable exporters. Increasingly, Kenyan success has been due to market segmentation, investing in certification schemes, adding value to products through TOOL: ADDING VALUE THROUGH ADDED sophisticated packaging, servicing niche markets, and OPERATIONS investing in marketing. “Deepening the value chain” refers to opportunities to add Over the years, due to effective public-private dialogue, or capture more value within a particular product or indus- the Kenyan government has been receptive to implementing try’s value chain by adding processes. Deepening can be regulatory changes, investing in education, and improving achieved by recognizing gaps in the value chain or facilitating infrastructure, which have increased the competitiveness of new linkages between value chain actors. These opportuni- the industry. For example, the Horticulture Crops Develop- ties can be achieved through by various actions, such as ment Authority (HCDA) of Kenya was initially directly adding operations to capture market demand and value, involved in the trading of vegetables but eventually switched upgrading the value chain, reorienting the chain to new to a more facilitative function; it now focuses solely on cer- market opportunities, integrating different aspects of the tification schemes. 73 Figure 4.20 Map of Kenya Timeline of Horticultural Development in Kenya 1957 First fresh produce to United Kingdom by air 1960s Duty-free access to UK market 1960s Investment in private farms around Lake Naivasha 1967 Horticulture Crops Development Authority (HCDA) 1970s Egerton College begins to offer degrees in horticulture 1975 Fresh Produce Exporters Association of Kenya formed 1980s HCDA passes EU trade enquiries to exporters 1987 Exports double in five years 1999 New fresh produce terminal built at Nairobi Airport Source: World Bank. Similarly, restrictive policies regarding the sale of fresh increased the demand for higher quality standards, different pineapples in the 1970s and importation of planting varieties, and organic or “safer”2 produce. A number of materials in the 1980s have now been lifted as a result of exporters have invested heavily in growing their own high- close consultation with the private sector. Throughout the quality, certified vegetables to take advantage of the increased 1970s and 1980s, the majority of Kenyan vegetables market opportunities for high-quality produce. The effect imported into the European Community were handled by of these trends has been a much shorter supply chain, a firms that serviced wholesale markets and small or greater degree of vertical integration, fewer active players, medium retail outlets. In the 1980s, Kenyan exports dou- and production and exporting on a much grander scale. By bled in five years due to a differential foreign exchange the early 2000s, seven of the largest food retailing chains in rate for horticultural exports, which the government set Europe accounted for 76 percent of fresh fruit and vegetable below average prices, providing further incentive for sales and 70 to 90 percent of fresh produce imports from exporters to invest in the industry. Africa (FAOSTAT data). By the late 1990s, due to lobbying efforts of the Fresh As of 2004, the total Kenyan vegetable export trade was Producer Exporters Association of Kenya (FPEAK), the worth US$139 million, and the country ranked second in Kenyan government partnered with the private sector to Africa in exporting fresh vegetables. The industry employs expand the Fresh Produce Terminal at the Nairobi airport, 45,000 to 60,000 people, of whom an estimated 60 percent thus improving the competitiveness of fresh vegetable are women, in commercial farms, processing, and logistics exports. Then, throughout the 1990s, large supermarkets operations; another 7,000 are smallholders. Employees typ- began to dominate the European grocery sector, in part, by ically earn just under US$2 per day, while smallholders are featuring signature “fresh produce” sections. As they did so, reportedly able to earn the equivalent of US$7 per day. these firms increased the market demand for higher quality, more variety, and price-competitive fresh produce. To meet THE VALUE CHAIN demand, many firms decided to vertically integrate their retail and wholesale operations, thus concentrating their In Kenya, green beans have traditionally been the most power in the market and making price competition and popular cash crop among smallholders due to their short product diversification major market forces. growing period, which facilitates a more consistent cash In the 2000s, as the power of the supermarkets continued income (Okado 1999). Farmers will typically plant as much to drive the market, many supermarkets began to pursue as they can sell, and those with contracts or a firm com- market segmentation and branding strategies, which mitment from an exporter may devote 100 percent of their 74 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE land to the cultivation of green beans. Green bean mono- The present market conditions in the EU supermarket culture cultivation can yield up to four harvests per year if sector have influenced a shift in the Kenyan green bean accompanied by application of chemical fertilizers. The industry to more integrated value chains best represented by two main challenges faced by smallholders are both larger integrated exporters. The value chain for large inte- brought by the rainy season: a higher disease incidence in grated exporters (figure 4.22) is characterized by exporters the crop and poor accessibility to areas with bad roads, having strong links to end-markets and producers through which prevents regular collection by exporters. contractual agreements and ownership. Supply chain man- The value chain graphic (figure 4.21) illustrates the agement is more efficient due to information sharing within smallholder “broker” and “small to medium exporter” the integrated value chain that eliminates costly demand market channels. The broker channel is composed of shortages or oversupply. Products are traced from their approximately 20,000–50,000 microenterprises (mostly origin and production practices are controlled to ensure quality and certification schemes. Increasingly, the value in Figure 4.21 Kenyan Green Bean Value Chain these relationships is garnered from investments made in value-added operations such as packaging, labeling, certifi- cation, and product diversification. Supermarkets These value-added results are clearly represented in the End Wholesale labor statistics for the integrated large exporter value chain. markets markets Approximately 7,000 smallholders are involved in fresh veg- Wholesale etable export, compared to 40,000–60,000 in the processing Importers Distributors importers industry at packhouses, or as farm laborers. For example, Homegrown is Kenya’s largest horticultural exporter and is Shipping Shipping Shipping an example of a highly integrated company. Ninety percent of Homegrown’s crops are grown on its own farms, where it Small and medium controls the storage, cooling, and logistics from the field to Briefcase exporters exporters the packing station; it has a joint venture with an airfreight Exporters company and a dedicated importer in the United Kingdom. Homegrown works with about 600 smallholders and Traders Brokers employs nearly 8,000 seasonal employees for its processing Figure 4.22 Integrated Export Value Chain Farm Small-scale Small and medium growers growers Supermarkets Wholesale (prepack and Broker channel SME exporter channel markets prepared pack) Source: J. E. Austin Associates, Inc. Dedicated Services distributors households) who sell to SME exporters (SMEX) or bro- kers. The value chain can be characterized by its low lev- Logistics Shipping els of information sharing with inaccurate records of contracts, quality Processing chemical usage during cultivation that denies it access to control, the European market. In the SMEX value chain, approxi- and certification Large vertically integrated mately 15–20 exporters may contract or have close work- exporters ing relations with their green bean suppliers (nearly 4,000 (8–10 exporters) Small growers SME farmers, small outgrowers, and farmer associations). (75–80% of exports) (~20,000–50,000) The exporters typically provide inputs to ensure the qual- Small and medium Large contract ity and quantity of products. Smallholders and small and growers (4,000) growers (~100) medium producers have been increasingly pushed out of the cultivation of green beans due to market requirements Source: J. E. Austin Associates, Inc. (2005). Analysis adapted from Irwin, and conditions. Grant, Parker, and Morgan (2005). CASE STUDY 5: KENYAN GREEN BEANS AND OTHER FRESH VEGETABLE EXPORTS 75 operations. Homegrown has also recently completed a factory implementing new processes and operations. These have for prepared salads, providing the capability to pick, pre- been initiated by private business in response to evolving pare, fully label, and transport the salads to supermarket market trends, recognized opportunities, and value chain shelves within 48 hours. pressures. The public sector has been an active partner in Homegrown’s recent investments in product development this growth. Further opportunities exist to increase the are indicative of the value drivers for the entire fresh vegetable competitiveness of the Kenyan fresh vegetable export export industry. Driving this accelerated value growth in fresh industry through value chain deepening, as well as vegetables has been the emergence of semiprocessed products through other approaches (for example, increasing the that meet stringent European standards and certifications. technical capacities and market understanding of serving This growth in exports consists of a broad range of products growing markets beyond Europe, extending the exporting produced under very strict hygienic conditions. In Kenya, the season, and reducing costs and losses through infrastruc- increase in value-added processing to produce “high-care” ture) (TechnoServe 2004). The realization of each products such as salads, prepared vegetables, and stir-fry mixes enhanced process will, in turn, provide opportunity for has increased export values for fresh vegetables by 250 percent added services within the value chain. (Jaffee 2003). NOTES CONCLUSION 1. NEPAD TechnoServe case study. The Kenyan fresh vegetable export industry has grown 2. “Safer” refers to produce with limited levels of chemical enormously in size and value added, in large part by residue. 76 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE TO O L 5 Identifying Business Models for Replication y analyzing value chains, participants can often was growing at twice the rate of supply. This analysis led to B identify intermediation opportunities that offer increased efficiency, economies of scale, transaction cost reduction, or more value added in the chain. Entrepre- the identification of an intermediation opportunity that could be exploited by entrepreneurs—namely, investments in simple refrigeration centers for the purchase and collec- neurs and businesses may be the first to identify and act on tion of milk which allowed an increase in the quality and them, or government and development partners (and their supply of milk, as well as providing farmers an outlet for consultants/practitioners) may be the ones to promote such selling it. This business model is being widely replicated and opportunities. The defining characteristic in the context of by April 2008, less than 30 months after efforts began, about this tool is that the opportunities offer the possibility of 1,000 collection centers were operating. replication within the value chain. Once a business model suitable for replication is identi- The benefits of identifying and promoting intermedia- fied, value chain participants and development practitioners tion opportunities go beyond adding value and upgrading can support and facilitate value chain stakeholders in success- the value chain (with the resulting net economic benefit in fully implementing a pilot enterprise. Once proven, stake- jobs, wages, and incomes). More than these, use of this tool holders can encourage the replication through promotional in countries with a particularly weak private sector and lack campaigns, business associations, technical assistance, and of an entrepreneurial culture amounts to investing in the other available means. In the Pakistan Dairy example, a pub- promotion of entrepreneurship. Additionally, as individual lic-private institution to promote the dairy sector is facilitat- entrepreneurs improve on the basic business model, they ing the replication of the collection centers by promoting the often generate their own innovations. business opportunity, soliciting applications for discounted Replicable business models can be recognized through a farm cooling tanks (which the institution negotiated with variety of mechanisms and experiences. For example, the provider), and identifying commercially appropriate sites opportunity can be identified through the simple need to for centers. upgrade quality (of both raw materials and processed prod- uct) through learning business models that have worked in A STEP-BY-STEP SUMMARY OF TOOL 5: other regions or countries in related types of value chains. IDENTIFYING BUSINESS MODELS FOR Opportunity may also appear through the application of REPLICATION analytical tools described elsewhere in this Guide, such as identifying needed services, benchmarking and gap analysis, ■ Identify intermediation opportunities (business models) and market analysis. Box 4.6 presents an example of a to increase efficiency and value added suitable for repli- replicable business model. cation. Many of the tools in this Guide are helpful in The Pakistan Dairy industry also provides a useful illus- this respect. tration (see box 4.7) of a replicable model. Value chain ■ Support and facilitate value chain stakeholders to imple- analysis in Pakistan revealed that in several areas near urban ment a pilot enterprise. centers, 45 percent of milk produced in the country never ■ When an approach is successfully proven, encourage its reached market because, in most areas, only the morning replication through promotional campaigns, business milk (55 percent of potential output) was collected. The rest associations, technical assistance, and other available (evening milk) went to waste. Further, domestic demand means. 77 Box 4.6 Replicable Business Models—Rwandan Coffee Washing Stations Rwandan coffee was a principal source of foreign With an annual budget of almost US$700,000 dedi- exchange for the country until the 1990s. But coffee’s cated to supporting the coffee sector, ADAR worked contribution to Rwanda’s foreign exchange earnings directly with private investors to open 16 washing sta- declined through the mid- and late 1990s. Rwandan tions in 2005. Direct assistance included feasibility coffee production never recovered to 1992 production studies, business plans, construction planning and volumes (39,000 mt) because of inefficiencies in the supervision, and training in coffee processing. Simi- coffee value chain. The country’s disparate nature of larly, PEARL worked with rural cooperatives to assist in coffee farming, the poor health of its coffee trees, the cooperative formation, business planning, washing sta- lack of wet-milling stations, and low incentives for tion construction, processing, cupping, marketing, and reinvestment all contributed to inefficiency. Growers Fair Trade certification. In both projects, the assistance were not offered higher prices for better quality beans, provided the platform for a replicable business model so they spent little time grading and separating their to be adopted for numerous future washing station bean harvests. Low coffee yields and poor price points openings. In the model, investment opportunities were influenced farmers to focus on other crops with higher created via a loan guarantee program that allowed the margins, further diminishing coffee’s competitiveness private investors to construct collection/washing sta- in world markets. tions and process coffee beans for improved quality. Despite the constraints that led to low-quality and The model was replicated each time a private sector low-quantity commodity grade coffee, the government investor sought to open a washing station. The investor of Rwanda (GoR) and donor partners believed that took out a loan from the guarantee fund and, along with Rwanda possessed the capacity, environmental condi- technical assistance from the projects, began processing tions, and political will to improve its coffee position in coffee for export. By November 2005, 10 of the 11 loans world markets. What Rwanda lacked was technical provided by the program, totaling US$1.6 million, went capacity, market information, and a coherent strategy. to private sector operators. Two USAID-funded projects, Partnership to Enhance As of January 2007, the private sector was continu- Agriculture in Rwanda through Linkages (PEARL), and ing to invest in coffee washing stations in Rwanda. The Assistance a la Dynamisation de Agribusiness au replicable business model provided by the projects has Rwanda (ADAR), helped to provide the strategy and helped to establish 80 functioning stations through- technical capacity that assisted in Rwanda’s coffee qual- out the country and 120 washing stations by the end ity and quantity improvements. The projects sought to of 2008. The washing stations provide an important improve Rwandan coffee by, among other actions, facil- intermediate role in the coffee value chain and have itating the opening and equipping of coffee-washing also proven to be platforms for entrepreneurship and stations in Rwanda’s top 50 producing districts. These entrepreneurial innovation. Ultimately, Rwanda washing stations filled a crucial gap in Rwanda’s produc- hopes to have its entire coffee production fully washed tion cycle and allowed the coffee’s quality to improve. by 2010. Source: Carlton Jones, J. E. Austin Associates, Inc. Box 4.7 Identifying and Replicating Business Models within the Value Chain—Dairy Pakistan Background informal trading routes. The farmers’ dairy production An estimated 30–35 million farmers in Pakistan are has often not reached domestic markets, despite the engaged in raising livestock, which generate 30–40 fact that the market for dairy is growing twice as fast as percent of their income. Ninety-seven percent of fresh the supply. milk is either consumed locally or distributed through (Box continues on the following page.) 78 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Box 4.7 Identifying and Replicating Business Models within the Value Chain—Dairy Pakistan (continued) Dairy Farmers Want to Invest—But Need to The Replicable Business Model Manage Risk (Collection Centers/Cooling Stations) The dairy value chains in Punjab Province and in the The core of the business model was to encourage area around Karachi recognized an opportunity to entrepreneurs to invest in and to manage collection improve the quality and increase the quantity of the centers/cooling stations. The entrepreneur puts up 20 milk that they were producing and marketing. The percent of the investment and receives a no-interest chain participants knew that they had unmet demand loan for the remainder, which was subsidized by the because they were able to sell everything they could government, managed by Dairy Pakistan, and distrib- supply. The industry’s strategic working group uted by a consortium of banks. Dairy Pakistan then (SWOG) meetings identified a huge market opportu- provided technical training on how to operate the nity that could entice entrepreneurs to invest time and cooling station. The large dairy processors/distribu- money into meeting this growing need. In fact, the tors committed to regular, predictable milk collection. dairy sector was missing out on selling its second (evening) milking, which is 45 percent of the milk pro- Communicating the Case for Investment duced on the farm. The SWOG presented the market opportunity to poten- The most significant issues for the value chain were tial entrepreneurs. Dairy Pakistan and the several banks that 97 percent of the trading was done on an informal sent out formal invitations for entrepreneurs to submit basis, and there was no cold chain to handle the storage applications to Dairy Pakistan for investment. The proj- of a second milking. Of the milk that farmers did sell, ect and Dairy Pakistan supported entrepreneurs with 15–19 percent was wasted en route to market, again due technical assistance in learning to operate the tanks, to spoilage because of lack of chilling. again reducing the risk of investment. As of mid-2006, Although these facts appeared to present invest- the project was facilitating 2,150 collection tanks and ment opportunity, it can be difficult to create the had received 3,050 applications. By May 2008, approxi- conditions within the value chain that motivate busi- mately 1,000 additional collection tanks were in place. nesses to invest and that encourage the value chain to upgrade its practices. Buying new equipment and Summary and Results changing their practices means both costs and risks The supply of chilled milk has increased by an esti- for farmers and intermediaries. These barriers were mated 500,000 liters per day. About 7,000 direct jobs removed by a facilitated strategic planning process have been created in collection and processing. Based that identified a workable business model. The plan- on the 2006 results, the entrepreneurs who own and ning process developed sufficient trust among the operate the centers will earn an estimated US$63 million participants to create a strong win-win solution and (net present value). More than 30,000 farmers now to generate commitment to the model, with risk shar- have access to market and are able to sell at higher ing and up-front financing from Dairy Pakistan, the prices. Additional benefits are the increased profits fur- public-private institution that was designed by the ther down the market chain. The private sector has SWOG project. invested more than $7 million in the program. Source: Mike Ducker with Marcos Arocha and Martin Webber, J. E. Austin Associates, Inc. TOOL 5: IDENTIFYING BUSINESS MODELS FOR REPLICATION 79 C A S E S T U DY 6 Identifying and Implementing Replicable Business Models—Mozambican Cashews Carlton Jones and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION BACKGROUND ollowing a tumultuous round of cashew sector From the 1920s until the mid-1970s, Mozambique was con- F reforms in Mozambique, the government of Mozam- bique and USAID commissioned a cashew subsector analysis1 seeking innovative means to revitalize the industry sidered the world’s leading cashew producer (240,000 mt at its peak in 1973),2 with considerable domestic capacity in processing quality cashews. By the early 1980s, Mozambique while maximizing benefits to small growers. The analysis had over a dozen processing factories and was the first African stressed the importance of replicable business models for country to process cashews on an industrial scale, rather than value-added processing of cashews. through the traditional method of hand-processing by SMEs. Rejuvenating the Mozambican cashew sector requires However, by the end of the 1970s, other global producers innovative approaches to bring value back to the actors in (India and Brazil) began to threaten Mozambique’s cashew the value chain. This case demonstrates how small and dominance.3 In response, in 1978, the government of medium hand-processing plants were identified as replica- Mozambique banned the export of raw nuts. The rationale ble businesses supporting that rejuvenation. Mozambique at the time was to stimulate domestic processing and main- has not yet returned to its former cashew dominance, but tain global processing dominance. But after a variety of those in the sector have learned that, through replicable events, including a civil war from 1982–1992 and the adop- business models, value chain actions can rebuild the private tion of policies that fixed raw nut prices, production con- firms that bolster the sector. tinued to decline (see figure 4.23) (down to 22,106 mt in 1990; Deloitte Touche [1997]). In 1992, the government of Mozambique implemented POINTS TO CONSIDER many reforms in the hope of regaining past cashew process- ing performance. The raw nut export ban was lifted, previ- When reviewing this case consider the following questions: ously state-owned factories were privatized and sold to local entrepreneurs, and there was a push to invest heavily in new ■ What led to the need to identify replicable business large-scale mechanical processing facilities. However, the models? government also introduced high taxes on raw nut exports ■ When is it appropriate to consider implementing such a (18–22 percent), again with the goal of pushing the entire model? industry toward domestic processing. The reforms failed, ■ What role do local entrepreneurs play in implementation? and the sector essentially collapsed by 1994. 80 Figure 4.23 Mozambican Cashew Nut Exports since the implemented with the goal of establishing a profitable SME 1970s processor in the northern province of Nampula that would serve as the pilot. If successful, the processor could serve as 250 the model for other, similar enterprises. 200 THE LEAD FIRM MODEL Thousands of metric tons A local businessman, Antonio Miranda, possessed many 150 of the characteristics hoped for in an entrepreneur. He was innovative, thrifty, socially conscious, and had vision. 100 With the support of a technical assistance provider (Tech- noServe 2003), a small- to medium-scale hand processor, Miranda Caju, Ltd., was established in 2001 on the 50 grounds of a previously closed facility. The building was reconstructed using local labor, which provided jobs to 0 the surrounding community. Mr. Miranda was able to 1973–74 1975–94 1995–98 1999–2001 2002+ Year range average raise funds for seed and working capital (US$47,000) in Raw nut exported Raw nut processed the form of a guarantee fund from INCAJU, Mozambique’s Total nuts National Cashew Institute, and he installed new equip- ment for whole nut production. Source: FAOSTAT data. In hand processing, each nut is steamed, shelled, dried, and peeled by hand, then pregraded to ensure a higher per- In 1995, the government of Mozambique liberalized the centage of whole kernels. After kernels are vacuum packed, cashew sector, in part as a condition for World Bank loans. they are trucked to exporters in the port of Nacala. The The reduction of export tariffs (from 18–22 percent to 20 plant had the capacity to employ 460 workers, purchase percent, then again to 14 percent) slightly increased prices at 12,500 mt of raw cashews from small growers, and process the farm gates, but, some argue (McMillan, Welch, and 1,250 mt of cashews that rivaled India and Brazil in quality. Rodrik 2003), also led to the closing of most processing fac- When Mr. Miranda announced his intention to hire locally, tories. Mozambican processors found it too difficult to 1,000 candidates applied to fill the 70 original positions. compete with traders selling raw nuts to India (where the Miranda Caju experienced and overcame many chal- industry is reportedly subsidized). Additionally, because of lenges. Within months, the processing plant was selling to a low margins, processors did not reinvest or maintain their major buyer in Holland. Not only was the plant making a plants; equipment began to break down, and improper and profit, but Miranda Caju workers earned, on average, improperly maintained equipment caused a high level of US$300 per year versus the average of US$8 per year in cash cashew kernel breakage. income earned by subsistence farmers. With most processing factories closed, and 7,000 Miranda Caju purchases raw nuts from several sources, employees out of work, Mozambique’s cashew sector suf- including recently formed farmer associations and small fered another relapse. By the late 1990s, instead of having a growers. Before the plant’s entrance into the market, most vibrant value-added cashew sector, Mozambique exported small growers sold to traders, who then sourced to whole- most of its nuts raw to India for processing and value added. salers. Miranda Caju was able to locate small growers with the In 2001, local businesses pressured the government to rein- capacity to improve their growing methods to provide better state the export tax on raw nuts. yields and, thus, higher quality raw nuts to the Miranda plant. Concerned about the sector, USAID commissioned a Miranda Caju’s entrance into the market benefited small cashew subsector analysis seeking innovative means to revi- growers by growing their incomes an average of 20 percent. talize the industry while maximizing benefits to small grow- ers. The study results suggested that small and medium REPLICATING THE MODEL processors could bring value back to Mozambique by pro- cessing some of the raw nuts that otherwise would be Recognizing the potential for additional small and medium exported to India (see figure 4.24). Thus, a program was processors to enter the cashew sector, TechnoServe arranged CASE STUDY 6: IDENTIFYING AND IMPLEMENTING REPLICABLE BUSINESS MODELS—MOZAMBICAN CASHEWS 81 Figure 4.24 Weaknesses in the Mozambican Cashew Domestic Value Chain Indian brokers Exporters Exporters Raw nut Weaknesses in brokers value chain: Processors Industrial • broker dominated market processors • weak industrial processors • raw nut export tax Wholesalers Traders Small traders Farm Smallholder cashew producers Source: J. E. Austin Associates, Inc. (2007). Figure 4.25 Mozambican Cashew Domestic Value Chain ing, hiring practices, and sourcing raw nuts from growers with Small Processors provided a sound foundation for other entrepreneurs to launch their own processing facilities in 2004. Also in 2004, European Miranda Caju opened a second operating plant to meet the Indian brokers brokers growing demand for processed cashews. Miranda Caju served as the model for five additional processing plants to Exporters Exporters open between 2002 and 2004, with a total processing capac- ity of 8,750 mt (see table 4.10). Industrial processors CONCLUSION: REBIRTH OF A SECTOR Processors Raw nut Small Since 2001, 12 processors have now opened under the prof- brokers processors itable, replicable business model demonstrated by Miranda Caju (see figure 4.25). They vary in their stages of develop- Wholesalers ment and success, with Miranda Caju continuing to lead the Farmer small to medium cashew processor market. Of those busi- Traders associations Small traders nesses, Miranda Caju continues to grow and innovate. The firm also hopes to increase the percentage of raw nuts it purchases from farmer associations (currently 40 percent), Farm and it now provides on-farm technical assistance to its small Smallholder cashew producers growers in the form of help with seedling replanting, qual- ity control, and improved yields. Source: J. E. Austin Associates, Inc. (2007). The entire value chain has benefited from these interven- tions, not only in increased volume of quality cashew pro- for other entrepreneurs to be trained on the Miranda Caju cessing and exports, but also from realizing that profitable premises to learn first-hand how to run a cashew plant. manual processing businesses can be created and can Mr. Miranda was an instrumental trainer, providing day-to- improve quality, create jobs, and rebuild the Mozambican day experiences and lessons to the entrepreneurs learning cashew brand. Access to investment and working capital has the business. His ability to share lessons learned on a variety improved, initially through INCAJU’s Guarantee Fund, and of topics like operations, cost savings, plant location, financ- later by other guarantee funds managed by the Ministry of 82 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Table 4.10 Mozambican Cashew Processing Operations Processing Small-grower Name Location Started capacity (mt) Employees purchases Miranda Caju Namige, Mogincual 2001–2 1,250 460 12,500 Africaju Lda Namialo, Meconta 2002–3 1,500 160 10,000 IPCCM Murrupula Sede 2002–3 1,000 84 10,000 Miranda Caju Angoche Sede 2003–4 1,500 230 5,000 Alexim Lda Iuluti, Mogovolas 2003–4 1,000 63 1,200 Moma Caju Lda Mecone, Moma 2003–4 1,000 63 1,200 Macia Caju Macia, Macia 2003–4 1,500 70 1,500 Source: Reprinted from TechnoServe (2004). Industry and Commerce. Since 2001, these processors have NOTES had annual sales over US$5.1 million and have employed over 1. The subsector analysis was conducted by U.S.-based 3,000 workers. Smallholders are also benefiting through the NGO TechnoServe. increased prices they receive at the farm gate. 2. TechnoServe. Mozambique’s cashew industry is examined further as a 3. In 1978, India was the top world producer, at 165,323 case accompanying Tool 7, Horizontal Collaboration— mt. Brazil was second with 77,000 mt, and Mozambique was Creating and Taking Advantage of Economies of Scale. fourth with 61,000 mt produced (FAOSTAT). CASE STUDY 6: IDENTIFYING AND IMPLEMENTING REPLICABLE BUSINESS MODELS—MOZAMBICAN CASHEWS 83 TO O L 6 Capturing Value Through Forward and Backward Integration t the firm level, vertical integration means creating The firm could also make decisions regarding its supply A forward and/or backward linkages. A firm becomes more vertically integrated when it takes on more of the activities that take place within its value chain. Vertical of inputs. At the production stage, a firm might recognize that its suppliers are not producing inputs that are adequate for use at the production stage. Rather than share informa- integration makes sense if, for example, the business is seek- tion and work with one or a group of suppliers, the firm ing to ensure supply or otherwise control inputs, capture might simply integrate backward and develop its own abil- more value, achieve economies of scale, or ensure access to ity to provide the inputs it needs. information. A value chain, by consequence, becomes more integrated through the decisions of firm-level actors. VERTICAL INTEGRATION FROM THE NATIONAL Vertical integration also takes place at the value chain VALUE CHAIN PERSPECTIVE level when more stages are brought into the country’s value chains. This means that a nation’s businesses are taking on For most products in most developing countries, relatively more of the activities within the global value chain, which simple value chains focus on getting a product (typically a adds value, provides more market contact and information, largely undifferentiated commodity) to market (whether creates employment, and more. Value chain members must that market is domestic or international). From this per- decide whether it makes sense for them to integrate—a cal- spective, the challenges are to achieve low transaction costs, culation that includes profit, risk, investor wishes, and other push volumes of product to the market (and sell them), and factors. Integration can also mean adding more functions to reduce losses from spoilage, waste, or theft. From the per- the value chain and not necessarily incorporating them spective of the in-country value chain participants, such from other countries. This integration may involve joint value chains tend to be supply driven and production driven commitments or even joint investments. (a situation that poses its own challenges, if the producer’s Companies and enterprises have always made conscious interests are not in line with market requirements). Also, the decisions about whether it makes sense to vertically inte- recipe for business development from this perspective grate. At the value chain level, one can even think that, involves reducing production and logistic barriers and before there was international trade, every industry was ver- removing taxes and levies (or imposing them to protect tically integrated with a region or nation. This is a tool that against cheaper competition or foreign competitors who examines whether there are gains to taking on more of the are willing to buy raw materials at slightly higher prices). value chain’s functions. A “market information gate” that prevents domestic pro- The value chain understood at the firm level can be ducers from understanding the export market is often pres- very simply illustrated (and, of course, can also be shown ent, thereby presenting both a challenge and an opportunity with much greater detail). In figure 4.26, each stage repre- for forward integration (see figure 4.27).1 sents a link in the value chain. In terms of integration, a One typical competitiveness goal is to increase quality firm operating in the production stage can assess its dis- and service within the value chain and to offer customers a tribution channels and decide that it can transport its desirable, higher-value product or service (shown in figure own goods more cheaply and efficiently than by using 4.28 as X+Y). This, if achieved, can offer huge increases in another firm. This firm has then made the decision to productivity and make the value chain and the country as a integrate forward and take on its value chain’s distribu- whole more competitive (see Tool 4, Upgrading and Deep- tion function. ening the Value Chain). 85 Figure 4.26 Firm Value Chain Marketing, Research and Production Procurement Processing Distribution sales, development wholesale Source: Adapted from Michael Porter. Figure 4.27 Improving Value Chains (before Value Added) Alternate Export value added market chain X+Z Market information gate Alternate Export high value market chain X+Y Standard value Export chain X market Transport/ Domestic market, Producers processing processors, and intermediaries exporters Export market price/unit Source: J. E. Austin Associates, Inc. Figure 4.28 Improving Value Chains (with Value Added) Alternate value added Export chain X+Z market Market information gate Alternate high value Export chain X+Y market Standard value chain X Export Transport/ Domestic market, market Producers processing processors, and intermediaries exporters Export market price/unit Source: J. E. Austin Associates, Inc. 86 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE An even more rewarding goal is to add value along the ■ How do improvements in quality control compare with value chain (shown as X+Z).2 This can be fairly simple, for the cost and with the alternatives for quality control? example, coffee washing, packaging versus bulk tea, filleted ■ Should the producers integrate backward and undertake fish, cut and packaged flowers delivered directly to retail transport or production, or both? outlets, or furniture or furniture components. It is analo- ■ Would backward integration lower the costs of raw gous to the Mongolian meat production example described materials? earlier in tool 4, figures 4.20 and 4.21. These value addi- ■ How much will control of quantity, quality, and timing tions contrast with, for example, selling unprocessed logs improve with integration? or lumber or selling unprocessed vegetables for delivery to ■ How far back should the producers integrate? markets. Value addition can be accomplished by introduc- ■ How much additional fixed investment will be required ing new enterprises into the value chain (thereby deepening to integrate? it), or by having existing firms take on new activities (ver- ■ How much additional working capital is required? tical integration). Adding value might also mean creating ■ How might integration reduce the project’s flexibility in domestic operations that had previously been performed obtaining sources of raw materials? abroad. With cut flowers (as in the Ugandan example), this ■ What are the economic and operational risks of a might include assembling bouquets and packaging for dis- decrease in this flexibility? play. In many value chains, it might take the form of pro- ■ How will integration affect variable and fixed costs? ducing intermediate or final products rather than raw ■ How will integration affect the plant’s break-even point? material (for example, rubber gloves rather than crepe rub- ■ Is integration politically feasible or socially desirable? ber, processed or canned fruits rather than fresh or frozen exports, or filleted and packaged meats or fish rather than Second are operational considerations. Vertical integra- frozen products). tion may be necessary if a firm needs to be able to control its supply of inputs. This need for control is especially relevant if the firm needs highly specialized inputs for its products. CONSIDERATIONS FOR INTEGRATION Also, by controlling its supply, a vertically integrated firm can more easily ensure availability. Although suppliers can There are many reasons to think about integration and sev- often provide inputs at a lower cost, especially if there is eral considerations that must be kept in mind when thinking competition within that stage, a vertically integrated firm about it. First is strategy: it is important to understand the may actually lower its costs by providing its own supply. context in which the firm or value chain operates and Integration must make basic financial sense: a firm or whether it can become more competitive through integra- country must evaluate whether value is being generated in tion. Once a firm understands its position in the value chain, adjacent links and whether it can capture enough of that it can determine whether there are profitable opportunities value to make integration profitable. The firm or country for expansion into adjacent links. A similar calculation must should perform a cost-benefit analysis to identify whether be made when a value chain seeks to vertically integrate the benefits outweigh the costs. Table 4.11 presents a num- through collaborative approaches. There are many strategic ber of reasons to integrate vertically. Boxes 4.8 and 4.9 pres- questions to ask about integration, and these vary depending ent two illustrative examples and the topic is considered on which stage the firm occupies in the value chain. Jim more deeply in case study 7. Austin’s book, Agroindustrial Project Analysis (1992), long a touchstone for investors and practitioners, lists important questions to ask in analyzing agricultural projects. Some are A STEP-BY-STEP SUMMARY OF TOOL 6: related to vertical integration and are relevant mainly to the CAPTURING VALUE THROUGH FORWARD production stage of the value chain, including: AND BACKWARD INTEGRATION ■ Analyze the current in-country value chain in the context ■ Is there competition in procurement among similar of the global value chain to identify profitable opportu- agroindustries? nities for expansion into adjacent links. ■ How much quality control would be gained if the proces- ■ Strategically assess current and future value chain addition sor integrated backward to assume the production, stor- activities in the context of the desirable objectives associ- age, transport, and handling functions? ated with vertical integration. Likely objectives include TOOL 6: CAPTURING VALUE THROUGH FORWARD AND BACKWARD INTEGRATION 87 Box 4.8 Benefits of Vertical Integration—ZEGA and Zambia’s Horticulture Value Chain Created in the 1980s to Support Diversification chain from the farmer to the European importer. The into Higher-Value Horticulture Products large growers invested in refrigerated trucks while In the 1980s, Zambia’s three largest horticulture exporters ZEGA handled cold storage and logistics at the airport. created the Zambian Export Growers Association This created a full, integrated cold chain for floriculture (ZEGA). Zambian exporters saw an opportunity to use and horticulture export products. the country’s considerable natural advantages to produce Backward Integration into Procurement of Inputs and export higher-value horticulture products. ZEGA’s ZEGA supported backward integration by buying farm founders recognized that they needed critical mass to inputs, such as fertilizer, which has provided the indus- purchase inputs from South Africa and to negotiate duty- try with two advantages: bulk purchasing power and free incentives with the Zambian government. ZEGA was thus lower input costs for the sector and important established without any donor support, but, as it evolved, working capital because ZEGA sells on account. it became an important vehicle for donor support. Because ZEGA controls the important link to air trans- Grew in the 1990s by Developing Competence port, growers have a powerful incentive to influence in the Freight Business other growers to pay their debts. Perhaps the main benefit of grower cooperation was to Results secure airfreight. Zambia’s airfreight export tonnage The vertical integration within Zambia’s value chain, was always less than in competing countries such as led by ZEGA, enabled the sector to increase exports of Kenya and Zimbabwe, so achieving critical mass to fresh vegetables and cut flowers from US$6 million in secure competitive rates and capacity was difficult. 1994 to over US$33million in 2001 and US$43 million In the 1990s, some of Zambia’s big horticulture grow- in 2005. This increase in exports was enabled by ZEGA’s ers started to create linkages with flower markets in Hol- forward integration into airfreight and backward inte- land and large food retailers in the United Kingdom. gration into procurement. ZEGA has filled important With these linkages to sophisticated markets, and with gaps within the Zambian value chain and has enabled perishable products at stake, the Zambian growers real- all value chain participants to benefit from economies ized that getting reliable, affordable airfreight service to of scale. ZEGA has also been a recognized “face” of the Northern Europe would be key to its long-term compet- industry in dialogues with the Zambian government itiveness. During the 1980s, Zambia Airways offered sub- and the donor community in receiving technical assis- sidized airfreight rates to Europe for the horticulture tance to support Zambia’s export growth. exporters, but the airline became insolvent in the late 1980s. ZEGA instead negotiated its first freight contract with British Airways, which nonetheless put Zambia at a ESA Rose Exports to the European Union cost disadvantage compared to other horticulture exporters such as Kenya and South Africa. However, 70,000 ZEGA members stood firm; even though they could 60,000 sometimes get cheaper freight rates on passenger planes, they continued to use ZEGA for freight services so it 50,000 could amass tonnage. Once producers reached a suffi- 40,000 Tons ciently large tonnage of horticulture produce, ZEGA was able to negotiate with African freight carriers to achieve 30,000 cost competitiveness. Over time, ZEGA developed a 20,000 competence for managing freight firms, and now has at 10,000 least one airfreight shipment of horticulture products going out a day. ZEGA even sought to break off the 0 88 90 92 94 96 98 00 02 04 freight business into a separate company, although it 19 19 19 19 19 19 20 20 20 continued to grow its expertise and service its clients. Kenya Zambia Zimbabwe Uganda Ethiopia and the rest of ESA Began Cold Storage at the Lusaka International Airport Because of EurepGAP standards, the horticulture value Source: UNCTAD (United Nations Conference on Trade and Devel- chain in Zambia needed to have an integrated cold opment) data, www.unctad.org. Source: Carlton Jones and Mike Ducker, J. E. Austin Associates, Inc. 88 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Table 4.11 Some Reasons to Consider Vertical Integration Reasons Considerations Control reasons • Insufficient supply • Inadequate supply • Need for highly specialized inputs • Cost savings Lack of intermediation • Ineffective communication and flow of information between members • Nonexistent technical/embedded services Establishment and expansion • Solidify position in value chain • Lower costs through economies of scale • Alter competitive landscape Capture more value • Opportunities to increase revenues without overstretching resources • Opportunities to undertake more functions without overstretching resources • Opportunities to create value Source: J. E. Austin Associates, Inc. Box 4.9 Bulgarian Wine—Integrating Operations to Secure Sourcing of Raw Material The Bulgarian wine industry is closely linked to Bulgaria’s Figure 1: Bulgarian Wine Value Chain: Traditional grape production subsector. The traditional value chain (as represented in figure 1) illustrates how winemakers Bulgarian rely on the grape auction and imports for their grape market supply. However, a severe frost and low temperatures in 1997–98 significantly restricted grape production at Bulgarian Bulgarian vineyards. More than 50 percent of vineyard winemakers production in northern Bulgaria and 20 percent in southern Bulgaria were lost. Wineries in the north were Grape auction forced to turn to suppliers from southern Bulgaria and Romania. This increased competition for grapes throughout Homemade wine Bulgaria caused prices to rise quickly. Consequently, Imported Bulgarian winemakers were forced to pay more for Independent grapes their Bulgarian grapes or to import grapes from neigh- Bulgarian growers boring countries with little control over the quality and Traditional wine channel variety of grapes. The poorly controlled imports nega- Source: J.E. Austin Associates, Inc. tively affected wine production. The firm Vinzavod-Assenovgrad (VA)a is located in a region famous for growing grapes. Prior to 1997–98, As shown in figure 2, VA also now secures a portion of VA had never had problems securing grapes from local its grape supply by offering small vine growers short- suppliers for its production cycle. term contracts for their grapes and preferential pricing on The grape shortages made the company aware of the wine. In the contract’s inaugural year, VA sourced 40,000 need for measures to ensure local supply to maintain kg of raw grapes from local smallholders. However, in quality and varietal differentiation. VA management subsequent years, VA allowed purchases under the new decided to develop its own vineyards and to create new mechanism to decline, once again relying on the grape contract mechanisms to secure grapes from local produc- auction as the primary avenue for domestic purchases. ers. The company invested in 200 hectares of grape pro- While the new contract mechanism did not radically duction and has made plans to expand to 350 hectares to restructure VA’s supply chain, it did institutionalize a new secure a reliable and cost-effective supply chain. fail-safe for securing local production in years of scarcity. (Box continues on the following page.) TOOL 6: CAPTURING VALUE THROUGH FORWARD AND BACKWARD INTEGRATION 89 Box 4.9 Bulgarian Wine—Integrating Operations to Secure Sourcing of Raw Material (continued) Figure 2: Bulgarian Wine Value Chain: Integrated Foreign markets Bulgarian (EU/China) market Bulgarian winemakers Value Chain intervention Value Chain Grape auction Vineyard grape production intervention New contract mechanism to capture local In 2000, begin to Homemade wine production “own source” grape quality control Imported Independent grapes Bulgarian growers Integrated wine channel Source: Michael Gorman and Martin Webber, J. E. Austin Associates, Inc. a VA’s corporate Web site: http://www.mavrud.com/en/index.htm. greater control over quantity, quality, and timing of raw Exporters could also pay the producers (and intermedi- materials and reduced transaction costs, among others. aries, for example, transporters) a premium at produce at ■ Analyze operational advantages and disadvantages associ- certain quality and delivery standards. From the perspective ated with vertical integration. This may include lower trans- of producers and intermediaries, who also want to sell action costs, higher fixed costs, complex logistics, and risk. more, they should do everything possible to learn about the market’s (and the exporters’) requirements. This sharing of information will add value and help value chain partici- NOTES pants produce the right products in sufficient quantity. 1. Forward integration by domestic producers often means 2. In reality, different businesses in competitive, market- that they need to access more information about the market driven economies generally participate in a variety of value to produce products that will sell. There are many ways of chains—some simple, some offering higher quality, and doing this. In order to gain a foothold in the export market, some offering considerable value addition. Within an econ- the exporter should learn as much about the market as omy, businesses make their own choices according to their possible and communicate that information to suppliers. business model. 90 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE C A S E S T U DY 7 Capturing Value through Integration—The Ghanaian Pineapple Industry and Blue Skies Holdings Ltd. Michael Gorman and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION The fresh pineapple market has traditionally been domi- nated by Côte d’Ivoire, Costa Rica, and the Philippines (see ertical integration generally refers to a firm’s own- V ership or control of vertically related activities. The greater the firm’s ownership and control over suc- cessive stages of the value chain for its products, the greater figure 4.29). Growth in the fresh pineapple industry has aver- aged 6 percent per year since 2000. Political instability in Côte d’Ivoire has caused its pineapple export growth to fall to 2 percent over the past five years, and it has lost significant mar- its degree of vertical integration. In a value chain context, ket share to Costa Rica and Ghana. In fact, during this same vertical integration can also be achieved between upstream period, Ghanaian exporters have achieved an average growth and downstream firms when there is a high level of inte- rate of 45 percent while Cost Rica has nearly doubled its grated systems and information sharing. exports to Europe. Costa Rica’s success has centered on its One case in point is Blue Skies Holdings Ltd., an example usage of the preferred MD2 varietal, as well as the logistical of a successful, vertically integrated exporter of pineapple competence and marketing prowess that the multinational and other processed fruit from Ghana. Del Monte Foods employs to service the European market. Ghana’s West African location provides an excellent cli- THE GHANAIAN PINEAPPLE INDUSTRY mate for growing fruits and vegetables, as well as advantages According to the Food and Agriculture Organization of the for servicing the European market. Ghanaian fresh pineap- United Nations (FAO), there are more than 80 countries pro- ple exporters face fierce competition from Costa Rica, Côte ducing approximately 17 million tons of pineapples. More d’Ivoire, Honduras, Mexico, Ecuador, and others. Costa Rica than 11 million (65 percent) of the 17 million tons grown are is the leading exporter of pineapple to the European mar- destined for export (FAOSTAT). Pineapples are exported in kets with an annual export of about 300,000 tons, followed various forms, and nearly 80 percent of pineapples are found by Côte d’Ivoire with exports of 150,000 tons, while Ghana on the market in processed form: 48 percent as juice and 30 has just reached the third position with 71,000 tons.1 percent as canned fruits. Thailand, Brazil, the Philippines, and Ghana’s main competitive advantage over Costa Rica is its India are the main producing countries. Thailand, the Philip- location, while its political stability and business environ- pines, and Indonesia account for 80 percent of the canned ment compare favorably with Côte d’Ivoire. pineapple industry. Brazil’s production is essentially con- Overall, Ghanaian pineapple exports to European mar- sumed domestically, as is India’s (Imbert 2003). kets have increased in recent years thanks to greater 91 Figure 4.29 Pineapple Exports Figure 4.30 European Pineapple Imports 1,200 1,200 Thousands of metric tons Thousands of metric tons 1,000 1,000 800 800 600 600 400 400 200 200 0 2000 2001 2002 2003 2004 2005 0 2000 2001 2002 2003 2004 2005 Ghana Côte d'Ivoire Costa Rica Source: FAOSTAT data. Source: FAOSTAT data. investment in the fruit export industry from both the private fresh fruits and vegetables on a year-round basis. The Euro- and public sectors. Regulatory reform, tax incentives, pean market is characterized by several relevant market fac- market linkages, investments into new varietals, public- tors and trends: private partnerships, and new economies of scale within the value chain have all helped to expand the Ghanaian ■ Increases in wealth and demand for high-value products pineapple industry. (many of which are imported) ■ Exotic produce market growth BACKGROUND ■ Diversified preferences: national and ethnic ■ Revolution in market structure: retail outlet dominance, The European market foodservice, and catering The European market for fresh produce has been expanding ■ New marketing formats: prepackaging and precut veg- with the rising incomes of European consumers. In 2005, the etables European market imported approximately 1 million metric ■ Consolidation of sources: direct linkages and faster mar- tons of pineapples (see figure 4.30), of which one-quarter are ket response estimated to be fresh pineapples (Vagneron, Faure, and ■ Regulatory environment change: lower tariffs but increased Loeillet 2005). However, several changing factors are driving safety constraints the transformation of the produce sector, including super- ■ Value chain integration and just-in-time inventory market strategies, food safety legislation, supply chain ■ Logistics networks: sea freight and airfreight capacity integrity, rationalization of the supply base, and innovation. ■ Niche markets, biocertification, and fair trade Consolidation of European supermarkets has, in part, been driving these changes. By the early 2000s, seven of the largest In Ghana, fresh pineapple is exported by 60 companies, food-retailing chains in Europe accounted for 76 percent of although more than 50 percent of the total export volume is fresh fruit and vegetable sales and 70–90 percent of fresh produced by the larger companies, such as Jei River Farm, produce imports from Africa (Hallam et al. 2005). In the Farmapines,2 and Koranco Farms. Exporter association United Kingdom, supermarkets are even more concentrated, organizations, like the Sea Freight Pineapple Exporters of with just four big chains accounting for 73 percent of sales at Ghana (SPEG), the Horticultural Association Ghana supermarkets and convenience stores (Economist 2007). (HAG), and the Exotic Fruit Exporters Association of Ghana Thus, the EU-SSA pineapple export supply chains are char- (EFEG), work to help Ghanaian exporters service the grow- acteristic of buyer-driven global commodity chains; the ing European fresh produce market. Processing companies European supermarkets increasingly demand products that such as Blue Skies, Tonggu Fruits, and First Catering export are low cost and quality certified (resulting in higher profits fresh-cut pineapples to high-quality retailers such as Marks via the use of branding), as well as new methods of market- & Spencer and Sainsbury’s. ing differentiation. Ghanaian fruit exporters source their products from European populations with higher disposable incomes both commercial farmers (70 percent) and small-scale have increasingly been demanding high-standard, certified farmers (30 percent), and the large commercial farming 92 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.31 Ghana’s Fresh Pineapple Exports to the EU Blue Skies’ products are certified to meet the EurepGAP pro- tocols for quality compliance. Fruits processed by Blue Skies 60,000 are sourced mainly from Ghana’s eastern and central regions, 50,000 with supply gaps being filled by imports. The Blue Skies value 40,000 chain is highly integrated, having incorporated operations Tons 30,000 from buying and transporting raw pineapples to delivering 20,000 certified, cleaned, cut, packaged, and branded pineapple 10,000 pieces to UK distribution networks. The company has made 0 excellent use of its owner’s networks within the EU super- 1997 2002 2004 market industry to achieve market access for its products. Air Sea Since 2000, the company has grown tremendously, expanding its value chain by incorporating additional opera- Source: Voisard and Jaeger; Ghana Horticulture Development Study; and SPEG (2004 figures). tions into its processing facilities. It has also expanded its local employment. Blue Skies began operations with 38 workers and has since increased its workforce to 1,000, over 60 percent enterprises are typically operated as outgrower schemes. of whom are permanent staff. It has also replicated its business While recent market conditions have led export companies model with similar ventures in South Africa and Egypt. By to increasingly invest in vertically integrated outgrower providing good extension services and farmer training, and operations, nearly all exporters mitigate risk by buying fruit by offering higher prices, the company has rapidly increased from small-scale farmers to supplement commercial farms’ its production from one to about 35 tons per week. Blue Skies production. By sourcing from small-scale producers is also known to pay its farmers promptly and at a higher throughout the country, exporters ensure a diverse supply price per kilogram than other pineapple buyers in the chain that is not as susceptible to weather, crop sickness, or Nsawam area of Ghana. other unpredictable risks. Blue Skies does not provide credit to farmers, nor does it link them to any financial agents; its prompt payment and GHANAIAN EXPORTS TO EUROPE higher prices are sufficient incentives for farmers to invest in their farms. In addition, the company has assumed technical During the late 1980s and early 1990s, Ghana carved a signif- and financial responsibility for certifying all its suppliers. It icant niche in the European Union (EU) market as a primary also provides inputs and equipment to its producers for pur- supplier of top-quality, airfreighted pineapples, supplying chase. Because of the investments needed to get certification, about 60 percent of the estimated annual 20,000 mt of those suppliers whom Blue Skies has helped obtain EurepGAP pineapples airfreighted to Europe.3 Throughout this period, accreditation are obliged to sell to the company. Recently, only a small amount of pineapples were sea-freighted (2,710 57 percent (77 of 135) of Blue Skies’ small-scale pineapple tons). Figure 4.31 presents the evolution of total Ghanaian producers were certified as organic, fair trade producers. Blue pineapple exports to the EU through 2004. The airfreight Skies operates with individual farmers and not cooperatives. market’s success was due to Ghana’s liberal market regulation, Several factors contributing to Blue Skies’ success reflect efficient handling services, and the diversity of available and concepts discussed throughout this Guide, such as high lev- relatively inexpensive flights to all parts of Europe. However, els of trust, sharing of information, innovation, value addi- during this period, pineapple export operations remained tion, positioning collaboration, and risk mitigation. Blue segmented and spread among many participants, and little Skies emphasizes prompt payment to farmers, the provision integration was accomplished. Ghanaian export volumes of training and education on EurepGAP standards, certifi- were eventually restricted by the limited airfreight capacity of cation of farmers, interest-free loans for dedicated farmers, commercial passenger aircraft. and willingness to improve local road infrastructure to improve access to farms by company trucks. THE BLUE SKIES HOLDINGS LTD. VALUE CHAIN CONCLUSION Established in 1998, the Blue Skies Holdings4 processes fresh, chilled pineapple, mango, watermelon, passion fruit, and Blue Skies has been able to take advantage of strong mar- papaya for export (see accompanying operating schedule). ket linkages with the European grocery sector, access to CASE STUDY 7: VALUE THROUGH INTEGRATION—THE GHANAIAN PINEAPPLE INDUSTRY AND BLUE SKIES HOLDINGS LTD. 93 Blue Skies Operating Schedule In less than 48 hours, fresh organic pineapples are har- 10:00 PM: Boxes of pineapples are packed onto vested in the mountains of Ghana and delivered to UK British Airways flight and take off for consumers. the United Kingdom Friday Thursday 5:45 AM: Pineapples arrive in London and go 9:00 AM: Pineapples are harvested in Akwapim through customs Mountains (100 km west of Accra) 8:45 AM: Pineapples are taken to British Airways 10:00 AM: Men cut pineapples and women deliver perishables-handling center outside of them to collection point London 10:30 AM: Pineapples are sorted by class at collec- 9:30 AM: Pineapples are taken out of cold storage tion point and quality is inspected again 12:00 PM: Fruit is loaded onto trucks and heads to 11:00 AM: Sainsbury truck picks up pineapples Blue Skies factory, 100 km away (2,000 and takes them to the supermarket’s dis- pineapples per truck) tribution center 58 km away 2:00 PM: Pineapples arrive at factory and are 12:00 PM: Fruit is sorted according to Sainsbury processed store orders 2:45 PM: Pineapples roll off assembly line and are cleaned; “topped and tailed”; have their Saturday skin trimmed; weighed; sealed in Sains- 4:00 AM: Delivery to Sainsbury stores made bury-labeled (UK supermarket) tubs; 5:00 AM: Fruit goes on sale in organic section put in holding chillers; and packed into 7:00 AM: European shoppers begin to purchase cardboard boxes pineapples 7:00 PM: Refrigerated load of pineapples leaves 9:00 AM: European consumers eat pineapples for factory for 100 km journey to Accra breakfast Source: Blue Skies corporate Web site, www.bsholdings.com. information on innovative practices, and foreign capital NOTES and expertise. It has implemented a highly sophisticated 1. GEPC News, http://www.gepcghana.com/news.php? production and quality control model and provided item=4&n=. appropriate incentives and support to its suppliers. Blue 2. Despite its contribution to exports, Farmapines’s output Skies services a value-added portion of a large, highly has subsequently declined, and it is now a marginal contrib- competitive commodity market. Starting with the same utor to sub-sector exports raw material, the value chain and operating model of Blue 3. Partnerships for Agribusiness Development, Agricul- Skies are very different from that which the Sea Freight tural Trade, and Market Access by TechnoServe for NEPAD, Pineapple Exporters of Ghana has successfully imple- November 2004. mented, which we will discuss in tool 7. 4. http://www.bsholdings.com/. 94 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE TO O L 7 Horizontal Collaboration—Creating and Taking Advantage of Economies of Scale ool 6 focused on approaches to vertical integration jointly with increased efficiency and effectiveness. Typically, T within a value chain. Horizontal linkages also offer excellent opportunities for value chain participants to obtain scale advantages through interfirm coordination. there will be many opportunities—in marketing, procure- ment of inputs, management, or logistics. When enough enterprises have expressed interest in By combining resources and sharing information, horizontal the idea of horizontal cooperation, some type of opera- cooperation allows participating companies and producers tional form, such as a simple agreement or a set of actions to achieve improved quality, service, and savings through facilitated by a producers’ association, formalizes the increased access to inputs, more leverage in sales negotia- arrangement. The benefits of horizontal collaboration can tions, and greater ability to design initiatives that emphasize lead to the creation of cooperatives, associations, or new upgrading the value chain. companies, or toward the reorientation of existing organ- This tool focuses on the implementation of horizontal izations to perform the joint activity. For example, joint collaboration mechanisms and linkages among businesses purchasing of inputs could form a basis for an inputs to overcome problems stemming from small-scale activity depot to be run by an association or as a jointly owned by some individual producers or enterprises. This small commercial venture in which many of the enterprises are scale prevents them, for example, from accessing inputs at represented. The need to obtain quality extension services optimum prices, from reducing the uneconomical unit costs can similarly be satisfied through a more developed mem- of extension services, or from enjoying enhanced market ber services association or cooperative. Joint marketing power stemming from increased volumes of production and and logistics can lead to the creation of a collection cen- nonfragmented marketing. ter, which could be responsible for increasing product Typical benefits of collaboration to achieve scale in trans- volume sales and thus obtaining better prices while reduc- actions or operations include reduced costs from activities ing transportation costs when consolidating shipments. carried out jointly and increased access to more and better The center could be operated as a company or within a inputs and services, which enables more professional man- cooperative. agement and marketing due to greater affordability. Looking Economies of scale do not necessarily need to be devel- further, though, horizontal collaboration among enterprises oped through producer associations or cooperatives. Hori- creates a collaboration platform that could later allow the zontal linkages are in many cases recognized, instigated, and chain to move toward forward or backward integration (dis- organized by lead firms in the value chain. cussed in tool 6), or to achieve improved quality (tool 9). Business-to-business collaboration is certainly an approach A STEP-BY-STEP SUMMARY FOR TOOL 7: that enterprises can and should explore independently. HORIZONTAL COLLABORATION—CREATING There is also potential for development partners and other AND TAKING ADVANTAGE OF ECONOMIES facilitators to assist the value chain participants in recogniz- OF SCALE ing and creating collaborations. The first step for enterprises looking to implement hori- ■ Identify areas in which enterprises performing similar zontal linkages is to identify areas in which they can operate activities in the chain can operate jointly with 95 increased efficiency and effectiveness. Typically, many ■ Give operational form to the collaboration, such as will be in marketing, procuring inputs, management, through simple agreements, cooperative creation, new and logistics. associations, or companies; reorient existing organiza- ■ Promote the idea to generate enterprise buy-in. tions to perform the joint activity. 96 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE C A S E S T U DY 8 Creating and Taking Advantage of Economies of Scale—The Ghana and Côte d’Ivoire Experiences in Fresh Pineapple Exports Michael Gorman and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION vegetables, primarily bananas and pineapples. A brief look at Côte d’Ivoire in the 1980s and 1990s helps to put Ghana’s he case accompanying tool 6 described a successful T story of vertical integration within the Ghanaian pineapple value chain. This case looks at a story of achieving economies of scale within the same industry. actions in perspective (Minot and Ngigi 2003). As a result of increased competition from Thailand, the collapse of state enterprises, and economic reforms that reduced subsidies, Côte d’Ivoire exports of canned pineapple Economies of scale characterize a production process in which and pineapple juice practically disappeared by the late 1980s. an increase in the number of units produced or managed gen- In response, much of Ivorian pineapple production switched erates a decrease in the average cost per unit. Achieving over to the export of fresh pineapples to Europe by Sea economies of scale is important when the minimum units Freight, using the same refrigerated freighters (“reefers”) that required to access desired inputs, services, technologies, or are used to transport bananas. This move took advantage of other capacities are quite large. Such minimums are required to Côte d’Ivoire’s proximity to Europe, a factor much more dissipate the high usage or acquisition costs of a service or facil- important in the fresh pineapple trade than in the market for ity over a larger number of inputs in order to increase efficiency. canned pineapple given spoilage considerations. The term “reaching scale” refers to attaining a level of pro- However, by the late 1980s, Côte d’Ivoire began to lose duction that allows the addition of further investment or the market share to fresh pineapple exporters in Central Amer- incorporation of additional operations and also enables ica and the Caribbean. After supplying close to 90 percent of wholesale input procurement. Where individual actors lack the European market for fresh pineapple in the mid-1980s, such scale, collaborative mechanisms can substitute. In Côte d’Ivoire’s market share fell to two-thirds in 1990 Ghana, pineapple exporters were required to reach substan- (Rougé and N’Goan 1997). But the 1990s also brought sev- tial volumes (scale) before they were able to access sea-freight eral changes favorable to the Ivorian fruit and vegetable transportation. This case describes their success. export industry. First, in the 1990s, the Organisation Centrale des Produc- CÔTE D’IVOIRE: ORGANISATION CENTRALE teurs-Exportateurs d’Ananas et de Bananes (OCAB) was DES PRODUCTEURS-EXPORTATEURS formed to represent the interests of exporters, set quality D’ANANAS ET DE BANANES standards, and facilitate communication. OCAB has reduced In 1999, Côte d’Ivoire was the largest horticulture exporter the number of “approved” exporters of fruit in an attempt to in West Africa, exporting US$140 million of fruits and maintain quality standards. It also organizes the charter of 97 refrigerated ships to transport bananas and pineapples to Figure 4.32 Ghana’s Pineapple Value Chain Europe. Second, in 1993, after much debate, Europe harmo- nized its banana import policies to make way for the single EU European market and continued granting former colonies markets preferred access to its markets. Third, the 50 percent devalu- ation of the CFA franc in January 1994 helped stimulate the Distributors economy, particularly the export sectors. The net impact of these three factors was that banana Africa Express Line Value Chain intervention exports grew from 95,000 mt in 1990 to 215,000 mt in 1999, • Trade financing while fresh pineapple exports expanded from 135,000 mt to SPEG • Storage • Business environment 183,000 mt over the same period (FAOSTAT data 2002). • TA Storage Côte d’Ivoire became the second largest fresh pineapple Inputs/financing exporter in the world after Costa Rica (Ti 2000). It is esti- mated that approximately 35,000 people are employed by the banana and pineapple plantations. In pineapple production, smallholders continue to domi- Small Outgrowers nate. Seventy percent of Ivorian pineapple exports are pro- growers duced by smallholders on farms of 0.5–10 hectares. The SPEG exporter channel remaining 30 percent is produced by large plantations, includ- ing some owned by vertically integrated banana companies Source: J. E. Austin Associates, Inc. such as Compagnie Fruitière and Chiquita. One reason for the greater involvement of smallholders in pineapple production compared with banana production is that the initial invest- provide freight services to the Ghanaian industry. The UBA ment cost of establishing a plot is estimated to be three to four boats are refrigerated vessels transporting bananas from times greater for bananas (Rougé and Goan 1997). Cameroon, and operators allocate space for Ghana’s pineap- Several factors lay behind the past success of fruit and ples based on available free space after the banana loads. vegetable exports from Côte d’Ivoire. First, Côte d’Ivoire Travel times to southern and northern EU destinations are 9 had long been known for its political stability. Second, Pres- and 13 days, respectively. ident Houphouet-Boigny had, for the most part, supported Since its formation, and the introduction of sea-freighting, agriculture-led growth. Third, Côte d’Ivoire had benefited SPEG has become a driving force in the Ghanaian pineapple from its proximity to European markets since it is just 8 to industry and has been profitable from its inception. As a 10 days by sea freighter from Marseilles. Although it also result, its membership increased from three in 1995 to 22 benefits from frequent air connections with Paris, this fac- by mid-2005 (Danielou and Ravry 2005). Pineapple tor was less important since most Ivorian fruit and vegetable exports from Ghana have increased from 15,764 tons val- exports have been via Sea Freight. Fourth, the government ued at US$5.6 million in 1995 to 57,392 tons valued at had relatively limited involvement in production and mar- US$18.3 million in 2003. The percentage of sea-freighted keting, particularly in the horticulture sector. exports to total pineapple exports increased from 17 percent However, with Côte d’Ivoire’s current political instability, in 1995 to 68 percent in 2003. At its peak, Ghanaian pineap- much of the fresh pineapple exporting industry has shifted ple exporters had access to two vessels on a regular weekly to more stable locations such as Ghana. basis to the European ports of Vado and Vendres in the south and to Port Antwerp in the north. That particular supply chain has subsequently atrophied. Ships now arrive on a less THE SEA FREIGHT PINEAPPLE EXPORT regular basis, with vessels from Cameroon bypassing Ghana. VALUE CHAIN The availability of regular vessel services since 1995 has The Sea Freight Pineapple Exporters of Ghana was formed in benefited all producers. Large-, medium-, and small-scale 1995 by Integral Ghana Ltd., Jei River Farms, and John producers expanded production and generated increases in Lawrence Farms1 to develop sea freight shipments of fresh farm-level incomes and employment. The 10 largest pineapples from Ghana (see figure 4.32). SPEG chose Union exporters controlled about 71 percent of total exports in Bananière Africaine (UBA/Dole) of France that same year to 2004 (TechnoServe 2004). 98 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Although initial pineapple exports from Ghana were Figure 4.33 Ghana’s European Pineapple Exports private sector initiatives, the Ghanaian government is also supporting sea-freighting by dedicating a facility at Port 80,000 MD2 variety 80,000 Tema for the consolidation of shipments. Ghana’s govern- 70,000 introduced 70,000 Thousands of US$ ment and industry players have successfully constructed 60,000 60,000 one handling facility at Port Tema, although the details on 50,000 50,000 Tons 40,000 40,000 who will manage and operate the shed are still being nego- 30,000 30,000 tiated. The government is also planning a second holding 20,000 20,000 facility at the airport. This facility is planned to be compli- 10,000 10,000 ant with GlobalGAP rules. 0 0 2000 2001 2002 2003 2004 2005 2006 BENEFITS FROM BUSINESS PARTNERSHIPS Tons Value The most important partnership developed over the past Source: Ghana Exporters Promotion Council. nine years is the SPEG-Union Bananière Africaine (now Africa Express Line) arrangement for the sea-freighting of pineapples. This strong partnership has ensured the avail- adoption of MD2, Ghana’s pineapple quality and presenta- ability of regular vessel services since 1995. tion are now up to EU standards and its export revenues Polycraft, a local carton manufacturer, is also working have increased in per unit value (see figure 4.33; this topic is with SPEG to provide its members with 35 percent of pack- further discussed in tool 6). aging requirements. SPEG also undertakes bulk procure- ment of agrochemicals from suppliers such as Wienco, Chemico, and Dizengoff for distribution to its members. On CONCLUSION average, SPEG budgets about US$50,000 toward the pur- During the period from 1995 through 2006, SPEG was able chase of agrochemicals for its members. The prices that to increase its share of the expanding European pineapple members pay are about 10 percent below market price but market by building scale through leveraging its relative include a small margin to cover administrative costs. logistical competitive advantages over its Latin American SPEG’s success in increasing Ghana’s primary pineapple counterparts. SPEG is also working with its members to exports was at least partially due to the development of sea meet EurepGAP standards and implement new traceability, freight capacity. Another success factor in the industry was certification schemes and other standards and to provide Ghana’s proximity to the market. other services. The early airfreighting of Ghana’s pineapple exports was attractive because the fruit could arrive at the EU market in six hours. Sea Freight extended shipping periods to between NOTE 9 and 13 days to southern and northern EU ports, respec- 1. SPEG was formed with support from the Ghanaian tively. Ghana had logistical advantages over Latin American government and USAID under the Trade and Investment exporters (who have longer shipment periods of 16–20 days Program (TIP). The TIP provided technical staff during to the EU) until recently due to the EU’s new preference for SPEG’s three formative years to oversee the coordination of the MD2 pineapple, which Ghana was not producing. sea shipments. Ghana’s government leased a shed at Port In 2005, Ghana lost considerable market share due to its Tema to SPEG solely for the consolidation of fruits before decision not to invest in the MD2 varietal. However, since the shipment. CASE STUDY 8: ECONOMIES OF SCALE—THE GHANA AND CÔTE D’IVOIRE EXPERIENCES IN FRESH PINEAPPLE EXPORTS 99 C A S E S T U DY 9 Creating and Taking Advantage of Economies of Scale within the Mozambican Cashew Value Chain Carlton Jones and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION association was established. There are three principal ben- efits to horizontal linkages: 1) lower costs, 2) access to ser- his case demonstrates how firms identified com- T mon areas for collaboration and created an associa- tion in the Mozambican cashew value chain that enabled the companies to achieve economies of scale in vices or inputs that are not easily acquired by an individual processor, and 3) pursuit of initiatives that are difficult for processors to accomplish on their own. Also consider the services offered by the association, as operations. Revisiting the example presented in Tool 5, Iden- they are good examples of market-driven (demand-side) tifying Business Models for Replication, this case looks at an services that have a stronger likelihood of being sustainable. analysis commissioned by USAID of value addition oppor- tunities in the Mozambican value chain aimed at revitalizing the country’s processing capacity. In the analysis, lead firms BACKGROUND were identified to establish new processing centers, and once operational, this model was replicated and implemented by From the 1920s until the mid-1970s, Mozambique was con- other processors. Those same processors experienced bottle- sidered the world’s leading cashew producer (240,000 mt at necks in the value chain and came together to address those its peak in 1973; TechnoServe 2004) with a considerable constraints through economies of scale. These economies domestic capacity for processing quality cashews. In 1978, the are realized when horizontal linkages occur, and the linkages government of Mozambique banned the export of raw nuts are most likely to be successful when there is a common in an attempt to stimulate domestic processing. Within a few platform from which firms can operate. In this instance, years, Mozambique had over a dozen processing factories and Mozambican processors were willing to organize and identi- was the first African country to process cashews on an indus- fied areas in which to jointly operate, creating an association trial scale. But by 1994, after a variety of events—including a that carried out those shared functions. civil war, the adoption of policies that fixed raw nut prices, and the continuation of the raw nut export ban—the cashew sector collapsed (see figure 4.35; FAOSTAT 2003). At the end POINTS TO CONSIDER of the civil war, those policies were abandoned, and the gov- While reading this case, consider the environment and ernment of Mozambique hoped to reclaim its past reputation actors that drove the processors to consider organizing, the of progress by investing heavily in large-scale mechanical steps they took, and the benefits they realized once the processing facilities. Unfortunately, the government also 100 Figure 4.34 Regions of Mozambique loans. (The rationale for this approach was highlighted in the discussion of tool 5.) The reduction of export tariffs did, in fact, increase prices slightly, but it also led to the closure of Mozambican processing factories. With those factories closed, Mozambique’s cashew sector entered another decline. By the late 1990s, instead of a vibrant value-added cashew sector, Mozambique exported most of its nuts— raw—to India for processing and value addition. Seeing an opportunity to assist, USAID commissioned TechnoServe to conduct a cashew subsector analysis, seek- ing to identify innovative ways to revitalize the industry and maximize benefits to small growers. As discussed in tool 5, a model version of a small hand-processing plant was designed, piloted, and, by 2004, replicated. The first successful plant, Miranda Caju, provided the replicable business model on which all other plants in Nampula province were based. Afterward, even though processors were established and growing, they still relied heavily on technical assistance. In examining the sector’s long-term viability, the processors recognized other exten- Source: World Bank. sion-service needs that were not being met. As other small hand-processors entered the market, stake- holders realized that to ensure long-term sustainability of the introduced a high tax on raw nut exports with the goal of entire value chain, these extension services needed to be fee- pushing the entire industry to domestic processing. based rather than subsidized. Unfortunately, if the extension In 1995, the Mozambican government liberalized the services were provided at full price, only Miranda Caju could cashew sector to meet World Bank conditions for continued pay the fees and still operate profitably. This scenario Figure 4.35 Mozambican Cashew Exports, 1961–2000 Independence, 1975 War begins,1982 War ends, 1992; raw exports Raw exports resume, 1991–92 250 banned, 1978 Thousands of metric tons 200 Total production 150 100 Raw exports 50 Processed exports 1961 1965 1970 1975 1980 1985 1990 1995 2000 Source: FAOSTAT, Ana Machalela, INCAJU statistician, e-mail communication, July 2001; Raimundo Matule, deputy director of INCAJU, e-mail commu- nications, September 2001 and May 2003. As adopted by McMillan, Welch and Rodrik (2003). CASE STUDY 9: CREATING AND TAKING ADVANTAGE OF ECONOMIES OF SCALE WITHIN THE MOZAMBICAN CASHEW VALUE CHAIN 101 encouraged the processors to link horizontally to distribute assistance, AIA is advocating for a gradual reduction of the the cost of extension services. Better still, this seemed to be a export tax on raw nuts, which, at 18 percent, penalizes farmers good business opportunity for a firm to provide these ser- and hampers competitiveness. In addition to providing these vices to all processors as the sector continued to expand. services to existing processor members, AIA also actively recruits and trains new processors. MOZAMBICAN CASHEW PROCESSORS LINK Branding is one of the most interesting services AIA pro- HORIZONTALLY vides. Again, with outside technical assistance, AIA created the “Zambique” cashew brand. This brand was created to With the assistance of TechnoServe, Miranda Caju’s president draw international awareness and interest to Mozambican and founder, Antonio Miranda, considered by his peers to be cashews, especially from U.S. buyers. an industry leader, brought together Nampula province’s other processors to discuss jointly creating a private firm to provide services to everyone in the sector. This lead firm HOW HORIZONTAL LINKAGES BENEFIT THE would provide valuable services to processors that would oth- MOZAMBICAN CASHEW VALUE CHAIN erwise have a difficult time accessing them. These meetings With AIA now providing much-needed services to small led to the formation of Agro Industria Associadas (AIA). Mozambican processors (figure 4.36), the following benefits have been realized. SERVICES PROVIDED BY AIA AIA began in 2004 as a private sector–led services firm com- ■ Improved quality control. Through AIA, quality has prising seven processor firms in Nampula. Each processor improved and poor-quality claims have been reduced by contributed US$500 of seed money to start the firm and was over 50 percent. In 2005, 26 containers were cited as hav- considered an equal owning partner. AIA selected a presi- ing quality problems, while in 2006, only 12 were. It is dent, Ali Cherif Deroua, and now provides the services once estimated that this reduction saved producers approxi- provided by a consulting firm. Some services are fee based, mately US$35,000 from 2005 to 2006. while others are nonfee based. AIA’s fee-based services fall ■ Speedier and cheaper access to inputs. Before AIA, it was into three main categories: processing, distribution, and nearly impossible to ask for duty exemptions. To qualify marketing. AIA provides the following nonfee services: train- for duty exemptions, a processor had to export all ing, branding, and advocacy. imported items within three months. This did not Its processing services include importing non-nut match normal business needs because processing vol- inputs like packaging and machinery. Distribution services umes in a year’s time were less than a container load, so include warehousing and load consolidation at Port Nacala processors typically could only import their packing and completing and filing paperwork for export adminis- needs once a year and not qualify for the exemptions tration. In marketing, AIA provides fee-based services such (see table 4.12). as selling (order-filling) to global buyers and providing pre- With AIA, processors were able to combine orders to shipment quality control. These quality control measures use temporary import-duty exemptions (IVA – 17 per- include ensuring Hazard Analysis and Critical Control cent + duty 7.5 percent). AIA was also able to reduce Point (HACCP) and EurepGAP compliance by adopting a shipping freight for its members. Before AIA, the average “three strikes, and you’re out” cut rate for suppliers. In this cost of exports per kilogram (kg) of kernels was US$0.38, system, suppliers are encouraged to improve their quality while after AIA, this cost dropped to US$0.27, and then measures or risk being excluded from the supply chain if again in 2006 to US$0.17 (see table 4.13). they incur three quality infractions. Adopting this system ■ Improved market linkages and information sharing. With has reduced instances of poor quality and increased export AIA, processors now have a timely and credible supplier prices. in the market. AIA carefully selects sea lines and transit AIA provides marketing intelligence to its members shipments, while keeping daily track of all containers. through training seminars and advocates on behalf of mem- Not only are these shipping records shared among AIA bers by engaging in public-private dialogue. In the past, these members, AIA also sends reports containing updates on discussions have included negotiating with the government sales, stocks, and receivables to banks on a weekly basis. of Mozambique for targeted infrastructure investments and This has helped banks feel more comfortable about the improving market regulations. With outside technical perceived risks associated with the sector and has made 102 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.36 Domestic Value Chain for Mozambican Cashews European Indian brokers brokers Exporters Exporters Industrial Processors processors Raw nut Small brokers processors Wholesalers Farmer Traders associations Small traders Farm Smallholder cashew producers Source: J. E. Austin Associates, Inc. Table 4.12 Cost of Packing Material before and after AIA Item Cost before AIA Cost after AIA Plastic bags Bad quality and repacking rate of 12 percent = US$0.72 Good quality and repacking rate of 5.3 percent = US$0.52 Cartons 3-ply (considered too thin) = US$1.10 5-ply with 4 colors and printed Zambique logo = US$0.085 Source: TechnoServe 2007. Table 4.13 Cost of Shipping before and after AIA ■ Improved industry image through “Zambique” brand. Time will tell how successful the introduction of a brand Item Cost before AIA Cost after AIA will be and how it will impact the Mozambican cashew Container to Rotterdam US$1,850 US$1,450 sector. Early indications suggest that a unified brand Port and service costs US$920 US$750–800 has helped buyers recognize that small processors in Source: TechnoServe 2007. Mozambique have improved their quality. The brand has certainly improved the solidarity of members within credit applications a little easier to file. This improved the sector. access to information would not have been possible for individual processors, although information is not the LESSONS LEARNED only thing shared among AIA members. Today, the improved communication and collaboration among AIA Horizontal collaboration mechanisms, such as those of AIA members has also translated into an atmosphere of members, demonstrate the benefits of joint operation. cooperation between firms. When one member experi- Increasing producers’ market power, enhancing their mar- ences shortage of an input, other AIA members pitch in ket linkages, and improving quality are all benefits that to provide those supplies, recognizing that as each firm other industries can consider when seeking to improve their gets stronger, the entire industry benefits. value chains through horizontal linkage. CASE STUDY 9: CREATING AND TAKING ADVANTAGE OF ECONOMIES OF SCALE WITHIN THE MOZAMBICAN CASHEW VALUE CHAIN 103 TO O L 8 Positioning Products and Value Chains for Greater Value and Competitiveness uilding on several of the tools already described, a margins and likely market demand at each position? Who B competitiveness positioning assessment provides strategic direction to many of the actions that the value chain implements to improve its competitiveness. will our competition be? In the case of the cashmere industry (see figure 4.37), Mongolia produces the world’s best quality raw cashmere This assessment and collaborative decision making inform (wool from a breed of small goats) in the world. Mongolia the value chain’s leadership about the value chain’s product produces very few value-added products (and virtually offerings, relative to competitors, in key markets. It also none of quality), so substantial exports are only in the forms the foundation for developing a strategic vision and a form of raw cashmere or yarn. Mongolia exports most of clear, actionable plan for repositioning the industry in cur- its cashmere to processors in Italy and Scotland, where the rent markets and for penetrating new ones. cashmere is processed and transformed into extremely high-value garments and fashions. Figure 4.37 illustrates Mongolia’s position in the world cashmere market relative POSITIONING THE VALUE CHAIN to major competitors and partners, with differentiation In a simple 2 x 2 matrix, the product or service of a company, represented on the x-axis and product scope represented value chain, or industry can be described in terms of product on the y-axis. (Note that this is an application of bench- scope (complexity, value addition) and product differentia- marking introduced in tool 3). Each country’s market tion (special qualities, lack of direct competitors). Products share as measured in revenues is represented by the relative and services in the lower left are basic commodities, subject to size of the circles. In most cases, higher profit per unit (and severe price competition and very restricted profit margins. certainly higher prices per unit) is implied by a position in Products in the upper left have a lot of value added but may the top right corner. However, it is important for this still be under severe price competition. Products to the graph to be interpreted in the context of local market con- extreme right are highly differentiated and, in that respect, ditions and the overall profit and profitability of the activ- may be able to command higher prices and margins but have ity.1 While the upper right quadrant is generally associated little value added. Of course, products and services in the top with high profitability, operations in the lower left may find right are in “competitiveness nirvana,” commanding high that high volumes of low value production may generate prices and margins because of their complexity and special total profits that outweigh the premium pricing available at qualities in the customer’s eye—all assuming, of course, other positions. that there is sufficient market demand to interest the value China was also a major producer of finished cashmere chain participant. products, but of lower quality than those produced in One challenge for value chain participants is to decide Scotland and Italy. Seeking new and inexpensive sources where to position the chain’s products or services. Where is of cashmere wool for their high-volume business, Chinese the product currently positioned in the domestic or global cashmere buyers competed with domestic wholesalers market? Where do we want it to be—and what are the qual- for Mongolian wool stocks. However, Chinese buyers had ity, service, and other requirements to be competitive in that no incentive to encourage high quality as they planned to positioning? What are the best global performers in any of feed low value-added industrial garment makers in China. the positions doing to be competitive? What are the profit Their advantage in the purchasing marketplace was to offer 105 Box 4.10 Ecuadorian Cacao—Positioning the Value Chain for Greater Value and Competitiveness In some cases, potential value exists in the value chain The improvements in value enabled a repositioning of and needs only to be unlocked. This can be achieved the higher quality portion of the Ecuadorian product, either by movement toward higher scope or toward and these are being supported by promotional and mar- product differentiation. Ecuador’s cacao industry illus- ket channel actions. Historically, Ecuador has received a trates this principle. US$20–US$100 premium over the baseline market Ecuador’s cacao industry has made advancements in price. However, the flavor profile of Ecuadorian cacao is processing and value added that enabled producers to so desirable in today’s consumer market that it com- export higher quality cacao and receive premium prices. mands a premium of US$800–US$1,200 per ton.a Premiums for Several Countries’ Cacao Products Premium over market price, Country May 4, 2007 (per ton, US$) Venezuela (dried and fermented) 2,000 Java (dried and fermented) 2,000 Ecuador (dried and partially fermented) 800––1,200 Ivory Coast (dried and fermented) 320 Dominican Republic (dried and 280 unfermented) Ghana (dried and fermented) 250 Source: Blommer Chocolate. Among the companies currently buying cacao from Single-origin dark chocolate can be a branded, Ecuador is Blommer Chocolate Company, a large man- value-added product because buyers are looking for the ufacturer that purchases raw cacao for grinding and specific Ecuadorian flavor profile. One indication of processing into chocolate products. It is the largest the repositioning of the value chain toward greater buyer in Ecuador and the largest raw cacao processor in value and competitiveness is the fact that single-origin the United States. Blommer customers include large, chocolate from Ecuador is being sold in international well-known companies and brands such as Mars, markets at a substantial premium. Additionally, the Nestlé, and Hershey, among others. Blommer is pleased government of Ecuador (GoE), with support from the with the quality of cacao that they are able to purchase Inter-American Development Bank, is promoting from Ecuadorian producers who have been trained Ecuadorian cacao in global, high-end niche markets. through the Farmer Field Schools. Blommer previously Also in line with the repositioning, Ecuadorian farmers used Ecuadorian cacao in a wide variety of dark choco- and the GoE are encouraging the cultivation and main- late products, but because of its premium qualities, tenance of Ecuador’s heritage cacao trees, which pro- Blommer has recently been using Ecuadorian cacao for duce the highly desired flavor profile. producing high-end, single-origin dark chocolate. Source: Lisa Carse and Martin Webber, J. E. Austin Associates, Inc. a Author interview with Karl Walk, purchaser for Blommer Chocolate, 2007. immediate cash. With this incentive, Mongolian herdsmen Mongolia’s downstream buyers recognized an oppor- were ready to sell to Chinese buyers. The perceived need to tunity to increase the Mongolian product’s quality differ- protect breed and wool quality suffered among herdsmen entiation by offering price incentives for higher quality selling to undiscerning Chinese markets. and by implementing both a mark (certification) of quality 106 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Box 4.11 Thailand GAP Cluster—Positioning Products (and the Value Chain) for Greater Value and Competitiveness Leveraging Other Value Chain Initiatives 1. Branding and certification: The cluster created the Box 4.10 illustrated the concept of the hidden poten- western cluster GAP logo and a grading process for tial in value chains. Key to realizing hidden potential in its products, which was approved and certified by the value chains is the pursuit of greater product scope Department of Agriculture. The logo and standards and differentiation. Thailand’s Good Agricultural appear on all producers’ packaging, and farmers are Practices (GAP) cluster is an excellent example of such encouraged to promote the brand. The cluster has an attempt. also done some local advertising of this brand name. Thailand’s agricultural sector is an important con- 2. Unique shelf space: The cluster was able to work tributor to its economy. Thailand has one of the most with supermarkets to gain dedicated shelf space for developed agricultural product sectors in Southeast its vegetables. This separated its products from the Asia and has been a net exporter of agricultural prod- open-air vegetables. This space was also branded ucts for decades. It is known in international markets with point-of-purchase (PoP) displays. for the quality of its fresh and processed products, and 3. Packaging: The cluster created unique packaging producers from both developed and developing coun- that highlighted product freshness and high quality, tries view it as a strong competitor. and it was also used to promote ready-to-eat vegeta- The Thai GAP cluster carried out a major program bles that were in demand by time-conscious urban to implement EurepGAP standards in western Thai- professionals. land to gain export certification to service its tradi- tional European supermarket business (discussed in Summary tool 9, box 4.12).The GAP cluster wanted to further To leverage the quality improvements made within leverage its achievement of EurepGAP standards in the value chain, the cluster positioned itself within domestic Thai markets that have similar market local markets that had similar requirements as export requirements. Thailand has many large super- and markets by using branding, certification, unique shelf hypermarkets in its urban areas, including foreign- space, and packaging that promoted quality and owned retail outlets like Tesco and Carrefour that freshness. These improvements are estimated to have desire similar quality products for their customers. generated a 50 percent increase in farmers’ bottom lines. Product Positioning Businesses must make these choices with purpose, Although value chain processes produced a quality or they will simply be out-positioned by their com- product that conformed to tough European standards, petitors or buyers, which makes understanding the the Thai GAP cluster wanted to position those same competition a critical aspect of repositioning as well. quality products within local super- and hypermarkets Movements to new positions do not have to happen in Thai urban areas. This would support a market instantly, and it is often most appropriate to adopt diversification strategy that reduces the risks of relying changes incrementally, for example, by adding differ- on exports linked to its investments in upgrading. The entiation through higher quality or better variety, and cluster took some of the following initiatives to posi- then adding product scope through processing or tion itself as a quality vegetable producer: improved packaging. Source: Mike Ducker, J. E. Austin Associates, Inc. and a Mongolian brand. At the same time, design and man- “upward” (more value added)—a more lucrative positioning ufacture of cashmere products in Mongolia was encouraged, with less exposure to competitive pressures. which added value within the Mongolian industry. Once an objective is determined, value chain participants The Mongolian cashmere industry understood the must decide which actions are necessary to achieve the actions necessary to change its positioning in the value chain desired positioning. Boxes 4.10 and 4.11 provide brief and acted to move to “the right” (greater differentiation) and examples; case study 10 examines a case more deeply. TOOL 8: POSITIONING PRODUCTS AND VALUE CHAINS FOR GREATER VALUE AND COMPETITIVENESS 107 Figure 4.37 Product Positioning—Mongolian Cashmere Industry Cashmere and cashmere garment exports Cashmere garments Italy (high value added) Scotland Product scope Afghanistan Goal 1999 Estimated 2003 Raw Mongolia cashmere (low value Low cost Differentiation added) Cashmere exports Raw cashmere Washed/dehaired Yarn and cloth garment Source: Nathan Associates Inc. and J. E. Austin Associates, Inc. for USAID. A STEP-BY-STEP SUMMARY OF TOOL 8: product differentiation and increase in-country, value- POSITIONING PRODUCTS AND VALUE CHAINS added activities. FOR GREATER VALUE AND COMPETITIVENESS NOTE ■ Assess and benchmark size and share of market. Collect net sales for each product segment and each competitor 1. Once completed, the graph is strategically revealing; how- ever, compiling the information for the analysis is not in each product segment. straightforward, apart from the size and segmentation of the ■ Assess and benchmark product scope (or product “offer”). circles. Once basic sales data are compiled for the value Collect industry value added for each product and com- chain’s key product segments, the circles must then be posi- petitors’ products. If industry value added is not available tioned on the graph. If available, the most accurate data to at the product level, the number and type of value-added measure product scope is industry value added. In some activities taking place in-country can be substituted. cases, reliable data on value added for a specific industry may ■ Assess and benchmark product differentiation. Prod- not be available. In this case, product scope can be gauged by uct differentiation should be measured by a combina- assessing the numbers and types of value-added activities that tion of both the average price point at a given level of occur in-country. Product differentiation can be measured in value addition, as well as specific product attributes a number of different ways. Market price can be a reflection and customer perceptions of the sources of product of the differentiation of a product in a given market, but this value. Product attributes and customer perceptions are is not always the case. Also, at the aggregated level, average price across a number of markets can be diluted and mask qualitative measurements but can be assessed quantita- differentiation. As a result, differentiation should be mea- tively through market research tools, such as consumer sured by a combination of both the average price point at a surveys. given level of value addition as well as specific product attrib- ■ Understand the possibilities and requirements for repo- utes and customer perception of the sources of product value. sitioning the product, and develop a repositioning strat- Product attributes and customer perception are qualitative egy. Repositioning a product in a more competitive space measurements but can still be measured through market requires a combination of activities that both enhance research tools such as customer surveys. 108 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE C A S E S T U DY 1 0 Value Chain Strategies for Market Repositioning—Rwandan Coffee Carlton Jones and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION BACKGROUND (1904–2001) n the 1990s, export revenues from coffee, an impor- Coffee was introduced in Rwanda in 1904 and was first I tant source of hard currency for Rwanda, declined. This case discusses a government-led initiative to improve the competitive position of Rwandan coffee. Before exported in 1917; it was quickly seen as a major source of income for the country. In 1933, the cultivation of coffee was made compulsory, and, in 1963, the government of 2001, Rwanda was an unknown in the specialty/high-value Rwanda passed laws making it illegal to uproot coffee trees. coffee sector. Today, it is a sought-after supplier of spe- Because of coffee’s historical role as a principal source cialty coffees to Europe and the United States. This case of foreign exchange for the country (averaging 56.7 per- touches upon the successes of the government of cent of all exports in the 1990s) and its broad political Rwanda’s initiative and also speculates about the likely support, the state was heavily involved in all stages of pro- outcomes if the government had more closely followed its duction, including marketing and dry milling. Nearly all own strategy. production of coffee ceased, however, during the genocide of 1994. Regionally, Rwanda competed with its southern neighbor Burundi, yet Burundi’s coffee was considered to FACTORS TO CONSIDER be slightly better in quality than that of Rwanda. Neither country produced coffee that was considered specialty When reviewing this case, it is important to keep these ques- grade, as in Ethiopia and Kenya. Despite the fact that some tions in mind: of the coffee grown in Rwanda, such as the Bourbon vari- etal, had specialty grade potential, all of Rwanda’s coffee ■ Where is Rwandan coffee positioned currently, and what was considered below commodity grade, and, when factors influence that position? exported, was only used by roasters in blends of low-end, ■ Where does the industry want to go, and what are the mass-produced coffee destined for Europe and the United quality, service, and other requirements to make it com- States (table 4.14; figure 4.38). petitive in that positioning? Within the value chain, the GoR supported the coffee ■ Who are the best global performers, and what puts them industry by establishing OCIR-CAFÉ (Rwanda Coffee in this position? Development Authority) and through it, distributed ■ What price points and profit margins exist in the various seedlings, fertilizer, phytosanitary products, and other quadrants? inputs to growers for free or at dramatically reduced prices. 109 Figure 4.38 Rwanda’s Coffee Product Position, 1990–2000 (High value added) Guatemalaa Kenyaa Ethiopiaa Rwanda 1990 Brazilb Rwanda 2000 Vietnamb (Low value added) Low cost Differentiation Source: J. E. Austin Associates, Inc. a Represents specialty coffee/not drawn to scale. b Represents commodity coffee/not drawn to scale. Table 4.14 Rwandan Coffee Production 1986 1987 1988 1989 1990 1992 1993 1995 1996 Production 35,424 43,026 43,026 39,091 39,575 38,970 28,495 21,829 15,239 (metric tons) Standard coffee 48.18 30.8 19.4 2 7 0.32 4.25 2.4 0.25 (percentage) Ordinary coffeea 38.59 60.2 75.7 94.7 86.9 93 88.7 92.7 82.9 (percentage) Source: OCIR-CAFÉ 2006. a Ordinary coffee is nonexport grade, while standard coffee is exportable, commodity grade coffee. Neither is considered specialty grade. Growers would apply the inputs to their crops and harvest, record highs. During the same period, Vietnam and Brazil and sell semiwashed beans to RWANDEX, the monopoly responded to high prices by increasing output of commod- responsible for dry milling and exporting coffee. The GoR ity grade coffee. Beginning in 1997, this growth of supply was a majority owner of RWANDEX and set the prices that dropped worldwide prices to historic lows. By 2001, average growers received from their coffee sales. In fact, the GoR global coffee prices were US$0.52/lb. Rwanda received continued to set prices for coffee up until 1998. Though US$0.40/kg (US$0.18/lb.), which, on average, was below coffee producer associations existed in Rwanda, they were the price of production. With prices this low, each actor in agents of the state that distributed inputs and did little else. the Rwandan coffee value chain lost money: small growers, processors, exporters, and even the banks that provided GLOBAL COMPETITION DRIVES DOWN PRICES lending.1 AND PRODUCTION RWANDA’S IN-COUNTRY CONSTRAINTS Coffee’s contribution to Rwanda’s foreign exchange declined in the 1990s. Production declined both before and World coffee prices were not the only determining factor for after the 1994 genocide, even as world prices reached near the decline in Rwanda’s coffee industry; the country’s coffee 110 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE production never recovered to 1992 production volumes positioning in world markets. These sessions resulted in (table 4.14) because its existing production process was coffee-sector liberalization strategies that, when imple- inefficient. This resulted from Rwanda’s disparate methods mented, began the task of improving Rwandan coffee. of coffee farming, the poor health of its coffee trees, the lack Armed with market information, the private sector learned of wet-milling stations, and the absence of incentives for that higher-value coffee was very attractive to global mar- reinvestment. Growers were not offered higher prices for kets, that cupping/taste results indicated Rwanda had sig- better-quality beans, so they had little reason to invest in nificant potential to produce specialty coffee, and that more sophisticated processes of production, harvesting, Rwanda could compete with higher-end producers such as cleaning, or separation of their bean harvests. Low coffee Ethiopia, Guatemala, and Kenya. The Rwandan reposition- yields coupled with poor price points influenced farmers to ing strategy is illustrated in figure 4.39. focus on other, higher-margin crops, further diminishing Rwandan coffee’s competitiveness in world markets. Contributing to Rwandan coffee repositioning Despite the constraints that led Rwanda to produce low- quality, low-quantity, commodity grade coffee, the GoR For Rwanda to move from being considered a commodity and donor partners believed that Rwanda possessed the grade to a specialty grade coffee producer, its coffee-producing capacity, environmental conditions (elevation, climate, soil sector needed to address three key areas: quality, Bourbon trees, and others), and political will to improve its coffee position in world markets. What Rwanda ■ Increase production, since production levels were lacked was technical capacity, market information, and a insufficient to attract global demand. Activities coherent strategy. included distributing improved inputs, supporting grow- ing associations, replanting coffee trees, and constructing wet-mill stations in Rwanda’s top 50 coffee-producing REPOSITIONING THE OFFER FOR RWANDAN districts. COFFEE ■ Improve quality. Activities included educating producers In response to the steady declines in production, quality, on quality and cupping, establishing quality-control and export revenue, the GoR and its donor partners began mechanisms, investing and technical assistance in wet-mill strategy sessions aimed at improving Rwandan coffee’s techniques and operational and financial management, Figure 4.39 Rwanda’s Coffee Positioning Goals for 2010 (High value added) Guatemalaa Kenyaa Ethiopiaa 2010a Rwanda 1990 Brazilb Rwanda 2000 Vietnamb (Low value added) Low cost Differentiation Source: J. E. Austin Associates, Inc. a Represents specialty coffee/not drawn to scale. b Represents commodity coffee/not drawn to scale. CASE STUDY 10: VALUE CHAIN STRATEGIES FOR MARKET REPOSITIONING—RWANDAN COFFEE 111 Figure 4.40 Generic Coffee Value Chain Coffee Value Chain Beans for Value Chain exporting interventions Exporter Unwashed Washed Value Chain green green interventions Processor beans beans Dry milling Wet milling Value Chain Farm interventions Coffee cherries Source: J. E. Austin Associates, Inc. improving infrastructure, strengthening cooperative and fee Corporation in June 2004. In November 2005, Starbucks association management, strengthening existing institu- selected two privately owned wet-milling facilities for an tions (like OCIR-CAFÉ), and providing financial mecha- exclusive distribution program, which provided coffee to nisms throughout the coffee value chain. 5,000 Starbucks retail outlets. ■ Promote the Rwandan brand. Activities included estab- In 1990, Rwanda’s commodity grade coffee fetched lishing and improving market linkages through trade- US$1.18/kg (0.54/lb.), but by 2001 its price had decreased to show visits, sharing information about the local and US$0.40/kg (US$0.18/lb.). However, through the above global coffee markets with the private sector, and insti- interventions, which were implemented with support from tuting other innovative promotional activities. the Partnership to Enhance Agriculture in Rwanda through Linkages and Agribusiness Development Activity in Rwanda These activities were carried out through a variety of projects funded by USAID, specialty coffee production and implementing partners and sponsored by various donor its subsequent price both increased. Without the wet-milling partners (see figure 4.40). interventions, Rwanda’s ability to improve the quality of its beans from ordinary to standard and specialty would have been impossible. Also, if Rwanda had only tried to maximize IMPLEMENTATION AND OUTCOMES profits and decrease costs within its value chain without Through these interventions, Rwanda was effectively able to attempting a repositioning strategy, it would have been more reposition its coffee and compete in higher-grade, higher- difficult to obtain the same results. priced markets (see figure 4.41; tables 4.15 and 4.16). July 2002 saw the country’s first sales of commercial volumes of RWANDAN COFFEE TODAY AND INTO THE specialty coffee, including a sale of 33 mt to Community FUTURE Coffee in the United States. By March of the following year, privately financed and operated wet-mill facilities produced In addition to the increased production and price/kg that fully washed coffee. Production and quality continued to Rwandan specialty coffee has realized, the new wet-milling increase, and after visits to and from trade show buyers, stations created 4,000 new jobs, and 5,000 rural households Rwandan specialty coffee made its first sale to Starbucks Cof- saw their incomes more than double (Chemonics 2005). 112 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.41 Results of Rwandan Coffee’s Positioning Efforts, 2005 (High value 2005 added) Rwandan specialty coffee Guatemala Kenya Ethiopia 2005 Rwanda 1990 Brazil Rwanda 2000 (Low value Vietnam added) Low cost Differentiation Source: J. E. Austin Associates, Inc. Table 4.15 Rwandan Coffee Production and Rwandan coffee market (see figure 4.42). OCIR-CAFÉ has Prices, 2003–05 developed a plan to move away from standard coffee alto- gether and focus only on specialty varieties. Rwandans Year Metric tons produced Price/kg (US$) could also choose to diversify their product offerings by 2003 162 1.56 seeking broader markets for standard coffee while simulta- 2004 747 2.40 neously maintaining focus on higher prices for specialty 2005 1,190 3.10 coffee. This would leverage the Rwandan coffee sector’s Source: OCIR-CAFÉ 2006. increased capacity and maturing coffee acumen and could enable Rwanda to broaden its coffee production to more Initial success from these interventions has sparked further diverse markets. donor interest in supporting Rwanda’s value-added coffee sec- In fact, this latter situation is ongoing, and Rwanda is tor. Partnerships with the GoR have spawned plans to con- more than midway into its positioning strategy. However, it tinue increasing production through the construction of an will most likely have future opportunities to revisit its strat- additional 164 wet-milling facilities. Continued investment in egy and take advantage of future market opportunities. the existing wet-mill facilities is required to make better use of Has Rwanda been successful in repositioning its coffee water sources and to equip them with water recycling pumps. industry? In many aspects, yes. By understanding its posi- These, and other interventions, will allow Rwanda to continue tion in world coffee markets and then implementing a strat- to support its growing specialty coffee industry. egy to reposition itself, Rwanda’s coffee industry has revital- As Rwanda gets closer to 2010, continued product posi- ized itself and has improved the earning potential of many tioning will be required to help chart new strategies for the small growers. CASE STUDY 10: VALUE CHAIN STRATEGIES FOR MARKET REPOSITIONING—RWANDAN COFFEE 113 Table 4.16 Standard and Ordinary Coffee Percentages, 1998–2005 Year 1998 2000 2001 2002 2003 2004 2005 Production (tons) 14,268 16,098 18,267 19,796 14,175 29,000 17,000 Standard coffee (percentage) 7.40 19.5 18.5 29.28 32.4 40.0 45.0 Ordinary coffee (percentage) 80.5 72.4 75.0 58.57 55.0 50.0 45.0 Source: OCIR-CAFÉ 2006. Figure 4.42 Rwanda’s Coffee Positioning, 2010 and Beyond (High value Rwandan specialty coffee (i.e. Starbucks) added) 2010+ Guatemalaa Kenyaa Ethiopiaa 2005 2010+ Rwanda 1990 Brazilb Rwanda 2000 Vietnamb (Low value added) Low cost Differentiation Source: J. E. Austin Associates, Inc. a Represents specialty coffee/not drawn to scale. b Represents commodity coffee/not drawn to scale. NOTE 1. Rob Henning, OTF Group. 114 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE TO O L 9 Applying Standards and Certifications to Achieve Greater Quality eeting a variety of quality and performance stan- M Figure 4.43 Standards Plotted against Product Value dards is integral to the success of agricultural value chains. However, the importance of specific qualities, standard measurements, and informational or other characteristics may not be readily apparent to all the actors in a value chain if they are not familiar with the tar- Product value get market. Aside from normal ethical, consumer health, and safety requirements, the market side of the value chain pays increasing attention to standards and certifications. National and regional markets are imposing increasingly strict requirements for basic market entry (for example, HACCP and EurepGAP). Powerful buyers and retailers, especially supermarkets, impose additional requirements on International Value-add Up-market Up-market their supply chains. entry standards standards and firm value chain and certifications certifications, specification integration As a result, the value chain must meet increasingly stringent (HACCP) (Rainforest requirements relating to product health and safety, intrinsic Alliance for product qualities (shape, color, taste, texture, and others), Sustainable Agriculture) packaging and labeling, and accompanying information. Value chains are also beginning to understand that meet- Source: J.E. Austin Associates, Inc. ing recognized standards is not just a condition for market access but a powerful way to compete for market share and higher unit values. Value chains can obtain price premiums tions is a value chain issue, and the strategies must be value if they meet these standards, especially if they achieve val- chain–wide strategies. ued product and production certifications. These certifica- tions can go well beyond market entry requirements and VOCABULARY appeal to special customer segments that are willing to pay premium prices (see figure 4.43). Thus, value chains are ■ International trade standards: Standards applicable to increasingly recognizing the opportunities inherent in pro- trade, imposed by trade agreement or market-governance viding certified, organic, fair trade, bird-friendly, and other fiat. high-standard products, as well as the value of marketing ■ Value-added standards: Geared to the specific require- and quality-control initiatives that are promoted through ments of niche or segmented markets; make a product seals of quality. more specialized or unique. Because a product is affected by many factors—from ■ Quality standards: Additional, specific buyer standards farm to market—achieving quality standards and certifica- such as appearance, size, and packaging. 115 INCREASING PRODUCT VALUE THROUGH Figure 4.44 International and Value-Added Standards STANDARDS Choosing and targeting standards should be part of a strategic market exercise. Many export markets have stan- National borders dards and/or certifications that are needed for entry. By achieving international certification or standards, local International entry standards Target Value-added standards value chains have the opportunity to export to other market and certification countries and select the market positioning of their prod- International Value-added ucts. However, implementing standards does not auto- standards standards matically mean that the value chain can sell in those like HACCP like rainforest and EurepGAP alliance can export markets; the chains must still market and sell to can be a door be a door of customers in those countries. of opportunity opportunity to Value-added standards allow for entry into certain to sell and sell and market in market to niche markets; for example, Rainforest Alliance standards export specific niches for coffee products appeal to many coffeehouses and markets specialty marketers in the United States (see figure 4.44). Source: J.E. Austin Associates, Inc. Many individual importers and retailers have their own quality standards that appeal to their particular customer how to set up a certification body, it is worth noting that base. several options are available: Implementing the processes and systems to meet stan- dards does take resources, so it is important that the value ■ Private companies chain’s leaders and firms choose the most strategically ■ Industry associations appropriate target market segments. Comparing imple- ■ Nongovernmental organizations (NGOs) mentation costs and the local value chain’s capacity to ■ Government agencies incorporate standards against the benefits of selling up- market is a strategic choice that must be considered before Governments are typically geared to certify products and incorporating standards. services to protect their citizens’ health and welfare, but are typically not best suited to certify based on other criteria. Elements of standards NGOs, associations, and private firms around the world have successfully set up certification agencies based on Implementing standards within a value chain means dis- international standards. cussing three elements: ■ Certification bodies INFORMATION CHANNELS ■ Information channels Entrepreneurs—businesses and producers, in general— ■ Management oversight and governance structures must be motivated to change the way they produce goods and services to meet standards, and they need information and economic incentives in order to do this. These incen- CERTIFICATION BODIES tives must include shared knowledge of the requirements Many standards and certificates have international bodies (and ideally, the logic behind them), as well as price points that certify that products meet certain standards. Several that reflect the additional costs and work involved in meet- have the ability to certify products and services in devel- ing requirements. There must also be trust within the value oping countries, but cost and timing can be a major issue chain that the process is stable. in bringing these international bodies into developing One aspect of creating trust is ensuring that proper countries. Therefore—and especially if large numbers of information channels are available and being used; these producers or exporters will receive certification—it is will give small and medium enterprises and producers often better to set up institutions in the local country. confidence that they will obtain fair rewards for the costs Although it is beyond the scope of this Guide to discuss of implementing new processes to meet standards. This 116 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE means that the value chain must communicate formally base is certified or is meeting market standards. In frag- and informally. Formal communication can occur through mented industries, lead firms are sometimes unable to meetings, cluster activities, integrated supply chain sys- manage the supply chain to meet market standards, and so tems, industry associations, conferences, and exchanging the industry would then have to leverage other institutions. price information. Informal channels can be created by The need for a coordinated response within a fragmented having a transparent culture within the value chain, espe- production environment is a key motivator for integration cially within the SMEs’ supply base. For example, if a and consolidation within value chains. farmer sees another farmer in the village benefit from an investment to meet standards or gain a certificate, the sec- ond farmer is more likely to upgrade processes based on the ASSOCIATIONS AND COOPERATIVES observed model. In fragmented value chains, associations and cooperatives can help manage value chain elements to meet market stan- MANAGEMENT OVERSIGHT AND GOVERNANCE dards. These institutions are often important when first implementing standards in a value chain; institutions that A value chain that is upgrading its standards requires some are producer owned, visible, and well known can build trust institution to take responsibility for managing the supply in the standardization process. Properly resourced, they can base to meet standards and specifications. Because the value be very effective in training and outreach activities. In some chain is comprised of independent firms and actors that cases, involving a credible third-party institution (as in the often have different motivations, this can be a difficult task. example of Kaesetsart University and the Thai GAP cluster, Credible governance, clearly able to link value chain perfor- box 4.12) can help overcome initial mistrust between pro- mance to market rewards, is always needed if the supply ducers and processors/exporters and can help focus all response of the value chain is to be coordinated and targeted parties on a coordinated approach to meeting standards. to market needs. Typically, there are three types of institutions for man- agement of the value chain: GOVERNMENT AGENCIES ■ Supply chain management instituted by an exporter, In many countries, and often in keeping with traditional, processor, or other lead firm historical/colonial, or even philosophical backgrounds, gov- ■ Associations and cooperatives ernment has played the role of industry governance, including ■ Government agencies standard setting, inspection, extension, and communication. Marketing boards or authorities are one prominent set of The success of these various forms of oversight and examples. However, while some state-run agencies are effective governance rests with their ability to understand market in their governance and oversight role—and, in some cases, requirements and translate them into in-chain procure- even step in to redress serious sectoral problems—there are ment standards, communicate information effectively, and also problems with such models. Government agencies are motivate suppliers to respond with needed investments often slow to understand and respond to market trends, lim- and operations. ited in their strategic focus, inflexible in promoting varying standards and price points, subject to public sector inefficien- cies and political and budget pressures, and liable to commu- LEAD FIRMS nicate poorly with the value chain. Many lead firms have made a “mindset” change that allows them to view the effective management of their supply SUMMARY chain as an opportunity for growth creation and larger prof- its, rather than simply as an additional imposed cost. This It is a strategic decision to instill standards or certifications mindset shift is based on the fact that if the participants in into the value chain based on target market requirements. a value chain work together, the value chain can more easily The choice of standards and certifications needs to be an meet changing market needs and reduce transaction costs. informed one. To implement these, effective elements of Therefore, the lead firm should take responsibility for certification bodies, information channels, and manage- managing its supply base, which includes ensuring that that ment oversight must be established. TOOL 9: APPLYING STANDARDS AND CERTIFICATIONS TO ACHIEVE GREATER QUALITY 117 Box 4.12 Thailand GAP Cluster—Use of Standards and Certifications to Upgrade Value In the early 2000s, the GAP cluster in western Thailand Figure 1: Thai Vegetable Export Value Chains was able to reorient its production to meet the specific European markets certifications needed to enter European and U.S. mar- European markets kets. This cluster was also able to develop and market certifications that add value to its products. These results were achieved through close collaboration among value chain participants. Exporters EurepGAP trade regulation Importance of Implementing EurepGAP through the Exporters Value Chain Thailand has long been able to successfully export high- value horticulture products to Europe. Once EurepGAP certification and traceability requirements were put in Packers Packers place, however, Thai vegetable exports dropped by 20 percent. The drop in exports was felt throughout the value chain—by exporters, packers, and growers. The exporters and government made several attempts to Vegetable growers Vegetable growers implement EurepGAP within the value chain, though without success. This was largely attributable to mis- trust among the exporters, government, and growers. A cluster approach was used to provide training and Vegetable exports reduced by 20% certification services by incorporating a local univer- sity, Kaesetsart University. The exporters collaborated Expected results closely in identifying market requirements, and the European market • Growers receive a 50% premium if university trained 2,000 growers on EurepGAP compli- certified ance, sending them to train other farmers. Growers • Increasing expected net income (2,000 growers) for the cluster over were more willing to accept the new processes when the next five years to US$2.2 million presented by a respected third party (the university) • Highly replicable with information support from the exporters. This Exporters • Show leadership allowed the exporters to gain market share and increase behind university their exports. The growers benefited by receiving a 50 • Help with brochures percent increase in their prices for certified products. and communications Packers Use of Certification and Branding for Local Markets To further leverage the output of growers who partici- pated in the EurepGAP training and processes, the clus- ter developed a western Thailand GAP logo. The cluster worked on sophisticated packaging, branding, and Vegetable growers Kaesetsart University smaller packages that were geared toward the large GAP training and certification supermarkets in Thai cities. It is expected that each services party in the value chain will gain greater value by lever- aging this certification and brand. Source: J. E. Austin Associates, Inc. Source: Mike Ducker, J. E. Austin Associates, Inc. 118 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Box 4.13 Ecuadorian Cacao—Improving Quality at the Producer Level to Achieve Higher Market Prices In 2003, the government of Ecuador (GoE) launched Figure 1: Ecuadorian Cacao Value Chain an alternative development project focused on the bor- der region between Ecuador and Colombia, which is a locus for cultivation of illicit crops. An assessment of Buyers, chocolate USA Importers the income and employment potential of other current producers crops grown in the area pointed to five potential crops, including cacao. There are two main types of cacao: forastero and criollo. Forastero cacao accounts for approximately 95 percent, most of the remaining 5 percent is criollo.a Packers/exporters Exporters Criollo cacao has traditionally been produced in Latin America, while forastero cacao has been grown in Ecuador Africa and Asia. Cacao is graded based on several crite- Collection centers ria, including mold content, level of fermentation, and percentage of cocoa butter, all of which affect the flavor profile of the chocolate produced. Criollo cacao is gen- Farm Smallholder cacao erally more flavorful, but it does not necessarily always producers command a premium. Cacao buyers and processors pay more attention to the local characteristics that cre- Source: J. E. Austin Associates, Inc. ate the particular flavor profile of the product, rather than to the type of cacao grown.b Prices and Production of Cacao Farmer Field Ecuador mainly grows criollo cacao, and its flavor Schools, supported by USAID, helped educate farmers profile is particularly well suited to producing fine dark to better cultivate and protect their trees, add value to chocolate, a market segment that has grown exponen- their product by differentiating between types of beans, tially during recent years.b However, quality control and to ferment and dry the beans. Farmers who provide problems and poor handling practices destroyed the value-added services receive a higher price for their conductivity of fine flavor and aroma in about 50 per- beans; those who sell beans after fermenting and drying cent of the harvest in Ecuador. This meant that even them can receive US$60 per quintal, versus US$28–30 though Ecuador was growing the criollo variety, 50 percent of the crop could not be sold at a higher price or was unfit for export. Cacao buyers typically do not buy directly from Figure b: Prices and Production of Cacao, 1971–72 to producers (see figure 1), preferring to work through 2004–05 collection centers. This is due to the fact that cacao 4,500 4,500 is not a plantation crop, and there is largely an 4,000 4,000 3,500 3,500 absence of associations that can sell cacao in suffi- Tons (1000) 3,000 3,000 cient quantity. 2,500 2,500 $/t A value chain analysis revealed several constraints in 2,000 2,000 the cacao sector, including poor production technol- 1,500 1,500 ogy, mixing different types of beans without quality 1,000 1,000 500 500 differentiation, and selling wet and unfermented 0 0 cacao.c Fermentation changes cacao’s flavor profile— 19 72 19 75 19 78 19 81 19 84 19 7 19 90 19 93 19 96 20 9 20 2 –5 –8 –9 – 1– – – – – – – – 01 04 sometimes positively and sometimes not. Ecuador’s 74 77 80 83 86 89 92 95 98 7 19 criollo cacao naturally possesses a desirable flavor pro- Prices ($/t) Gross crop (in thousand tons) file for higher-end dark chocolate products, so produc- ers sought to address quality problems as well as reduce Source: UNCTAD, based on the data from the International Cocoa postharvest losses. Organization, quarterly bulletin of cocoa statistics. (Box continues on the following page.) TOOL 9: APPLYING STANDARDS AND CERTIFICATIONS TO ACHIEVE GREATER QUALITY 119 Box 4.13 Ecuador Cacao—Improving Quality at the Producer Level to Achieve Higher Market Prices (continued) per quintal if unprocessed.d Cacao beans are sold on the market price. However, because of its desirable flavor New York and London exchanges, where a baseline mar- profile, Ecuadorian cacao currently commands a pre- ket price is offered; then, premiums or discounts are mium of US$800–US$1,200 per ton.b Through the applied depending on the country of origin, the quality Farmer Field Schools, farmers learned how to add of the shipments, and other factors. Between 50 percent more value to their product by maintaining bean qual- and 75 percent of Ecuadorian production is currently of ity, fermenting, and drying the beans before taking sufficient quality to be sold at a higher price. them to the collection centers. These actions have led to As described in box 4.10, Ecuador has historically the production of higher quality cacao and, in turn, to received a US$20–US$100 premium over the baseline the farmers who receive a higher price for their cacao. Prices of Various Countries’ Cacao Products Premium over market price, Country May 4, 2007 (per ton, US$) Venezuela (fermented) 2,000 Java (fermented) 2,000 Ecuador (partially fermented) 800–1,200 Ivory Coast (fermented) 320 Dominican Republic (unfermented) 280 Ghana (fermented) 250 Note: This is the same table that appears in box 4.10. Figure 3: World Production of Cacao Beans 4,000 3,500 3,000 In thousands of tons 2,500 2,000 1,500 1,000 500 0 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 99 9 20 0 20 1 20 2 20 3 20 4 20 5 –6 19 –9 00 – – – – – – – – – – – – – 00 01 02 03 04 05 90 91 92 93 94 95 96 97 98 –2 19 Côte d´Ivoire Ghana Indonesia Nigeria Brazil Cameroon Ecuador Malaysia Others Source: Lisa Carse, J. E. Austin Associates, Inc.; UNCTAD, based on the data from the International Cocoa Organization, quarterly bulletin of cocoa statistics. a http://www.unctad.org/infocomm/anglais/cocoa/quality.htm. b Author interview with Karl Walk, purchaser for Blommer Chocolate, 2007. c The process of drying cacao reduces the likelihood of developing mold; currently, the U.S. Department of Agriculture rejects shipments of cacao that exceed 4 percent mold content. d Technical Evaluation of the Ecuador Northern Border Income and Employment Project Implemented by ARD, Inc. 120 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE A STEP-BY-STEP SUMMARY OF TOOL 9: and costs that will be necessary. Contact certification APPLYING STANDARDS AND CERTIFICATIONS bodies to discuss the time and resources necessary to TO ACHIEVE GREATER QUALITY obtain certification. ■ Identify the process, pricing, training, and other require- ■ Analyze market data for price premiums associated ments to meet standards or certifications. with individual standards and quality certifications. In ■ Assess the firm level and value chain capacity for qual- addition to quantifying opportunities within existing ity control. Also assess the quality and consistency of markets, look at the potential for certifications to open services provided by other value chain actors needed to up new niche markets. Identify the market risks of not obtain and maintain certification. Assess value chain meeting standards or certifications. linkages and relationships to identify key elements that ■ Contact other businesses that have obtained certifica- need coordination, and the actors that will ensure tion, particularly lead firms, to discuss the economics of coordination. value added relative to traditional production. ■ Investigate public sector support and services for pro- ■ Identify and understand the technical requirements to ducers and enterprises seeking certification or value- meet standards or certification, and evaluate the actions added production. TOOL 9: APPLYING STANDARDS AND CERTIFICATIONS TO ACHIEVE GREATER QUALITY 121 C A S E S T U DY 1 1 Ugandan Nile Perch Quality Management and Certification Michael Ducker and Martin Webber J. E. Austin Associates, Inc. POINTS TO CONSIDER when Spanish and Italian authorities found contamination in Nile perch and issued bilateral bans. These steps forced his case study looks at certification processes that T help ensure safety and quality for the final con- sumers of Nile perch. The case considers the Nile perch export value chain in Uganda, which extends from Lake the European Commission to send several missions to Uganda to test the product and the processes within the value chain. Some of the problems that were identified from these missions included: Victoria fishermen to dinner tables in Europe and around the world, and how quality and safety issues impact the value ■ Fish-processing plants failed to meet conditions laid out chain. The Ugandan value chain successfully improved its in EU regulations quality management when faced with potentially losing its ■ The Uganda National Bureau of Standards (UNBS) issued sizable European market. This case also highlights the value health certificates incorrectly that different certifications have within the value chain. ■ Lack of microbiological tests to support government health certificates ■ Lack of routine government monitoring for presence of BACKGROUND chemicals in fish and water Opportunistic growth in the 1990s led to an undisciplined ■ Lack of sanitary infrastructure and fencing at landing value chain (figure 4.45) that caused sector quality issues. sites In the early 1990s, Kenya, and then Uganda, started ■ Fish handling was not hygienic throughout the chain exporting Nile perch to Europe. Fish became a major Ugandan export during the mid-1990s. Despite the prof- In response to the missions’ findings, two Ugandan pro- itability of these initial years, the Ugandan fish industry cessing plants were prohibited from exporting Nile perch to failed to invest in quality control measures central to the the EU. value chain’s long term strength. In 1999, the Ugandan press reported instances of fish poi- From 1997 to 2000, several health incidents in the Euro- soning in Lake Victoria. The UNBS notified the EU that it pean Union and in Uganda caused the EU to place numer- could not guarantee the safety of fish exports, and the EU ous bans and restrictions on Nile perch imports (and other then banned all fish imports from Lake Victoria. The EU fish) from Uganda, as well as on other countries that import bans had wide-ranging effects in Uganda; in addition export fish from Lake Victoria. (See box on the Nile Perch to lower fish exports and export revenue, fishing communi- Certification Timeline for details.) Problems first surfaced ties suffered tremendous damage, as did fish processors and 122 Nile Perch Certification Timeline February 1997: Spain and Italy claim that their authori- April 1999: EU meets in Brussels with representatives ties have detected high levels of bacterial contamination, of authorities from Kenya, Tanzania, and Uganda to and impose bilateral ban on fishery product imports. discuss test results; the EU announces a ban on fresh and frozen fish from the three countries. March 1997: EU inspection confirms “serious micro- biological contamination.” August 1999: EU mission assesses resources and capabilities of competent authority in Uganda in April 1997: EU requires mandatory tests on imports of relation to control of pesticide residues; mission pro- Nile perch from three East African countries. vides 10 recommendations; UNBS responds to EU December 1997–June 1998: Following an outbreak of report but does not provide all requested documen- cholera in East Africa, the EU bans fresh fish imports and tation or details. A private laboratory is established in imposes mandatory tests on frozen fish from East Africa. Kampala, accredited to perform pesticide-monitor- ing tests; industry adopts the “voluntary code of November–December 1998: EC sends a Food and Vet- practice” for quality control; Department of Fisheries erinary Office mission to Uganda to assess compliance (DFR) revises inspection manual. Transfer of compe- in production conditions; two processing plants are tent authority from UNBS to DFR. found not compliant. The two noncompliant plants are removed from the list of approved establishments. In July 2000: Ban lifted when the EU accepts guarantees the same month, the Ugandan press reports instances that Uganda has put in required procedures for safety of fish poisoning in Lake Victoria. of exports; country qualifies for temporary certifica- tion in List II (see About EU Fish Import Lists box). March 1999: Based on press reports, a number of dis- trict authorities ban fish sales. UNBS notifies the EU May 2001: Uganda goes back to List I (see About that it cannot guarantee the safety of fish exports. EU Fish Import Lists box). Source: DISS 2005. related service industries (packaging, transport, and others). managing Uganda’s certification process. Since Europe As a result of the bans, three plants closed down completely. was the fish’s major destination, the government and The remaining plants worked at 20 percent capacity, while industry wanted its certification process to match the 60–70 percent of employees were laid off. EurepGAP process. INTERVENTION CREATING A EUREPGAP CERTIFICATION PROCESS IN UGANDA The EU bans shut off the supply of a product that was much in demand in the EU marketplace, and the market The GoU streamlined its fish regulatory and inspection had few substitutes. Pressures on both the demand and systems, with the Department of Fisheries (DFR) formally supply sides of the market therefore provided major becoming the sole competent authority for fish safety incentives for actors throughout the value chain to face issues. DFR would be responsible for certifying fish the problem. The members of the Uganda Fish Processors exports as EurepGAP compliant, and it needed to achieve and Exporters Association (UFPEA), European fish HACCP accreditation to regulate the value chain to importers, the government of Uganda (GoU), and the EU EurepGAP standards. worked together and took action to deal with the issues. The DFR completely revised its guidelines as well as its The GoU and UFPEA had several working group meet- monitoring and inspection systems. A manual of standard ings to design an action plan. Their major initiative was operating procedures was established to guide inspections, to restructure the government agencies responsible for and training programs were carried out for inspectors. CASE STUDY 11: UGANDAN NILE PERCH QUALITY MANAGEMENT AND CERTIFICATION 123 Figure 4.45 Ugandan Nile Perch Value Chain About EU Fish Import Lists In 1998, the EU started segregating fish-exporting countries into three lists. List I countries could export fishery products to the EU from any estab- European markets lishment approved by the competent authority. List II countries were authorized to export on the basis of a specific list of approved establishments. List III countries were deemed unable to provide guarantees of appropriate inspection and monitor- ing. In order to export from these countries, addi- tional documentation and checks were needed and only individual establishments approved by the EU could export. Fish processors/exporters 600 total landing sites in Uganda, but only 14 are approved for export. As a result, different monitoring procedures were put in place at the local level, including the formation of committees at landing sites and Beach Management Units (BMUs) that started registering boats and gear. This approach follows what, in fisheries, is known as comanage- ment—power-sharing between state and local communities Landing sites and a shift of responsibilities from the former to the latter. In this framework, BMUs are supposed to coordinate with local governments via the formation of Lake Management Organizations (Ponte 2005). As of 2004, BMU-managed landing sites were not authorized to export to Europe, so many processors, agents, and traders transfer fish at one of the 14 approved landing sites. Fishermen THE IMPORTANT ROLE OF PESTICIDE LABORATORIES IN THE CERTIFICATION PROCESS Source: J. E. Austin Associates, Inc. The EurepGAP certification process requires biochemical tests to check for pesticide residue. No laboratory in Uganda In 2008, DFR’s central offices were staffed with 17 inspec- could perform the pesticide residue test, so samples were tors who monitor the overall system and operations at pro- being shipped to Belgium, where a Belgian firm, Chemipher cessing plants. Another 20 or so inspectors operate at the (U) Ltd., did the tests. Chemipher recognized that there was 14 landing sites that are approved as sources of fish for sustained business for them in Uganda, so they opened a export. These inspectors issue local fish-health inspection laboratory there. Having a local lab helped streamline the certificates that are required to move fish from a landing site certification process and reduce costs. to a processing factory. These certificates contain information on both the supplier and buyer of fish at the landing site and ISO 9001 CERTIFICATION on the fish’s origin. However, DFR did not have the capacity to handle quality control with the fishermen or at many of Many of the fish processors and exporters wanted to add the landing sites away from major urban centers. There are another layer of quality standards to their production, mostly 124 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE to demonstrate (and to help the market perceive) that they ■ Formulation of a new fisheries policy were serious about quality. With the assistance of a USAID- ■ Improved monitoring and inspection systems supported financed project1 that trained the fish processors in ISO 9001 by inspection manuals, standard operating procedures, (a subset of ISO 9000, see figure 4.46) processes, the proces- and the training of inspectors sors were then certified by an outside consulting firm. ■ Regional efforts for the harmonization of handling pro- cedures in the three countries sharing Lake Victoria ■ Upgrading of a (small) number of landing sites and INDUSTRY-LEVEL CERTIFICATIONS plans for upgrading a substantial number of others The association of fish processors, UFPEA, has adopted a ■ Upgrading of processing plants’ procedures and layouts voluntary code of Good Manufacturing Practices (GMPs). ■ Opening up of the U.S. market, which also requires The fish processors implemented HACCP and good quality HACCP compliance management systems (see figure 4.47) with support from ■ Installation of two local laboratories (Chemipher and EU funding, and 11 processors were upgraded to handle fish UNBS) and general improvement of service provision to for export (see figure 4.48). The voluntary GMPs were mon- the industry itored by UFPEA and proved helpful in improving proces- ■ Increased number of processing plants and improved sors’ practices. export performance (see figure 4.49) THE RESULTS: A MORE COMPETITIVE INDUSTRY LESSONS LEARNED THAN ITS NEIGHBORS—AND ONE THAT HAS ■ There was and still is a strong incentive for the value GAINED A REPUTATION FOR GOOD QUALITY chain and government to work together to ensure a qual- In short, compliance with EU standards (including HACCP ity product. The potential total losses of poor quality procedures) by the Ugandan fish industry in reaction to the management were apparent to all parties. import bans resulted in: ■ Paradoxically, banning the supply of all Nile perch from the Lake Victoria region created incentives for European ■ Streamlined regulation under a single, strong, and com- fish importers and the EU itself to support Uganda petent authority (DFR) because there were few replacement sources. Figure 4.46 ISO 9000 Certification Process Testing and certifying Movement of product Fish logistics Fishermen Landing sites (transport and Fish processors/ exporters European markets middlemen) Individual Ugandan fish processors and exporters ISO certification board Source: J. E. Austin Associates, Inc., 2007. CASE STUDY 11: UGANDAN NILE PERCH QUALITY MANAGEMENT AND CERTIFICATION 125 Figure 4.47 Good Manufacturing Practice and HACCP Testing and certifying Movement of product Fish logistics Fishermen Landing sites (transport and Fish processors/ middlemen) exporters European markets Ugandan Fish Processors and Individual Exporters fish Association processors good agricultural practices HACCP Source: Stefano Ponte, “Bans, Tests, and Alchemy: Food Safety Standards and the Ugandan Fish Export Industry.” Danish Institute for International Studies 2005. Figure 4.48 HACCP Implementation Total estimated cumulative expenditure to Length reach HACCP of process compliance, HAACP HAACP Number of achieving capital cost Company complaint compliance of plants compliance (thousands Extra recurrent code begins begins upgradeda (months) of US$) costs (US$/year)b A Y 1998 2 12 39,600 B Y 2001 1 12 C Y 1997 1 48 1,927 65,800 D Y 1997 1 12 1,000 E Y 2000 1 24 45,000 F Y 1995 1 36 72,000 G Y 1998 2 36 1,000 70,000 H Y 1997 1 12 1,500 80,000 I Y 2000 1 12 200 43,000 Average 11 23 1,125 59,343 Source: Stefano Ponte, “Bans, Tests, and Alchemy: Food Safety Standards and the Ugandan Fish Export Industry.” Danish Institute for International Studies 2005. a Plants built after 2001 (already to HACCP specifications) are not included here. b Estimate includes product testing, extra quality management labor, materials, and annual training. ■ Recognition of the importance of quality management, ■ The fish processors and exporters were natural actors to and of building a secure reputation for quality, led to take the lead in determining and disseminating informa- actions beyond the minimum needed, such as imple- tion about the standards required within the value chain. menting ISO 9001 and GMPs. They were responsible for a large part of the value-added 126 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.49 Uganda’s Nile Perch Exports 25,000 120,000 20,000 100,000 Euros (thousands) 80,000 15,000 Tons 60,000 10,000 40,000 5,000 20,000 0 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year Tons Value Source : EUROSTAT data, calculations by J. E. Austin Associates, Inc. process and were the portion of the value chain most responsibility to ensure that they receive fish that meets knowledgeable about export markets’ requirements. They the EU market’s quality requirements. could serve as the “control point” for the rest of the value ■ Fishermen and fish traders also understand and chain. The government had reason to listen to them because remember that markets can be “turned off ” and, conse- they employed a large number of people and recognizably quently, have incentives to supply fish that meets qual- controlled the market linkage that tens of thousands of ity requirements. people working within the value chain helped to supply. ■ There is multilayer monitoring at the fish processing and export stages, but monitoring is much weaker at the NOTE landing sites and with the fishermen. Currently, local 1. Under the SPEED project, this and other assistance to governments do not have the capacity to do much mon- the fish industry was provided by J. E. Austin Associates, itoring, so the exporters and processors have most of the Inc., and the prime contractor, Chemonics Inc. CASE STUDY 11: UGANDAN NILE PERCH QUALITY MANAGEMENT AND CERTIFICATION 127 TO O L 1 0 Identifying Needed Support Services for the Value Chain rofitable value chains are supported by services that information and product development support, business P allow the chain to grow, be more efficient, and enhance its competitiveness. The overall objective is to improve the depth and breadth of services currently being management and consulting, transportation and logistics, quality assurance (including certifications), skills, extensions and training, veterinary services, and credit and other finan- provided to the value chain, enabling them to be commer- cial services. Box 4.14 describes an example of an enter- cially sustainable, and to help those services emerge where prise-linked extension services model. Box 4.15 describes they are not being provided. The availability of new and bet- the actors of a sector organization. ter services should enhance the profitability of the whole It is absolutely in the interest of businesses, entrepre- value chain. Commercially sustainable services will typically neurs, and associations to ensure provision and access to involve specialization on the part of the service deliverer; services that would enhance their value chain’s profitability. thus, there are important linkages with the deepening of the In many cases, demand for services can also offer opportu- value chain, as discussed in Tool 4, Upgrading and Deepen- nities for small and medium enterprises to enter the value ing the Value Chain. chain market as suppliers. The range of services that can add value and strength to In the specific case of financial services, relationships a value chain is vast. Examples include input supply, market between value chain actors can also enable financial flows by Box 4.14 Ugandan Cotton—Enterprise-Linked Extension Services Model Uganda’s cotton production dramatically decreased The Enterprise-Linked Extension Model for the cot- during the 1970s, and the sector has not yet fully recov- ton industry begins with a ginnery that is performing at ered. Supported by USAID,a the government of Uganda undercapacity, where there is nevertheless market (GoU) sought to increase Uganda’s cotton production demand for cotton. For example, the Nykatonzi gin- and revenue by encouraging small farmers to grow nery has a productive capacity of 20,000 bales per year, more and higher quality cotton. Greater production yet in the early 2000s, it was only processing about would enable ginneries to operate closer to full capac- 10,000 bales annually.b ity. By involving private business in serving the needs of The farmers already had supplier relationships with the farmers at the input and financing stages, the gin- the ginneries; however, the industry and the GoU rec- neries were able to encourage farmers to increase the ognized that these farmers needed extension services if supply of cotton available to the ginneries. This was they were going to produce cotton in sufficient quanti- accomplished through a model that has been success- ties for the ginneries to operate efficiently. fully replicated through eight lead ginners representing Inputs and service needs were identified by analyz- the interests of supporting ginners in eight designated ing the underperformance of the sector compared with cotton production zones; the model has also been historic levels, including value chain and GAP assess- extended to other sectors. ments. Farmers did not have access to needed inputs, (Box continues on the following page.) 129 Box 4.14 Ugandan Cotton—Enterprise-Linked Extension Services Model (continued) and they lacked the technical knowledge to increase farmers who act as extension agents. Lead farmers their yields. The identified needs included: pass on cotton-production technologies to collabo- rating farmers for adoption through trainings, field ■ Training and extension days, and hands-on exercises. Technical advice is pro- ■ Technical advice vided by the ginneries and USAID/APEP. ■ Access to inputs The benefits to the ginneries included increased and ■ Financing of inputs more reliable cotton supply, greater operational effi- ■ A guaranteed buyer ciency, and greater loyalty among farmers to the gin- nery. The benefits to the farmer included increased Since output could be boosted through the use of production, productivity, and profits; greater knowl- these inputs, the ginneries worked with stockists to edge of the market; sophisticated production tech- provide these inputs to the farmers. The purchase niques; and a guaranteed buyer for their supply. The agreements between the ginnery and the farmer pro- model has successfully increased cotton production vided a risk-mitigation mechanism for the stockists’ and revenues in Uganda. More ginneries are in opera- investment. The farmers’ need to purchase these inputs tion, and farmers have been able to increase their yields led to the development of financial services programs threefold to around 600 kg/hectare. As a best practices for the farmers. The ginneries worked with financial benchmark, Australian yields in 2005 were 2,080 service providers to give the farmers access to the finan- kg/hectare. cial resources they needed. All of these steps were able to take place because the farmers had guaranteed buy- Results ers in the ginneries through purchase agreements. The model successfully increased cotton production For extension services, ginneries were encouraged and revenues in Uganda. It has now also been repli- to communicate their needs and engage directly with cated in several sectors, including maize and sunflow- farmers. The ginners, with support from the USAID/ ers. In the maize sector, corporate linkages have been Agricultural Productivity Enhancement Program strengthened, farmers have been economically (APEP), set up demonstration plots and trained farm- empowered, and support services have been created. ers in cotton production techniques, including the use Production and sales volume of maize remain high, of fertilizers and pesticides; farmers were trained by and quality has improved. In the sunflower sector, an lead farmers, collaborating farmers, and site coordi- additional US$6 million dollars in farm income has nators. An employee of the ginnery, called a site coor- been generated in three years, with 35,000 farmers dinator, oversees the plots, coordinates field trips, joining a dedicated production system.c provides information to farmers, and supervises lead Sources: Lisa Carse and Martin Webber, J. E. Austin Associates, Inc.; Uganda Bureau of Statistics. a Initially the SPEED (Support for Private Enterprise Expansion and Development) Project, and subsequently APEP. Both projects were implemented by Chemonics, Inc. b Ralph Chaffee, April 2, 2002, Enterprise-Linked Extension Services in Uganda; SPEED Project. c Mark Wood, USAID/APEP Project, 27 March, 2007. making the potential client more attractive to traditional approaches are certainly preferable. Additionally, services financial institutions. The benefits of these buyer-supplier may be delivered as part of another commercial transaction, value chain relationships—specifically, a more secure mar- such as in the case of embedded services. For example, a ket and improved skills—make potential borrowers (suppli- processor extends credit in the form of “virtual” working ers) more creditworthy to financial institutions. capital to a small farmer when the processor provides seeds, Services can be delivered through many appropriate fertilizer, or pesticides as part of an outgrower scheme.1 In mechanisms. Services along the value chain can be provided this context, for example, formal financial institutions can by both public and private entities; commercially sustainable enter the equation and make credit flows available, perhaps 130 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Box 4.15 Sri Lankan Cinnamon World trade in spices, their related products, and herbal Members of the spice industry cluster formed the health care products are estimated to be US$200 billion Sri Lankan Spice Council (TSC) in 2001 to establish Sri per year with an annual growth rate of over 5 percent. Lanka as one of the top five branded, value-added In Sri Lanka, growing and processing spices provides spices and allied products marketers in the world. TSC cash income to over 400,000 smallholders and many has worked hard to differentiate its Ceylon cinnamon processors. Sri Lanka commands over 80 percent of the from lower-quality substitutes. One problem that TSC world’s true cinnamon production and exports close addressed was that Ceylon cinnamon and Cassia are to 13,000 mt per year in the form of quills in differ- classified under the same Harmonized System (HS) ent grades, mainly in bulk form, at a value of US$50 code of the World Customs Organization (WCO). In million. collaboration with the U.S. Department of Commerce Cinnamon zeylanicum, the source of the spice, is a and Sri Lanka Customs, and after deliberations with the small, unassuming evergreen that is native to Sri WCO, TSC succeeded in obtaining a separate subhead- Lanka’s west and southwest. Cinnamon has been ing for “Ceylon cinnamon” in the HS code. popular for ages, imported to Egypt as early as 2000 TSC has carried out several actions to improve BC. Demand for cinnamon helped drive the Euro- product quality and market access. TSC carried out a pean “age of discovery” beginning with Vasco da market analysis to locate the best sales prospects for Gama’s first trip to Asia in 1497. There is “true” Ceylon whole spices and to identify the kind of bottling and cinnamon, and there are other spices which are incor- packaging that is required for optimal value creation in rectly referred to as cinnamon, such as Cassia (C. aro- the United States. TSC has also worked with local spice maticum), Indonesian cinnamon (C. burmannii), and smallholders and suppliers to improve postharvest others (e.g. C. loureirii). The price differential between handling and management of spices in order to true cinnamon and Cassia is 4:1. While European and increase the quality of spices that are delivered to Sri Latin American markets distinguish the varieties, the Lankan exporters. U.S. market does not. Thus, in the U.S., low-quality cas- sia sells for a fraction of the price of the Sri Lankan product. Figure 2: Cinnamon Exports’ Value Chain Figure 1: Value of Sri Lankan Cinnamon Exports Retail market 50,000 Manufacturer/ 48,000 food service company Value (US$ thousands) 46,000 Specialty Processor grinder 44,000 Import agent/ 42,000 broker Value Chain The spice Exporters/ 40,000 intervention council traders 38,000 • international classification 1999 2000 2001 2002 2003 2004 • market analysis • training center Smallholder • branding producers Medium and large Source: Michael Gorman, J. E. Austin Associates, Inc., and 70% of production producers FAOSTAT data. (400,000) 30% of production Source: J. E. Austin Associates, Inc. TOOL 10: IDENTIFYING NEEDED SUPPORT SERVICES FOR THE VALUE CHAIN 131 Figure 4.50 Mapping Actual and Potential Business and Financial Services Export markets Large-scale processors Intermediate Domestic mass Whole- traders Primary markets sale producers Final product Institutional traders Small-scale customers processors Niche markets Local markets Facilitation Upgrading Market Financial of linkages standards information services Product Producer Input diversification coordination supplies Source: Albu and Griffith (2005), “Mapping the Market: A Framework for Rural Enterprise Development Policy and Practice,” at www.practicalaction. org/?id=mapping_the_market. even extending the offer to other financial services (savings, Within development projects, the approach will often transfers, and longer-term loans). This would extend the involve one or more pilot initiatives carried out in close depth, breadth, and sustainability of the services that were collaboration with value chain participants, providing ade- previously provided (mainly short-term working capital). quate support to encourage emergence of the market for To implement this tool, it is useful to map the particular service. In most cases, services that are provided on a mar- services that are currently being provided (their sustainabil- ket basis will be more sustainable, as well as those provided ity, quality, and location within the chain), as well as those ser- by specialized institutions. As many of the services are from vices that are potentially viable that can improve the chain’s sound, replicable businesses, they can be good examples of performance. Figure 4.50 provides an example of what the the replicable business models discussed in tool 5. resulting map could look like. The mapping is, of course, related to Tool 2, Designing A STEP-BY-STEP SUMMARY OF TOOL 10: Informed Strategies across the Value Chain, as well as to Tool IDENTIFYING NEEDED SUPPORT SERVICES FOR 3, Conducting Benchmarking and Gap Assessments of Value THE VALUE CHAIN Chains. Indeed, sound value chain analysis involves mapping the actors and, by benchmarking against competitors, identi- ■ Along the value chain, map services that are currently fying needed services that could enhance the value chain. The being provided as well as those services that are poten- focus here, though, is in implementing the results of analyti- tially viable and can lead to improvements in the chain’s cal methods, and, given its importance and potential, this performance. Benchmarking and analyzing gaps against implementation is treated as a separate tool in this section. other value chains are particularly useful tools for identi- Once the map of current and potential services is com- fying potential services not being provided. plete, interventions can be developed to introduce a service ■ Include in the map indications of the services’ sustain- for which there is potential demand within the chain, as well ability, quality, and location within the chain. as to improve the quantity, quality, and sustainability of ■ Conduct feasibility studies and develop business plans to those currently being offered. introduce services for which there is potential demand Entrepreneurs, businesses, and practitioners will need to within the chain and to improve the quantity, quality, carry out feasibility analyses and develop business plans. and sustainability of those currently being offered. In 132 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE most cases, services that are provided on a market basis the smallholder production process, providing a large will be more sustainable, as well as those provided by number of services, such as input credits, tillage, spraying, specialized institutions. and harvesting. The smallholder provides land and labor in return for this comprehensive extension/input package. The high-value horticulture export sector is currently the NOTE focus of considerable development of outgrower schemes 1. The term “outgrower scheme” is often reserved for (for example, Hortico in Zimbabwe and Homegrown schemes where agribusiness has considerable control over in Kenya). TOOL 10: IDENTIFYING NEEDED SUPPORT SERVICES FOR THE VALUE CHAIN 133 C A S E S T U DY 1 2 Identifying Needed Support Services for the Value Chain— Zambian Cotton Carlton Jones and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION advice on growing techniques. LINTCO was the principle buyer of seed cotton, the sole provider of extension services, ommercially viable extension services can be vital C to a value chain’s health. In the case of Zambia’s cotton industry, support services were provided in a variable market that featured too many independent and the sole distributor of inputs on credit. Production fluc- tuated during this period but generally trended downward (figure 4.51). By the early 1990s, LINTCO was operating at a loss, having accumulated substantial unpaid debts. cotton traders and service providers, ultimately resulting in These trends began to change in 1994. Zambia’s president, significant loan defaults, decreases in production, and the Frederick Chiluba, implemented a wide-ranging restructur- failure of many service providers. This case examines how a ing of Zambia’s economy, including privatizing the cotton large private firm identified and altered the way it provided industry through the Zambia Privatization Agency (ZPA). extension services to small growers, helping to stabilize and ZPA facilitated the sale of LINTCO to Lonrho Cotton and reinvigorate Zambia’s cotton value chain. Clark Cotton, two private ginners and exporters. The two firms operated in different regions of the country, and both POINTS TO CONSIDER worked through direct outgrower schemes that offered inputs When reviewing this case, consider the following questions: and extension services on credit to farmers. When farmers sold their cotton to ginners, the cost of the inputs and services ■ What led to the need to provide support services? they received before harvest was deducted from their selling ■ When is it appropriate to consider implementing differ- price. Because both ginners operated in otherwise under- ent models? served markets, their practice of providing seed, other inputs, ■ What role does the private sector play in implementation? and services on credit involved minimal risk. Repayment rates averaged 86 percent. BACKGROUND The expansion of cotton production attracted four new From the late 1970s until 1994, Zambia’s cotton purchasing, ginners and delinters to the market.1 National cotton pro- processing, and marketing was controlled by the state-owned duction increased through 1997. Lint Company of Zambia (LINTCO). During that period, To serve the increased demand for cotton, some ginners LINTCO purchased seed cotton from an estimated 140,000 contracted with independent outgrower agents to recruit more small farmers at a fixed price and extended services such as farmers to produce and source cotton to them. These out- the provision of certified seeds, pesticides, sprayers, bags, and grower agents received inputs from the ginners, distributed 134 Figure 4.51 Zambian Cotton Exports, 1990–94 Figure 4.52 Zambia's Cotton Value Chain 3,500 3,500 Garment 3,000 3,000 Dryers Manufacturers 2,500 2,500 Additional Processing Spinners Metric Tons US$ (1,000) 2,000 2,000 Exporters Exporters 1,500 1,500 1,000 1,000 Initial Processing Cotton 500 500 Ginners Ginners extend services 0 0 to farmers on credit in 1990 1991 1992 1993 1994 outgrower schemes Year Quantity (mt) Value (US$ thousands) Farm Source: FAOSTAT data. Smallholder Cottonseed Producers them to their farm networks on credit, and when harvest Source: J. E. Austin Associates, Inc. time came, sold the cotton gathered from the farmers back to their respective ginners. In the same way that the increased cotton production attracted new ginners, the apparent success per year shortfall. To lower the likelihood of their own of the outgrower agents attracted additional independent default, the remaining ginners stopped making embedded agents to the market. These agents purchased inputs from service contracts with growers. In 2000, with no other other sources and offered them to any farmer on credit. In means to finance production, farmer output decreased to return, that farmer would sell cotton back to the independ- 50,000 mt, with just 2,500 mt exported (both less than half ent agent, who would sell to any ginner willing to pay. of 1998 levels). Many of the outgrower agents that con- This unchecked proliferation of ginners and independ- tributed to the repayment crisis closed down, and the entire ent agents led to many problems. By 1998, ginning capacity value chain had an average credit default rate of 53 percent. exceeded production by 50,000 tons per year (Tschirley, Amaka Holdings, a ginning company, went out of business, Zulu, and Shaffer 2004). With too many agents competing leaving the remaining ginners to retool in an effort to sur- for a limited number of farmers, sourcing was chaotic. This vive the market crash. competition led to growing distrust and a lack of trans- parency in price setting, with agents and ginners vying to DUNAVANT’S DISTRIBUTOR MODEL outbid each other for cotton. Some farmers, despite having agreed to outgrower contracts with specific ginners, sold After taking over Lonrho’s operations, Dunavant, a privately their cotton to any agent willing to pay more than the con- held U.S.-based cotton company, further implemented and tract price. Some agents purposefully sought to outbid out- perfected Lonrho’s service and extension model. The new grower contracts to acquire cotton. The entire value chain approach impacted Zambia’s cotton industry in two ways. became volatile as ginners and outgrowers experienced First, the service-extension model showed that outgrower increased incidences of defaulted loans. Some agents com- schemes could work with little risk of loan defaults if the pensated for large portfolios of defaulted loans by marking schemes were properly designed and managed. Second, up the inputs they sold to the remaining farmers who had Dunavant used its distributor model to significantly expand remained loyal. This made it even more difficult for those its production network (see figure 4.54). remaining farmers to make a profit and resulted in even Dunavant’s distributor model was very different from pre- higher rates of loan defaults. vious schemes. In the past, Lonrho relied on a large number By 1999, the entire Zambian cotton value chain was in a of direct company employees, including almost 800 extension crisis (figures 4.52 and 4.53). At this time, Lonrho, while agents, to carry out the required activities. Overhead in the negotiating its own sale to Dunavant, began laying the previous model was significant, and this burden was greatly groundwork for a new service and extension model. At the exacerbated when borrowers defaulted. In the new distributor time of its sale, Lonrho was projected to post a US$2 million model, Dunavant used almost no direct-hire employees to CASE STUDY 12: IDENTIFYING NEEDED SUPPORT SERVICES FOR THE VALUE CHAIN—ZAMBIAN COTTON 135 Figure 4.53 Zambian Competition for Cottonseed Initial processing Cotton ginners Contract Outgrower schemes break Independent Traders agents agents down because of increased competition and independent agents outbidding ginners Farm Smallholder cottonseed producers Source: J. E. Austin Associates, Inc. Figure 4.54 The Dunavant Distributor Model Garment manufacturers Additional processors Dyers Spinners Exporters Exporters Dunavant Initial processing Dunavant distributor Traders Distributors agents provide extension services Farm Smallholder cottonseed producers Source: J. E. Austin Associates, Inc. deliver services. Instead, “distributors” were mobilized via for- 0.85 × 0.075 + 1.0 × 0.125 = 0.0215)2 in commissions based mal written contracts to identify farmers. The distributors on their efforts. To maintain performance, Dunavant would acquire the inputs from Dunavant on credit, deliver dropped any distributor who could not bring in a minimum them along with technical advice to the farmers, and ensure of 50 percent of their credit portfolio. By 2003, the company that farmers sold their cotton back to Dunavant in order to raised this minimum credit recovery rate to 60 percent. In recover the input credit. In this scheme, the distributor’s com- some of the better-performing regions, the cut-off rate went pensation was directly tied to the amount of credit recovered. to levels as high as 80 percent. Paid on a graduating scale, the more credit a distributor Another unique aspect of Dunavant’s distributor model recovered, the more the distributor earned. was the “work-in, live-in” principle. Distributors were Table 4.17 illustrates the distributor compensation plan. required to farm cotton themselves and live in the same area Distributors could earn up to 21.5 percent (0.65 × 0.05 + as their farmer network. 136 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Table 4.17 Dunavant Compensation Plan grew to 80 percent—in the second year, to 88 percent and, after three years, to 93 percent. Recovery percentage Compensation rate 65–84 5 percent of the total credit CONCLUSIONS: GROWTH OF A SECTOR 85–99 Additional 7.5 percent of the total credit Dunavant’s successful rollout of its distributor model of 100 Additional 12.5 percent of the total credit providing services to farmers encouraged other ginners to Source: Dunavant, 2006. follow with similar arrangements. Not all ginners replicated the model exactly, and most did not place as rigorous an emphasis on training and distributor selection as Dunavant. Dunavant showed its commitment to the success of the Still others, such as Zambia’s other large ginner, Clark Cot- program by offering two types of training: credit manage- ton (Clark’s southern African holdings were purchased by ment and cotton production and harvesting best practices. Cargill in 1996), maintained the old model and continued These courses laid a strong foundation of sound business to extend services to farmers via its own employees. operations and management for the distributors, allowing In all, the entire Zambian cotton value chain has experi- them to assess farmers’ creditworthiness while rapidly grow- enced rapid growth since the sharp drop of the early 2000s ing their portfolios. (figure 4.55). This rapid recovery was led entirely by the pri- As Dunavant’s distributor network grew, its outgrower vate sector, in large part because of Dunavant’s ability to iden- network followed suit with the average distributor handling tify, design, and deliver innovative ways to extend services to 65 growers each. In step with this growth was Dunavant’s small farmers. As of the 2005–06 season, Dunavant was out- realized increase in credit repayments. In the year prior to performing other Zambian ginners in terms of volume and the scheme’s implementation, Dunavant’s reported recovery produced an estimated 115,000 mt of cotton lint. Clark/Cargill rate was 67 percent. After one year in the system, the rate is second in the Zambian market with 60,000 mt. Figure 4.55 Zambia’s Cotton Lint Exports, 1995–2004 70,000 90,000 80,000 60,000 70,000 50,000 60,000 Metric Tons US$ (000) 40,000 50,000 30,000 40,000 30,000 20,000 20,000 10,000 10,000 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year Quantity (mt) Value (US$ thousands) Source: FAOSTAT data. NOTES in 1997, Mulungushi Textiles (now Zambia China Mulun- gushi Textiles) opened in 1999. Northern Growers began 1. Amaka Holdings opened in 1997, but is now closed, service in 1986, and expanded in 1997. having gone into receivership. Continental Ginnery opened 2. Tschirley (2004). CASE STUDY 12: IDENTIFYING NEEDED SUPPORT SERVICES FOR THE VALUE CHAIN—ZAMBIAN COTTON 137 TO O L 1 1 Improving the Operating Environment by Promoting Public-Private Dialogue ENABLING ENVIRONMENT important due to their impact on strategic portions of the supply or value chain. Lacking incentives and experience, he enabling environment for business is critical to T the development and growth of a vibrant private sector and its firms. Constraints in the enabling environment can limit business growth, such as through: local governments tend to be less sophisticated in their understanding of the constraints faced by value chain mem- bers in the enabling environment. Businesses within the value chain often have more personal relationships with local officials, which can be both a benefit and a barrier to ■ Increasing costs enacting pro-growth change. Often, and especially in lower- ■ Decreasing competitiveness income countries, the private sector feels powerless to effect ■ Decreasing product and service quality change or believes that promoting change is not their ■ Increasing business and investment risk responsibility. However, the private sector must often serve ■ Decreasing foreign and domestic investment as the impetus for reform and sometimes even lead the ■ Constraining businesses’ willingness to pursue long-term search for solutions by providing government officials with strategies irrefutable data and a plan for change through an open dia- logue process. The value chain’s ability and willingness to upgrade and make strategic choices often depends on the development PUBLIC-PRIVATE DIALOGUE of a long-term strategy. However, a burdensome regulatory, legal, and policy environment can severely hinder the Through both official and ad hoc forums and vehicles for growth of industries, and diminish competitiveness and dialogue between the public and private sectors, the value success in global markets. A poor business environment chain can communicate its opportunities and challenges not only limits local firms’ capital investments, it also within the enabling environment. Through the value chain’s obstructs foreign investment. Reforming policies so that sharing of industry strategies developed through analytical they are favorable to businesses can encourage dynamism tools such as positioning and benchmarking, the public sec- and efficiency. tor can understand the impacts of its own actions, decisions, Value chains’ integrated nature makes them suscepti- and capacities and more effectively prioritize issues and ble to constraints in the enabling environment at any actions to align with private sector needs. level. Constraints affect their costs and ability to act, from Public-private dialogue (PPD) implementation can take the most basic supplier of raw materials to the broker several forms but generally follows the format described who arranges for a large international shipment of fin- below (see also table 4.18). This applies to national, subna- ished goods. tional, or sector-specific dialogues.1 Government is often the principal actor in changing reg- ulatory issues and is responsible for improvements and ■ Establish a mandate. This can include memorandums of reforms. Often the private sector’s interactions with govern- understanding, formal government mandates, or tempo- ment (and those of development partners as well) tend to be rary initiatives. on the national level. However, to a value chain, the capaci- ■ Align with an institution. Possible choices would be ties and wisdom of local government can be even more investment promotion agencies, government ministries, 139 Table 4.18 Sample Checklist of Issues to Address decision makers and influential members of the private at Various Stages of the PPD Process sector who want to facilitate change. As broad and repre- sentative a group as possible should be chosen and Range of issues to identify and should include small businesses, minorities, and women tackle while designing or to the extent possible. maintaining partnerships ■ Identify and support a champion and a facilitator. A 1- Ignition Government willingness Cross-spectrum support strong but not overly powerful champion should be cho- Business priorities sen from the constituency to represent and drive the Linkages with existing organizations process. Also, dialogue facilitators should serve as brokers Sense of urgency Establishing credibility and help participants negotiate and set timetables and priorities. 2- Participation Selection mechanisms Terms of membership ■ Set clear goals and reach them. Determine the types of Choosing key individuals outputs the PPD process will generate. These can take the Striking a balance in representation form of roadmaps, a policy white paper, or reform pro- Including SMEs Civil society participation posals in addition to softer outputs such as cooperation, which emerges through dialogue. Quantifiable results 3- Structure Permanent secretariat Individual leadership early on can help build momentum and credibility for Working groups the process. Government structure ■ Public outreach and communication. This step is vital Transparency and rules of engagement Institutional flexibility for disseminating broader-scale changes in the enabling environment and generating larger-scale buy-in for 4- Goals and outputs Mission statements Managing expectations reforms. It can include branding of the PPD initiative, Quantifiable outcomes media education and awareness campaigns, and social Reform type and importance marketing. Monitoring and accountability Clarity and credibility ■ Monitor and evaluate outcomes. Documentation of clear successes and obstacles is important to building 5- Role of donors Type and level of support Public image trust and generating traction for change. Quality control Avoiding favoritism It is important to have channels of communication Sponsorship versus direction Ownership transfer open with national and local municipal governments, because they each have a different influence on limiting or 6- Outreach Branding and marketing Using the media facilitating investment and growth. For example, busi- Engaging the grassroots nesses cannot take advantage of an excellent customs sys- Enlisting the public tem with low tariffs if the roads leading to the port are Targeting decision makers Sharing experience impassable. The value chain must know which levels of government determine the policies that most affect their Source: www.publicprivatedialogue.org. operating environments and work to engage them. The value chain may also be able to join with local public sec- tor leaders to advocate at the national level. In order to donor agencies, or a newly created and independent effectively communicate as a unit, value chain participants institution. Institutional alignment also includes the (or industries they represent) must first develop a clear location of meetings and where the initiative’s secretariat consensus strategy that outlines and prioritizes the policy will be housed. changes needed. ■ Clearly defined structure and rules for participation. PPD can be a tool for encouraging policy changes that The PPD process should have a secretariat and working enhance the competitive position of the firms within the groups for specific issues. The secretariat will serve as the value chain and link the value chain’s strategy to the dia- coordinating body, and working group members will logue process. PPD’s success rests on several factors that come from the private sector, governments, associations, affect the quality of the dialogue and its strength as a academia, and possibly donors. Participants should be forum for advocacy. First, the private sector must clearly 140 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Box 4.16 Tanzanian Coffee and KILICAFE: Productive Public-Private Dialogue Tanzania has the climate and altitude to produce high- other countries, Tanzania had the highest taxes on quality coffee, but several constraints prohibited it coffee producers (up to 21 percent) and the lowest rate from competing seriously in the global specialty coffee of reinvestment. In some instances, countries levied market—the only growing segment of the market significantly lower taxes, and these lower taxes helped and the one offering attractive prices. These included alleviate the effect of major price drops and improve an aging population of coffee trees, a scarcity of well- competition. operated wet-milling stations, and a restrictive enabling TechnoServe and the other stakeholders discussed environment that forced all coffee to be sold through a the CTBI study and reached out to the GoT, making the blind national auction system. These constraints limited following recommendations: the industry and resulted in low prices to growers, pro- viding them little incentive to produce high-quality cof- ■ Harmonize taxes fee or reinvest in their plantations. The coffee sector ■ Reduce steps and fees for licensing actors wanted change but were unaware of their ■ Allow smallholder growers of specialty coffee to options. Likewise, the government of Tanzania (GoT) bypass the national auction system (Moshi Coffee knew that something needed to be done to improve the Auction) and negotiate/sell directly to specialty buy- enabling environment but didn’t know where to begin. ers (direct export) In 2001, TechnoServe helped coffee growers form the Association of Kilimanjaro Specialty Coffee Grow- In June 2003, Tanzanian Minister of Finance, Basil ers (now called KILICAFE). The organization is a Mramba, announced sweeping reforms that included farmer-owned association that provides services to its the CTBI study’s recommendations. The tax and mar- members. These services include coffee marketing, pro- keting law reforms took effect in October 2003. In vision of inputs, quality coffee production, lobbying for March 2004, KILICAFE, able to bypass the Moshi Cof- regulatory change, and cupping services for quality fee Auction and negotiate directly with specialty buyers, identification. sold over 23,000 pounds of fully washed Arabica coffee Recognizing that changes in the enabling environ- directly to Peet’s Coffee and Tea, a U.S.-based specialty ment would be important to the sector, TechnoServe coffee roaster. This sale involved five small-grower brought the coffee sector’s various stakeholders together groups, which represented 645 small growers. The small for roundtable discussions. These discussions included growers received a 150 percent price premium on the the Tanzanian Coffee Board, KILICAFE members, and coffee sold to Peet’s compared to other growers. This private buyers. Participants noted that they were the was the first direct grower-to-roaster transaction in Tan- first discussions that actually involved all actors in the zania’s history. Later that year, Peet’s and KILICAFE cre- coffee sector. As a result, in partnership with stake- ated the “Tanzania Kilimanjaro Limited Edition” coffee holders, TechnoServe undertook the Coffee Taxation brand, which was sold exclusively by Peet’s coffee stores and Benchmarking Initiative (CTBI) to investigate and distributors. Tanzania’s taxation policies and regulations govern- Today, taxes in the Tanzanian coffee sector have ing the sector. decreased from 21 percent to a range of 14–16 percent. The study involved benchmarking comparisons The steps and fees associated with licensing are also with five “peer” coffee-producing nations: Costa Rica, fewer, and lower, respectively. However, the reform that Ethiopia, Guatemala, Kenya, and Uganda. In addition, has helped spark revitalization in the industry was the TechnoServe facilitated a tour for Tanzania’s Minister ability to directly export specialty coffee. Since the of Agriculture to Costa Rica to meet his counterpart, Peet’s sale in 2005, KILICAFE has continued to negoti- as well as other coffee stakeholders in the country. ate and sell high-grade coffee to Peet’s, Starbucks, Illy- Findings from the study showed that, compared to the cafe, and a range of other global specialty buyers. Source: Carlton Jones, J. E. Austin Associates, Inc. TOOL 11: IMPROVING THE OPERATING ENVIRONMENT BY PROMOTING PUBLIC-PRIVATE DIALOGUE 141 understand the public sector’s role in the value chain. The PPD can encourage action that benefits the value chain public sector may often be blamed for, or looked to for by educating and informing the public sector. The private solutions to, problems that are or should be more in private sector should be able to communicate those points at which producers’ control. It is also helpful to understand that the the greatest value is added (or subtracted) from the value policy and regulatory environment have both legal and chain and ways to make it easy for the public sector to decide enforcement components and that these may differ sub- on actions that will contribute to the value chain’s strength. stantially. The infrastructure environment and political Associations and institutions for collaboration, as Michael power dynamics between various stakeholders will make Porter has called them, are either formal or informal organi- up the climate of dialogue. zations that facilitate the exchange of information among A benchmarking activity of specific business environ- members and can help foster cooperation. They can take the ment elements can be a starting point for generating a form of regional, social, or professional networks or they can forum for constructive dialogue among stakeholders along be industry or professional associations that cut across vari- the value chain, as it will generate credible information for ous industry sectors and value chains. These institutions play decision making. Sound prioritization and decision making a significant role in strengthening and promoting the value are difficult if parties are seen as advocating biased or chain or industry agenda. There are types of institutions unfounded positions or asking for special favors. called business membership organizations (BMOs) that serve Once parties have agreed to discuss their common inter- a variety of specialized functions (see table 4.19). ests, a PPD must establish certain parameters for effective BMOs can improve the business environment by build- discussion. Some general, overarching principles must be ing and supporting trust among its members; establishing a in place for the forum to be effective in reducing barriers forum for dialogue, collective strategy, and planning; to value chain efficiency. A PPD must include the “right” increasing the ability to communicate with one voice people from both the public and private sectors. This means through advocacy activities; and assisting with other actions that key decision makers and knowledgeable, credible opin- (see tables 4.19 and 4.20). ion leaders must be present, rather than just the highest- The International Finance Corporation and the World ranking member of an organization. Participants must also Bank have an excellent resource detailing best-practice be encouraged to commit to the process and leave egos and implementations of PPD initiatives. These cases, along with political infighting at the door. guides and comprehensive information on PPD, can be They should all be operating from the same base of found on the online forum, www.publicprivatedialogue.org. information and have access to the same data. This may be the benchmarking data gathered through a previous exer- A STEP-BY-STEP SUMMARY OF TOOL 11: cise. The use of benchmarking data can be especially help- IMPROVING THE OPERATING ENVIRONMENT ful if it is obtained through public-private collaboration. BY PROMOTING PUBLIC-PRIVATE DIALOGUE The dialogue should have clear goals, collaboratively agreed upon. It is important that all of the stakeholders involved agree on the discussion’s topics and goals to avoid ■ Identify burdensome regulations, laws, and policies neg- sessions that get off track or that degenerate into blame and atively impacting the growth and competitiveness of the fault-finding. Every PPD mechanism should have a method value chain. for providing feedback and input into policy formation. ■ Qualify and quantify the impact of the current business The private sector must make a credible case for change environment on growth and competitiveness using through the strength of its strategy and by clearly commu- empirical metrics, such as benchmarking activity. This nicating its goals. By using sound data, credible and objec- will provide basic data as a platform for public-private tive outside experts to provide analysis, and well-facilitated dialogue. discussion, the private sector can create a nonthreatening ■ Establish a clear mandate for the public-private forum. and constructive dialogue environment. This can include memoranda of understanding, govern- It is helpful for the private sector to explain the tax and rev- ment reforms, or temporary initiatives. enue impacts for the public sector if changes are put in place. ■ Identify institutions whose support will showcase official The private sector should be able to link changes to meeting commitment to the public-private dialogue and resulting government goals, job creation, and revenue increases. decisions and actions. 142 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Table 4.19 Types of Business Membership Organizations and Their Functions BMO type Defining factor Typical functions and services Trade/industry associations Occupation/industry Arbitration, quota allocation, industry standards setting, lobbying. quality upgrading SME associations Size of firm Entrepreneurship training and consulting, finance schemes, group services Women’s associations Gender Entrepreneurship training, microfinance, gender-specific advocacy Employers’ associations Labor relations Interest representation vis-à-vis unions, professional information, and training Confederations Apex bodies High-level advocacy, general business information, research, coordination of member associations Binational associations Transnationality Trade promotion, trade fairs, matchmaking Chambers Geographic region Delegated government functions, arbitration courts, basic information services, matchmaking, local economic development Source: World Bank (2005), “Building the Capacity of Business Membership Organizations: Guiding Principles for Project Managers,” Second Edition. Table 4.20 Pursuing Effective Dialogue Ineffective Effective ■ Individual company ■ Value chain stakeholders ■ Ad hoc complaints ■ Comprehensive vision ■ Operational level ■ Strategy ■ Laundry lists ■ Priorities ■ Anecdotal evidence ■ Data and analysis ■ Concessions ■ Co-responsibility ■ Opposite sides ■ Same side of table Source: J. E. Austin Associates, Inc. ■ Clearly define the structure and rules of the public- ■ Monitor and publicize the progress of the dialogue and private dialogue. its outcomes. ■ Encourage individual firms and organizations, which are capable of facilitating and following through with PPD, NOTE to be leaders in the forum. ■ Identify measurable outcomes for the dialogue. 1. Source: PPD Handbook, World Bank. TOOL 11: IMPROVING THE OPERATING ENVIRONMENT BY PROMOTING PUBLIC-PRIVATE DIALOGUE 143 C A S E S T U DY 1 3 Improving the Operating Environment through Public-Private Dialogue—Botswana Cattle Producers Association Carlton Jones J. E. Austin Associates, Inc. INTRODUCTION ■ What were some of the goals, were they clear, and how were they achieved? nderstanding the role the private sector plays in U facilitating change at the local, regional, and national government levels is important when con- sidering changes to the enabling environment for value ■ ■ What vehicles were used to engage the government? Are there any measurable outcomes? BACKGROUND chains. If the private sector does not speak with an informed, unified voice, does not have a common agenda, and does not In Botswana, the red meat industry (figure 4.56) is one of understand how to engage the government, change is unlikely. three main economic pillars (behind only diamond mining In this case, Botswana’s parastatal meat monopoly and tourism) that support the economy. But with declining addressed a startling sector contraction through public- exports and losses experienced by cattle farmers and the private dialogue, organizing the Botswana Cattle Producers state-run Botswana Meat Commission (BMC), something Association and soliciting its help in designing a sector had to be done to turn the situation around. From con- revitalization strategy. The dialogue is ongoing and is still tributing around 30 percent of GDP at independence in catalyzing change within the sector. It demonstrates how 1966, the sector shrank to 3 percent or less of GDP in 2004. change is occurring after private sector participants in Likewise, over the same period, the contribution of beef to Botswana’s red meat value chain organized to effectively national export revenues fell from 70 percent to 1.7 percent engage the government for mutually beneficial changes in (Jefferis 2005). In 1998, beef export value was US$92.57 the red meat sector. million. By 2004, it was US$46.38 million (FAOSTAT). Over the same period, export quantity fell from 25,000 tons to POINTS TO CONSIDER 8,600 tons (figure 4.57). Look for some of the steps outlined in the tool: Established in 1966, the BMC is the country’s sole exporter and domestic wholesaler of beef. This status, in addition to ■ Was a mandate established? other privileges, is conferred by the BMC Act. Botswana’s ■ What institutions did the private sector align with as it main beef export market is the European Union. Protected as organized? a monopoly, the BMC acts as the country’s single industrial ■ Who was identified as a champion or facilitator for the processor and export channel and sets the prices it pays to group? cattle producers. The BMC operates abattoirs in Lobatse, 144 Figure 4.56 Botswana’s Red Meat Value Chain Figure 4.58 Locations of Botswana’s Abattoirs EU/end market Cold chain/ Exporter packhouses Retail In-country Butcher(s) distribution consumption Kill Cut Process Pack Abattoir/Botswana Meat Commission Processor Sire Fatten Finish Farm Producers’ farms Source: J. E. Austin Associates, Inc. Source: World Bank. Figure 4.57 Exports of Botswana’s Beef, 1990–2004 still underutilized. This underutilization drove up unit 30 costs, and the BMC began losing money. Around the same Export quantity (thousand tons) time, EU beef prices leveled, followed by the revenues from 25 cattle sales in Botswana. Cattle producers were severely 20 impacted as well, and were being paid well below export parity (the price neighboring cattle producers received in 15 Namibia and South Africa). 10 Botswana’s cattle farmers often complained among them- selves and recognized that it was becoming increasingly diffi- 5 cult to operate, but never organized to generate change in 0 their institutional and enabling environment. However, when 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 losses continued and export revenue continued to decline, Year cattle producers could use neither their land nor their cattle Export quantity (thousand tons) as collateral against loans. Led by Philip Fischer (a producer himself), cattle producers approached a USAID-funded proj- Source: FAOSTAT data. ect, the Southern Africa Global Competitiveness Hub (SAGCH), for assistance in forming a national association. Its goal was to have existing regional cattle-producing associa- Francistown, and Maun (figure 4.58) that were designed to tions speak with one voice to create a common agenda and to handle an output of 8,000 cattle and 500 small stock per day lobby that agenda for policy change. (Lobatse), 400 cattle and 140 small stock per day (Francis- town), and 100 cattle per day (Maun)—but each operated at levels well below their capacity. The Maun abattoir was per- BIRTH OF THE BOTSWANA CATTLE manently closed in 1996 after an outbreak of cattle lung PRODUCERS ASSOCIATION disease necessitated the culling of all cattle in Ngamiland (Botswana Meat Association 2006). Despite the closing of SAGCH was able to provide the technical assistance that led to one of the three abattoirs, the remaining two abattoirs were the formation of the Botswana Cattle Producers Association CASE STUDY 13: IMPROVING THE OPERATING ENVIRONMENT THROUGH PUBLIC-PRIVATE DIALOGUE 145 (BCPA), an organization that represents the country’s 60,000 Declining revenues cattle producers. The BCPA organized, drafted by-laws, reg- As the BCPA suspected, the study also revealed that the istered as an official industry association, elected its first declining prices paid by EU markets resulted in revenue chairperson (Philip Fischer), and established a common declines and subsequent lower prices paid to cattle pro- agenda from which to lobby the government for action. Ini- ducers (in real terms, after adjusting for inflation). Cou- tial components of the common agenda included the desire pled with the government of Botswana’s (GoB’s) desire to to receive export price parity for their livestock, an improved make the consumption of beef affordable for all the production system, and the liberalization of Botswana’s entire people of Botswana, prices remained artificially low. red meat sector. Export cattle producers, without competitive alternative markets for their beef, were limited to selling to only one UNCOVERING THE PROBLEMS buyer, the BMC monopoly. This limited their ability to increase profits. Energized by their ability to organize and hopeful for the The sector conducted a benchmarking exercise that com- future, the BCPA again approached the SAGCH for assistance pared Botswana’s cattle market to those in Namibia and in conducting a study to uncover all the constraints in the red South Africa. Comparing these markets, the study also meat market to provide much-needed statistical data to sup- determined that Namibian abattoirs paid 40 percent more port their planned advocacy efforts. The study was conducted than the BMC paid its cattle producers, while South Africa by the former deputy governor for the Bank of Botswana, paid twice as much to its producers. Keith Jefferis. Mr. Jefferis is currently an independent con- sultant and is highly respected within the country. His study produced several key findings. Operating under monopolistic conditions Declining national herd The study also highlighted a glaring problem: The BMC was operating as a money-losing monopoly whose inefficient Though the data was poor, Mr. Jefferis’s study suggested that operation was leading to the unsustainability of the entire the national herd population in Botswana was decreasing red meat market in Botswana. BCPA producers of export- from its peak of approximately 3 million animals in the quality beef were forced to sell at below-market prices to the early 1980s to about 2.5 million. Rising costs, drought, and BMC for exporting. Live cattle exports were banned, as were cattle producer cash flow problems were all cited as con- beef imports. This artificial market structure meant that, tributing to the herd population decline. without interventions, the national herd would continue to Additionally, he noted that the existing production system, decline, and cattle producers would continue to lose money which produced mature cows and oxen, would not provide and possibly be forced to close their operations or move to enough “offtake” to keep up with rising demand. The combi- other countries to survive. nation of a declining herd size, stagnating offtake, and rising domestic demand for beef were all contributing to reduced cattle sales to the BMC, and hence reduced throughput and BCPA PUBLISHES FINDINGS AND ENGAGES capacity utilization.1 GOVERNMENT OF BOTSWANA Shortly after the research was concluded, the above findings High costs throughout the value chain were published in a policy paper, “How Trade Liberalization With high fixed-unit input costs, and abattoirs operating Can Contribute to Solving the Crisis in the Cattle and Beef at around 50 percent capacity, the BMC operated at levels Sector.” This paper, also prepared by Mr. Jefferis, highlighted severely below built capacity. This inefficiency caused the some of the industry’s challenges and made policy recom- cost per unit of output to rise. Compared with neighbor- mendations meant for consideration by the government of ing countries, Botswana was operating at less than half the Botswana and BMC. In May 2005, the BCPA assembled volume levels that were expected for a competitive, com- industry stakeholders with the assistance of the SAGCH, mercially run operation to survive (Jefferis 2005). Jefferis and formally presented its findings and Mr. Jefferis’s recom- concluded that this excess capacity was, in part, the result mendations, several of which are outlined in the following of the 1990 opening of the Francistown abattoir. sections (see also figure 4.59). 146 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.59 Recommendations for Botswana’s Red Meat Value Chain EU/End market Cold chain/ Exporter packhouses Retail D Butcher(s) Value Chain In-country distribution i Import beef consumption interventions r e Kill Cut Process Pack c Value Chain Privatizing Processor Abattoir/Botswana t interventions the BMC Meat Commission e Agent(s) x National p Value Chain Price parity auction Auction market interventions o r Sire Fatten Finish t oxen system Farm Value Chain to weaner interventions system Producers’ farms Source: J. E. Austin Associates, Inc. Changing the cattle production system This change from an oxen system to a weaner system is a more efficient means of production and could potentially Shifting to modern production techniques in Botswana increase offtake from the existing 270,000 to 700,000 per would increase offtake rates and keep up with anticipated year. More importantly, this production increase does not demand. As mentioned earlier as a finding from the research, rely on increasing the national herd size. Botswana’s production system (the oxen system) was based Unfortunately, shifting to a weaner system is not possible on selling mature male and female cattle to abattoirs. The until prices for cattle are more aligned with costs. That modern “weaner” system is the recognized, preferred means that BCPA members need to be paid export-parity method of cattle production in the world. In this method, prices, which did not occur under the existing legislation. male calves are sold to feedlots as soon as they are weaned. While in feedlots, these weaned male calves are intensively fed and fattened for three to four months, then sold directly Revising the BMC Act to abattoirs. At the farm, remaining herds are then com- prised predominately of cows and calves. In Botswana, the BMC Act of 1966 reserves the exportation In production, the benefits of the weaner system are that of live animals or their edible products for the abattoir farms have higher proportions of (productive) cows, rather unless the Minister of Agriculture permits otherwise in than (unproductive) oxen. Farms adopting weaner-system writing. In addition, such a permit should be issued with the production methods are able to provide younger, better- BMC’s consent according to section 21, which addresses quality meat because weaners (aged less than a year) are sent controls on the export of cattle and the licensing of export to abattoirs instead of mature cattle (whose average age is slaughterhouses. three years). Additionally, environmental impacts are Jefferis’s policy recommendation was to revise the BMC reduced since animals graze for shorter periods and are Act to remove the prohibition on non-BMC export slaugh- younger, reducing the amount of land needed for them terhouses and beef exports, and to lift the ban on live-cattle to graze. beef imports. Jefferis also included the introduction of a Weaner-produced cattle are also less impacted by drought, national auction system as the primary method of cattle sales as they make fewer demands on the land for grazing. and price determination, accompanied by widely available CASE STUDY 13: IMPROVING THE OPERATING ENVIRONMENT THROUGH PUBLIC-PRIVATE DIALOGUE 147 beef-pricing publications. This would allow the entire beef OUTCOMES and cattle industry to be regulated by competition and free- As with several of the cases illustrated in this Guide, this market principles, instead of the existing structure where case is still evolving. There have been reforms (see figure prices are set solely by the BMC. With BCPA members able 4.60), but more liberalization is necessary to enable BCPA to get export-parity prices, they would then be able to afford members to export to preferred markets. One immediate the switch to weaner production systems. success for the BCPA was its ability to garner support, which Based on estimates, if the BMC Act were revised to allow influenced the GoB to strongly consider its recommenda- for competition, prices would approximate those found in tions. Their organization is now a recognized partner of the South Africa, allowing the entire cattle market in GoB and is actively engaged in policy discussions that affect Botswana to recover. the red meat industry. The policy paper which sparked the public-private dialogue that revitalized the industry was later translated into Setswana for the House of Chiefs and Privatizing the BMC other stakeholders in Botswana. The report is seen as one of Operating as a monopoly, the BMC hindered growth in the the single most important outputs that allowed the BCPA sector. Selling off noncore assets, closing unproductive abat- to influence the GoB. toirs, and restructuring BMC functions toward governance In December 2005, the BMC increased the prices that it and health enforcement and compliance would allow the pays to producers by an average of 40 percent, so they are industry to move away from its existing protectionist posi- now in line with neighboring Namibia. It is expected that tion to being competitive. this price increase will offset some of the losses experienced To disseminate its research and findings, the BCPA by BCPA members and will allow them to increase the off- invited key stakeholders and the national press to hear take sent to abattoirs. In March 2006, a further 40 percent about the challenges faced by Botswana’s cattle producers. price increase for top-grade (prime) beef also went into The event sparked a national debate about how to address effect. By July 2006, the GoB and the BMC publicly adopted the challenges of BCPA members. Just as important, the the BCPA’s two primary objectives—to pay export-parity BCPA was able to produce credible data from which to make prices and to support conversion to a weaner and feedlot its case and, for the first time, BCPA members felt empow- production system (see figure 4.61). Both price increases still ered to continue to press for change in their sector. affect BMC profitability, but as profits for cattle producers Figure 4.60 Initial Implementation of Recommendations—Red Meat EU/end market Cold chain/ Exporter packhouses Retail In-country Butcher(s) distribution consumption Kill Cut Process Pack Processor Abattoir/Botswana Meat Commission National auction Sire Fatten Finish Farm Value Chain interventions 40% price increase Producer farms Source: J. E. Austin Associates, Inc. 148 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.61 Next Steps for Botswana’s Red Meat Value Chain EU/end market Cold chain/ Exporter packhouses Retail Butcher(s) In-country distribution consumption Kill Cut Process Pack Processor Abattoir/Botswana Meat Commission Agent(s) Value Chain Price parity National interventions auction Auction market Sire Fatten Finish Farm Value Chain oxen system to interventions weaner system Producer farms Source: J. E. Austin Associates, Inc. increase, they will be able to invest in increasing their off- Going forward, there are several levels of the value chain take, which will also positively affect abattoir operations. that could be affected based on the BCPA’s policy recom- mendations. The most notable are the adoption of a national auction system and the possibility of exporting CONCLUSIONS: PPD EFFECTS ON THE RED directly to other markets (bypassing the BMC altogether). MEAT VALUE CHAIN The BCPA continues to press for change in its industry and Producers are still not being paid full export-price parity. Yet, recognizes that continued research and reliable economic the latest price increases and the GoB’s commitment to adopt data are its best ammunition. As one observer said, “Having weaner production and export-price parity signify to the a unified voice was important, but more important than BCPA that their long-awaited reforms are closer to becoming that was the sound economic data we presented to the gov- reality. The BCPA is now working to assist the GoB in imple- ernment. Without that data, a unified voice would have menting the reforms. As the weaner system is adopted, new been discounted.” service providers (feedlot operators) will be necessary to sup- port the industry. Some cattle producers are now looking to NOTE expand their businesses into feedlot operations in anticipa- tion of the changes. 1. Jefferis Interview 2007. CASE STUDY 13: IMPROVING THE OPERATING ENVIRONMENT THROUGH PUBLIC-PRIVATE DIALOGUE 149 TO O L 1 2 Achieving Synergies through Clustering BACKGROUND ON CLUSTERS ■ Policy change ■ Collaboration luster strengthening and cluster-development C initiatives began to gain popularity as economic development tools in the 1980s. Since the late 1990s, cluster development and promotion programs have ■ ■ ■ ■ Implementation of standards Producer-marketer collaboration Supply chain management Branding and image been applied with success in developing and emerging ■ Shared investment in workforce development, certifi- economies, and are starting to take hold in Africa. The cation and skills, technology, and services cluster approach emphasizes collaboration among cluster members to achieve objectives that are beyond the capa- bilities of individual firms or even value chains. Cluster-based approaches help firms and value chains “Clusters are geographic concentrations of interconnected reduce transaction and information barriers, and, therefore, companies, specialized suppliers, service providers, and asso- costs and inefficiencies, as they identify common interests ciated institutions in a particular field that are present in a and develop common strategies. This, in turn, can lead to a nation or region.”1 Associated institutions can include trade more formal public-private dialogue process, build collabo- organizations, funding organizations, universities, research ration, and exploit synergies among the cluster’s organiza- organizations, and labor unions, among others. Thus, for tions. Cooperation that arises from clustering cannot only our purposes, the cluster is not linear as with a supply or increase productivity but can also align firms to solve com- value chain; it is an associated, highly communicating col- mon problems. The strengthening of existing clusters and lection of participants, coordinated to focus on achieving the fostering of cluster development can begin with a map- objectives that are important to the value chain, or more ping exercise that helps identify potential synergies that often, to multiple value chains. could lead to the benefits described above. Clusters, which have a geographic focus, arise naturally or can be encouraged to grow around existing assets, firms, THE RELATIONSHIP BETWEEN VALUE or value chains. However, the process of clustering, CHAINS AND CLUSTERS approaches that encourage cluster-style communication and interaction, and associated cluster initiatives, can play a At their core, clusters are centered on elements of one or large role in strengthening firms, value chains, and the eco- many value chains. Because clusters emphasize locational nomic regions in which they operate. factors or other commonalities, they can incorporate many As a collection of related firms, the cluster benefits from value chains or portions of them that operate across clus- proximity and can increase those firms’ competitiveness in ters. Clusters can form across many links in the value chain the marketplace by exploiting synergies and linkages such as: or deepen a specific link. From a development perspective, assistance to the value chain is part of the cluster approach. ■ Improved market access Clustering is a tool to strengthen firm relationships through ■ Firm specialization development of a private sector–led strategy, building of ■ Access to information and market intelligence foundations for dialogue, and creation of opportunities for ■ Bargaining power upgrading of skills and technology. 151 CLUSTER INITIATIVES 5. Building sustainability ■ Continuity of cluster efforts after the CI depends on An initiative to develop clustering approaches or to strengthen creating a strong sense of ownership and on finding clusters will reinforce the value chain’s interests. In developing leaders who champion continuing improvements. countries, the most successful cluster initiatives are typically a facilitated but private sector–led process. A cluster map is a valuable planning tool for analyzing the When a cluster is promoted by an industry or value current state of the cluster and can identify where various chain, its proponents, of course, tend to select a value chain value chains link into it. Using the map for benchmarking focus. When implemented with government or develop- and gap analysis can also identify weaknesses in cross-cutting ment partner assistance, clusters need to be selected for par- areas such as skills availability, transport, support, and infra- ticipation in the cluster initiative. Thus, it is important to structure. Figure 4.62 offers an example of a cluster map for first identify several potential core industries or value chains cut flowers in Kenya. and then help them to self-select based on their resources, Strategic objectives of the cluster should be clearly out- industry willingness to participate, and growth potential. lined, and cluster members should be strongly committed Since the cluster initiative is a facilitated but private to those goals. Implementation often includes dialogue with sector–led process, the second step is for the facilitator(s) government and advocacy for changes in regulations and who will be engaging with the industry to gather as much procedures. This process is easier if the cluster has a champion information as possible on broader economic and industry in government who can create traction for the implementa- data, principal firms within the industry, and interests for tion plan and who acts as a facilitator with the government. the firms and associated stakeholders. Intractable government policies, such as promotion of strong A clustering initiative (CI) typically takes place in five state-owned enterprises, could limit the growth achieved phases: through clusters. 1. Initial research and engagement leading to the formation A successful cluster-strengthening process can help attract of a cluster initiative (usually through a memorandum of foreign direct investment and the participation of multina- understanding) tional corporations. If a cluster can develop and implement ■ Develop and present the rationale for cluster coopera- a successful strategy, it can generate internal firm investment, tion based on data gathered with identified leadership. government investment, and external and co-investment ■ Generate strong interest in cooperation leading to opportunities. In addition, clustering projects can be used mutual commitments within the cluster. Can be facil- in conjunction with national initiatives such as special eco- itated through a specific association or organization. nomic zones or export processing zones. 2. Industry diagnostics leading to strategy development Business associations, trade associations, industry ■ Cluster coordinators, industry consultants, and facili- groups, and similar institutions can play an important role tators work with cluster members to evaluate and in cluster development and sustainability. They have con- analyze the current state of the industry and identify vening power, can provide services in line with the industry potential solutions. strategy, and can advocate on behalf of the industry cluster. ■ A private sector–led industry strategy (including The cluster itself can be institutionalized for these same rea- objectives, strategy, and an action plan) is designed sons; however, it is important that this does not happen and agreed upon. until processes are firmly in place. 3. Initial implementation of strategic initiatives ■ Issues outlined in the strategy are prioritized and CLUSTER EVALUATION action plans designed with coordination of those involved. Clusters and cluster initiatives can be evaluated in several ■ “Quick win” projects, lobbying for policy changes, or ways. The most important indicator of success is whether initial coordination with academic or associative bod- firms and cluster members are reaping the benefits of ies may be implemented with little funding. the strategies they have implemented. Such successes 4. Identification of projects and sources of financing could include new sales and exports, reduced costs, and ■ Larger-scale projects may need funding from within increased access to necessary machinery and markets, as the industry, government, banks or other sources of well as to appropriate labor and technology. One frame- investment. work for evaluating successes is the PAID approach 152 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.62 Kenya’s Cut Flower Cluster Government Agencies, NGOs and Industry Associations Horticultural Crops Development Authority (HCDA) Government Export Policies Targeting Horticulture Government Policy for Rewriting Agriculture: National Export Strategy; Export Promotion Council (EPC) Nongovernment Organizations The Rural Enterprise Agri-Business Promotion Project (USAID; CAME, IPAD) Horticultural Produce Handling Fact Project (HONC) Postharvest Plant stock Trade and Industry Associations cooling Kenya Flow Council (KFC) Fresh Produce Exporters Association technology of Kenya (FPEAK) Regional Growers Associations e.g., North and South Greenhouse; Kinangop: Lake Naluska, etc Grading/ shading packaging sheds structures Packaging and Irrigation labelling technology Postharvest materials Flower handling; farming transport to Precooling market Refrigerated technology trucks Fertilizers, Freight pesticides, forwarders herbicides Education, research and quality standards organizations Research institutions: Clearing and Agricultural Kenya Agriculture Research Institute (KARI) forwarding cluster International Center for Insect Physiology and Ecology (ICIPE) agents Public universities with postgraduate degrees in horticulture: Air carriers Horticultural University of Kenya; Jamo Kenya (commercial/ cluster (fruits University of Agriculture and Technology charters) and vegetables) Quality and standards: EUREGAP standard (UK and Dutch supermarkets) Tourism Kenya Plant Health Inspectorate Services (KEPHIS) cluster Source: Hornberger, Ndiritu, and Ponce-Brito et al. (2007); Microecomics of Competitiveness, Harvard Business School (2007). developed by J. E. Austin Associates. This approach, analyze the current state of the industry and identify described in more detail in the discussion of tool 13, looks potential opportunities for cluster-based initiatives. at improvements in four areas: Potential cluster relationships should be centered on geographically proximate elements of several related 1. Process indicators value chains. 2. Action indicators ■ Generate strong interest in cooperation leading to 3. Investment indicators mutual commitments within the cluster. 4. Delivered results ■ Assist the private sector in developing a cluster strategy (including objectives, strategy, and an action plan). Pres- A STEP-BY- STEP SUMMARY OF TOOL 12: ent these for discussion within the cluster. ACHIEVING SYNERGIES THROUGH ■ Prioritize interventions toward achieving the cluster CLUSTERING strategy. Focus initially on initiatives that will demon- ■ Cluster coordinators, industry consultants, and facil- strate short-term success and that require modest itators work with cluster members to evaluate and funding. TOOL 12: ACHIEVING SYNERGIES THROUGH CLUSTERING 153 ■ Identify financing for larger-scale initiatives from within ■ Monitor and publicize clustering results. the value chains, government, banks, or other sources of investment. ■ Encourage leadership among cluster participants so that NOTE members create norms of cooperation and champion con- 1. Institute for Strategy and Competitiveness, Harvard tinuing improvements even after the initiative has ended. Business School. 154 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE C A S E S T U DY 1 4 Achieving Synergies through Clustering— Kenyan Avocados Carlton Jones and Martin Webber J. E. Austin Associates, Inc. INTRODUCTION BACKGROUND he term “cluster” is often used loosely and com- Mexico and the United States have dominated the global T monly incorporates a variety of value chain ele- ments. In most instances, it is meant to involve a geographic concentration of similar businesses within the avocado export market for the last three decades. During that time, Kenya has consistently ranked as a top 20 pro- ducer. Its best ranking was eleventh, in 1961 (FAOSTAT). same or related value chains. Generally speaking, this Guide Kenya’s main export market is Europe, to which it supplies has accepted the definition of “cluster” as a geographic con- mainly the Fuerte variety avocado. In 2003, 92 percent of centration of interconnected companies, specialized suppliers, avocados produced by Kenya were of the Fuerte variety, service providers, and associated institutions in a particular while the other 8 percent were of the Hass variety (Deloitte field that are present in a nation or region.1 These clusters can Touche 2003). From the mid-1970s to the late 1990s, incorporate or work across value chains, and, thus, are not Kenya consistently ranked nineteenth among world pro- linear. This case examines how a Kenyan market-linkage ducers, jumping to thirteenth in 1998. Kenya was able to strategy, along with a cluster initiative, strengthened firms maintain and even to improve its position based on natu- and the overall value chain in the fresh avocado sector. The ral market linkages to Europe and its ability to provide case first introduces the Kenyan avocado value chain, then avocados during off-peak seasons. However, by 2000, a describes initiatives to create and then to strengthen the value switch in European consumer tastes to the Hass variety, chain’s market linkages. The case describes the broader avo- and other factors discussed below, pushed Kenya’s market cado cluster map and the role of cluster actors. rank back to sixteenth (see figure 4.63). Unfortunately for Kenyan small growers, prices paid for the Fuerte avocado POINTS TO CONSIDER did not keep pace with other cash crops. The farmers, therefore, did not reinvest in avocado trees, and avocado When reviewing this case, consider the following; quality declined. ■ Clustering is a tool to strengthen firm relationships By 2002, small Kenyan avocado farmers had no direct through the development of a private sector–led strategy, links with exporters for export-grade avocados. In late build a foundation for dialogue, and create the opportu- 2002, the government of Kenya (GoK) and USAID funded nity for upgrading skills and technology. a project to improve market linkages between small avocado ■ What were the steps taken to facilitate clustering? growers and exporters, while supporting a cluster initiative ■ What were some of the benefits realized from establish- that strengthened the entire sector. A value chain analy- ing the avocado cluster? sis2 (see figure 4.64) identified many important points, 155 Figure 4.63 Kenyan Avocado Production, 1994–2007 80,000 70,000 60,000 Metric tons 50,000 40,000 30,000 20,000 10,000 0 04 a 05 a 06 a 07 a 94 95 96 97 98 99 00 01 02 03 19 19 19 19 19 19 20 20 20 20 20 20 20 20 Source: FAOSTAT data. a FAO estimate. Figure 4.64 Kenyan Avocado Value Chain Exporter Exporters Export fresh market Processor Large scale Export processed processors Trader Brokers/traders Wholesale Super- market market Farm Domestic fresh Small-scale Fresh fruit growers retailers Sources: J. E. Austin Associates, Inc.; Kenya BDS. such as the fact that the average avocado small grower had backward integration strategies, which provided exten- seven or fewer trees, and only 5 percent had more than sion services and supply contracts to small growers. In 20 trees. The analysis also confirmed the predominance addition to supporting lead firms, the project helped to of indigenous Fuerte variety avocados, which were more establish small outgrower producer groups. By supporting susceptible to disease and were in declining demand in the avocado sector through these means, it was expected European markets. This analysis also showed that avocado that a corresponding cluster initiative would take shape that small growers were very discouraged because of factors would bolster the entire value chain, bring in other actors, including rampant crop disease, little access to technical and improve the relationship between exporters and assistance, almost no access to finance, and dependence on small growers. poor-quality Fuerte avocados. With low grade-1 fruit yields, poor prices for the little grade-1 fruit harvested, and THE KENYAN AVOCADO VALUE CHAIN no market for grade-2 fruit, some farmers cut down their avocado trees to sell for firewood. The avocado value chain was a broker-dominated spot mar- The goal of the Kenya Business Development Services3 ket whose value chain resulted in low prices and unreliable (Kenya BDS) Project was to improve access to markets and markets for growers (see figure 4.64). There were no stand- access to competitive skills by supporting lead firms in alone business services supporting the sector, nor was there 156 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE a market for grade-2 “reject” avocados. Instead, almost all manure application, spraying, grafting, grading, collection, small-grower avocados were sold for domestic consump- and transport. Later, other exporters, like Indu-Farm Ltd., tion. Constraints identified in this value chain included: joined the market linkage activity. Indu-Farm signed memo- randa of understanding to provide supply contracts to pro- ■ Lack of information and knowledge of the markets ducer groups and committed an agronomist to work with ■ Absence of farmer marketing groups farmers on good agricultural practices to prepare them for ■ Limited access to inputs meeting EurepGAP certification. Supply contracts guaran- ■ Limited access to resources and weak incentives for teed the market and allowed growers to focus on improving upgrading quality. The result was a twofold and even threefold increase ■ Weak vertical and horizontal linkages within the value in prices over those previously received by growers who sold chain to brokers (figure 4.66). ■ Lack of trust among producers, brokers, and exporters THE KENYAN AVOCADO CLUSTER After fruit was sold to brokers, those brokers then sourced it to various markets, local supermarkets, processors, and As market linkages continued to form between exporters exporters. The little export-quality fruit that were produced and small growers, other supporting industries were estab- were packed at one of seven packhouses situated within two lished, supported, and ultimately relied upon to provide ser- hours of the production areas and, after pre-cooling, were vices to the avocado sector. As the cluster map (figure 4.65) loaded and transported to containers at Port Mombasa. demonstrates, these services were provided by a variety of Average transport time to Europe was 13–21 days. industries and input providers. As implementation of the Kenya BDS project began, lead firms were identified that were interested in participating in ROLE OF CLUSTER ACTORS providing extension services to small-scale growers. The first such lead firm, East African Growers Association (EAGA), A variety of actors support the avocado cluster in Kenya. was very interested in participating in the project after realiz- Some are existing businesses that seek to take advantage of ing the benefits of integrating backward into the supply chain market opportunities that exist in the newly revived avo- to improve EurepGAP eligibility. With the support of Kenya cado sector. Others are firms and entrepreneurs established BDS, EAGA began providing farm extension services to pro- through technical assistance. The cluster also includes insti- ducer groups (composed of 400 farmers) such as pruning, tutions and associations that support the sector through Figure 4.65 Kenyan Avocado Value Chain and Cluster Inputs Production-Processing Supporting industries Government organizations • Ministry of Agriculture Raw materials and natural resources Small-scale • Kenya Plant Health • Private nurseries growers inspectorate Services • Kenya Agricultural Research Institute • Pest Control Products Board • Nurseries • Horticultural Crop Development Technology Authority • Top-working service providers Large-scale Industrial organizations • Agrochemical spray processors • Fresh Produce Exporters Association • Service providers Brokers/traders of Kenya • Agricultural Association of Kenya Capital • Equity bank Educational organizations • Kenya Agricultural Research Institute Machinery and equipment • National Horticultural Research Centre • Achelis Kenya Ltd. Exporters Other supporting industries • Avocado oil processors Sources: J. E. Austin Associates, Inc.; Kenya BDS. CASE STUDY 14: ACHIEVING SYNERGIES THROUGH CLUSTERING—KENYAN AVOCADOS 157 research, certification, and advocacy. Each actor plays a useful The Agricultural Association of Kenya (AAK) is the role in the cluster and is presented in figure 4.65 in the cate- umbrella organization for manufacturers, formulators, gories of “supporting industries” and “inputs.” repackers, importers, distributors, farmers, and users of pest-control products.4 AAK assisted in the training of agro- chemical service providers on the proper and safe applica- Supporting industries tion of pesticide on small-grower farms. Once properly To facilitate a market for the otherwise rejected grade-2 trained, agrochemical service providers are then eligible for Fuerte avocados that most small growers produced, oil AAK certification. processors (Ruiru Natural Oils, All Green Ltd., and others) were funded by private investors, supported by the project, Government organizations and linked to small growers. Other processors that already processed other fruits and nuts (Sunmango, Ltd., and Av-Oil The Kenya Plant Health Inspectorate Services organiza- Industries, Ltd.) purchased new equipment to retool their tion emerged as a partner to help train newly formed plants and enter the avocado sector. Through supply con- private nursery service providers. KEPHIS is a regulatory tracts, these processors provided a market for not only agency for quality control of agricultural input and pro- grade-2, but also grade-3 Fuerte avocados. Because proces- duce in Kenya. It coordinates all matters relating to crop sors required a steady supply of mature fruit for optimum pests and disease control and advises the Director of Agri- operational efficiency in their plants (an average of 20 mt culture on appropriate seeds and planting materials for per processor, per day), Kenya BDS stepped in to facilitate export and import.5 additional producer-group supply contracts to ensure that A department in Kenya’s Ministry of Agriculture, the supply was met. The oil processed by these facilities was Pest Control Products Board (PCPB), regulates the impor- shipped in crude form to South Africa to be refined for cos- tation, manufacture, exportation, distribution, and use of metics. The introduction of these processors created an pest-control products in Kenya. It ensures that only PCPB- assured market for all grades of avocados produced on assessed products are used in the country. small-grower farms at a 25–50 percent higher price than The Horticultural Crop Development Authority previously received from brokers. (HCDA) is a Kenyan parastatal organization tasked with promoting and regulating the horticulture sector. It helped train agrochemical service providers in regulatory compli- Educational organizations ance and in understanding the agronomic and physiological The Kenya Agricultural Research Institute is Kenya’s national aspects of avocados. organization for coordinating agricultural research. Its National Horticulture Research Centre (NHRC) focuses on Input suppliers/providers horticultural research. KARI/NHRC continues to play a vital role in the avocado cluster by training producer groups and Raw materials and natural resources. KARI nurseries and service providers on proper horticulture techniques. Many KEPHIS provided private nurseries with much-needed avocado technical assistance trainings also take place on technical services to help convert and/or replenish avocado KARI campuses. farms with Hass varieties. Services provided included top- working, pruning, planting, and providing root stock and scion materials for producer groups. Each participating Industrial organizations nursery was inspected and registered with HCDA. The Fresh Produce Exporters Association of Kenya is a member-supported private association in the horticulture Technology. One identified service that avocado-producer industry. It is Kenya’s principal association representing groups needed was the introduction of agrochemicals to growers and exporters. FPEAK’s mission is to develop mitigate the risk of pest infestation and disease. Kenyan horticulture in the global marketplace. In addition Commercializing this service aspect was vital to ensuring the to marketing and technical support, it lobbies for its con- vitality of the avocado value chain. As such, service providers stituents’ agendas, administers Kenya-GAP (a code of prac- were identified, trained, and equipped through KARI/ tice for Kenya’s horticulture industry), and promotes member NHRC, KEPHIS, AAK, and PCPB so that the providers compliance in other international standards. understood the complexities of safe and appropriate pesticide 158 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE applications. The integrated pest-management program trained, they were linked with producer groups to begin had two main components: developing and mentoring servicing trees. In as little as 12 months, the trees began to independent service providers and bringing in commercial produce the new, higher-valued Hass avocados. financial arrangements that enabled farmers to access these services. The service providers came from varying Capital. Addressing a major constraint in the avocado value backgrounds; some were drawn from within the farming chain, Equity Bank provided credit facilities that enabled community, while others were brokers who saw an opportunity avocado-producer groups to purchase agrochemical services to remain vitally linked to the changing avocado sector. on credit. Only producer groups with existing supply With a high percentage of Fuerte avocados on each contracts and a history of buying and selling to a lead small-grower farm, extension workers promoted on-farm exporter were eligible to participate in this program. After diversification using Hass varieties. Serving as ecological applying for credit, eligible producers received their answer insurance against variety specific pests and diseases, Hass within 48 hours. The credit covered the labor for spraying, as avocados also showed a slight price preference on interna- well as the purchase and delivery of pesticides. All the costs tional markets. More importantly, the campaign served to were covered under a fixed-price-per-tree-sprayed plan, mobilize economically marginal native trees, already com- which is paid at the start of avocado season and then mon on farms, for export production. This mobilization deducted by the bank on a draw-down basis every time relied on grafting, the technique of attaching fruit-producing spraying takes place or upon payment for the avocados branches of one tree to another. To facilitate this conversion, delivered. Credit facilities were also established for service top-working commercial grafting services had to be intro- providers to buy and maintain mechanical spray-pump duced to the farmers. Awareness training provided for equipment, run agrochemical stores, and purchase fuel. producer groups created demand for the service providers, and roughly 7,000 (Deloitte 2003) farmers preregistered for Machinery and equipment. Achelis Kenya Ltd., a subsidiary variety conversion. In some districts, the demand for variety of a Taiwanese import/export company, played an integral conversion exceeded 100,000 trees, nearly twice the pro- role in the avocado cluster by selling and training service gram’s capacity. With the average price of top-working providers in its motorized agrochemical sprayer product estimated at K Sh 250 per tree, conversion also presented a line. Other machinery providers included Israeli firms that significant business opportunity for entrepreneurs willing supplied pressing equipment used for grade-2 and grade-3 to be trained in this intervention. As top-workers were avocado processing. Figure 4.66 Kenyan Avocado Exports, 1975–2005 80,000 80,000 70,000 70,000 60,000 60,000 50,000 50,000 US$ (1000) MT 40,000 40,000 30,000 30,000 20,000 20,000 10,000 10,000 0 0 1975 1985 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Production Production Source: FAOSTAT data. CASE STUDY 14: ACHIEVING SYNERGIES THROUGH CLUSTERING—KENYAN AVOCADOS 159 RESULTS ■ Faster and cheaper access to inputs ■ Improved market linkages and information sharing Like many of this Guide’s cases, the Kenyan avocado case is ongoing. By late 2006, the program had worked with 14,240 smallholder farmers organized into 475 producer groups. One of the program’s most significant results is the Each small grower is accessing embedded services in commercial viability of the entire sector as demonstrated extension, produce collection, transportation, and a guaran- by the “replicated effect” that took place among exporters. teed market whose prices average 3–4 times those of the bro- Besides EAGA, four other lead firms have adopted the kers. Grade-1 fruit yields have increased from less than 15 program and are working downstream with contract percent to over 65 percent per tree. Participating farmers are growers. collectively averaging between 30 and 40 mt of avocado pro- duction per day. In addition, the introduction of avocado NOTES processors has provided a stable market for all small-grower production grades and varieties, with crude oil exports 1. Institute for Strategy and Competitiveness, Harvard reaching South Africa and Italy. Business School. Other benefits from the backward linkages interventions 2. Conducted by Deloitte’s Emerging Markets Group. and cluster initiatives include: 3. Kenya BDS is a five year, US$5 million project imple- mented by EMG with a period of performance from Septem- ■ Improved quality control ber 2002 to September 2007. ■ A clear path of transition from Fuerte to Hass avocado 4. AAK, http://www.agrochem.co.ke/. production 5. KEPHIS, http://www.kephis.org/. 160 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE TO O L 1 3 Monitoring Achievements in Value Chain Performance PURPOSE OF MONITORING organization’s performance more broadly (for example, looking at staff behavior, organizational structures and onitoring and evaluation (M&E) methods can be M used as a management tool that enables value chain participants and promoters to track implementa- tion progress, evaluate value chain performance, and identify methodologies, and the efficient achievement of outputs). PEs should assess the effectiveness of different factors being used to create change and as opportunities for implementing organizations to learn about themselves. the impact of initiatives. In its most basic form, M&E uses Impact assessment (IA) measures outcomes and exam- indicators to identify progress toward achieving intermediate ines changes at higher levels of a program (that is, the goal targets or ultimate goals. Monitoring systems comprise proce- and purpose level). IA effectiveness depends on having a dural arrangements for data collection, analysis, reporting, baseline or control group with which to compare results so and feedback. In business, monitoring is used to measure the that changes can be properly attributed. IA should be able return on inputs as a means to verify an investment’s success to identify which factors contributed to changes and in before returns are realized, as well as to receive guidance on what fashion. Impact assessment exercises are also key prioritization and decision making for business programs. opportunities for both program staff and beneficiaries to M&E is, of course, already a well-developed field of use in monitoring progress and affecting the evolution of practice with many established and effective implemen- program design.1 tation methods and processes. In private sector develop- The focus of many M&E implementations has been on the ment, M&E methods have three principal modes: project “project” cycle of international development interventions. monitoring, performance evaluation, and impact assess- As such, the many insights gained from these studies have had ment. Effective impact assessment often depends on many positive effects on increasing the efficacy and efficient good program evaluation and, in turn, systematic project implementation of projects and their goals. Unfortunately, monitoring. the design and implementation of performance-monitoring methods useful for measuring the actual performance of a QUESTIONS TO ASK value chain and of its participants (rather than a project) When reviewing this case consider the following questions: have yet to be properly adapted for use in private sector development contexts. ■ What does the value chain really want to monitor? Thus, for the purposes of implementing value chain ■ At what level does the value chain measure the impacts? improvements, the challenge is to provide methodologies that can be used by value chain participants to monitor the Project monitoring (PM) refers to the systematic collection implementation of their own programs. Value chain partic- and analysis of data and information about inputs, activities, ipants will require monitoring to maintain focus, reach and outputs. It is used for management purposes—to mon- objectives, and track changes in value chain performance itor progress against a plan, identify emerging issues and and development, including increases in productivity and problems, and take corrective measures. other business measurements of success. Performance evaluation (PE) is a periodic study at key Monitoring activities should provide information about points in a project cycle that examines a program or the current status of a project and general trends pertinent 161 to the value chain. Some key points on monitoring (and While measuring productivity is sufficient for measuring related evaluation) include: business performance, it does not necessarily provide mea- surement for implementation strategies, especially when the ■ Measurements are periodically carried out impact of implementation on value chain performance is ■ Monitoring is conducted for the specific purpose of seen only in the medium- or longer term. Therefore, process checking the status of the agreed-upon process or initia- indicators are also needed. tive or evaluating progress toward a strategic or manage- The level at which an impact measurement should be ment objective taken will depend on the nature of the initiative. In various ■ The results of monitoring should be evaluated and circumstances, measuring at the firm level, value chain should provide guidance for action aggregate level, country or national level, or individual level While there is often a great deal of anecdotal evidence of may all be appropriate. the impact of value chain initiatives and actions, formal Figure 4.672 illustrates an example of how value chain ini- measurements against a baseline or against a program of tiatives can begin to formulate effective monitoring and strategy implementation are frequently lacking. Some of the related evaluation programs. These require concerted actions difficulties with the application of traditional monitoring by the various value chain participants. When assisting the approaches include: value chain to develop its own monitoring and evaluation process, one must consider the following proposed steps. ■ Systems that are not attuned to the industry’s measuring vocabulary ■ The value chain must be understood by expert analysis ■ Difficulty in attributing changes to program interven- ■ Key benchmarks must be determined tions ■ Industry leaders must be consulted ■ Monitoring that does not necessarily provide insights ■ Program design must include M&E into better business practices to drive the industr forward ■ Different programs and initiatives must be linked to the ■ Monitoring responsibility that is not clearly delegated or value chain to take advantage of synergies resources that are not allocated ■ Performance measurements inform effectiveness In practice, the evaluation focus for value chains (and IMPLEMENTING MONITORING IN VALUE CHAINS clusters) has been monitored in value-added increases as a measure of productivity improvement. However, single, Monitoring interventions require stakeholders to determine quantitative measures can ignore the process side of a value which indicators are most appropriate and useful for track- chain initiative. One comprehensive evaluation approach is ing program implementation and value chain performance. the PAID framework,3 a measurement system for evaluating Traditionally, measurements of productivity or “value addi- value chain initiatives that has been adapted from the tion” are used to convey improvements in performance. approach to cluster evaluation. The PAID M&E framework (see box 4.18) not only mea- sures delivered results but also coinvestment by both the pri- Three Different Perspectives on M&E vate and public sectors. This tool can be used in value chain projects on the basis of proper benchmarks being determined ■ Business perspective: monitor value chain per- by participant organizations and institutions. For example, formance and provide feedback to inform the process indicators measure the ability of value chain prac- decision making titioners to engage the proper value chain–leading authorities ■ Process perspective: provide guidance on value and market players. The action indicators could track the chain participants’ focus as they reach their value chain initiative’s progress by looking at the changes that objectives have occurred since the intervention. The investment indica- ■ Programmatic perspective: ensure that the tors gauge the buy-in by value chain participants and those money spent on implementation is achieving actors indirectly determining the health of the value chain’s the intended results competitiveness. Delivered results measure the essential goal Source: J. E. Austin Associates, Inc. of any value chain initiative, which is to increase productivity, capture value, create jobs, and grow business. 162 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Figure 4.67 M&E Value Chain Model Rapid sector and value chain analysis Key global, regional, national sectoral benchmarks Setting up Work with lead firms through industry experts monitoring and evaluation Design industry-level interventions system Leverage/link access to finance and the enabling environment to the value chain Measure outcome and impact variables Source: Adapted from multiple FIAS-IFC presentations on value chains by Subramanian and Sur. Box 4.17 Standards for Ghanaian Pineapples Ghana’s pineapple market has been built on strong by USAID and the government of Ghana (GoG). entrepreneurship from the private sector and a SPEG was established to facilitate sea-freighting demand for Ghanaian sea-freighted pineapples in Ghanaian pineapple varieties by gaining the necessary Europe, especially outside the core French market. scale to operate at competitive prices. During the late 1980s and early 1990s, Ghana carved a To ensure quality in its pineapple exports, SPEG niche in the EU market as a primary supplier of top- worked with the Ghana Standards Board to develop a quality, airfreighted pineapples, controlling about 60 poster (see figure 4.68) that would be used by produc- percent of the estimated annual 20,000 mt of pineap- ers and packers alike as a simple guide to the minimal ples airfreighted to Europe. Ghana also exported a quality standards required for exporting. The easy-to- small amount by sea-freight (2,710 mt), but the bulk read poster was posted in strategic locations for were airfreighted (13,054 mt worth over US$400,000). exporters, traders, and farmers so that all actors within To increase exports to EU markets, sea-freighting was the Ghana pineapple chain consistently maintained explored. The Sea Freight Pineapple Exporters of the standards for color, shape, crown condition, and Ghana is a consortium of 14 exporter firms supported other pineapple characteristics. Source: Carlton Jones, J. E. Austin Associates, Inc. CONCLUSION two types of performance: 1) implementation of strategy and 2) increases of productivity. This Guide has presented Methodologies such as the PAID framework can be effec- 12 other tools and approaches that one can associate with tively applied to value chain initiatives as long as they are implementing value chain programs. Most of these tools designed to measure impacts experienced by the various can be targets for monitoring, given measurement indica- value chain participants and the various segments of the tors before, during, and after an intervention. value chain. Monitoring for value chains should focus on TOOL 13: MONITORING ACHIEVEMENTS IN VALUE CHAIN PERFORMANCE 163 Figure 4.68 Sample SPEG Poster Showing Desired Pineapple Qualities—USAID Source: USAID/Ghana Trade and Investment Program for a Competitive Export Economy implemented by Chemonics International. Box 4.18 The PAID M&E Framework Process indicators track the ability of the implementers I nvestment indicators track coinvestments by to engage the leadership of the value chain, elicit a strong counterparts. Coinvestment typically begins mod- response, and structure a collaborative agreement. These estly (through the contribution of cluster executives’ indicators should be set at the project outset and are very time, provision of workshop venues, and so on) but important during the first year of activity. then accelerates as the initiative moves to maturity. It Action indicators track whether progress is being may take time to prepare feasibility studies and proj- made in implementing the strategic initiatives identi- ects and to secure financing. The most significant fied in the first phase of the project. These cannot be investments occur at the implementation stage of programmed at the outset. action initiatives. (Box continues on the following page.) 164 BUILDING COMPETITIVENESS IN AFRICA’S AGRICULTURE Box 4.18 The PAID M&E Framework (continued) Delivered results indicators focus on increases in pro- The results become measurable after some time, often ductivity and value added but may also include export years. However, there are delivered results that are more revenues, employment growth, new enterprise growth, qualitative. The emergence of trust and cooperation average wages, and average profitability in the industry. It within an industry, business-government and academic must also be demonstrated that the project contributed collaboration, changes of mindset, and spread effects can directly (wholly or partially) to delivering these results. be observed but are not easily quantified. Source: Kevin X. Murphy, J. E. Austin Associates, Inc. A STEP-BY-STEP SUMMARY OF TOOL 13: ■ Report the findings to the value chain stakeholders. This MONITORING ACHIEVEMENTS IN VALUE encourages continued buy-in and a continued sense of CHAIN PERFORMANCE responsibility among implementers, and enables mid- course improvements and adjustments. ■ Analyze the present value chain to identify data points that may indicate future progress toward the value chain’s goals. ■ Identify process and results metrics that will demonstrate NOTES the progress of an intervention or initiative relative to the 1. Adapted from an online contribution from Mike Albu strategic goals. These will include a balance of process, of Practical Action found at: “Impact Assessment: An action, investment, and delivered results indicators. Online Speaker’s Corner Discussion Led by Gary Woller and ■ The value chain stakeholders should agree on the M&E Hosted by microLinks.org,” September 26–28, 2006. More criteria. 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Abiola, eds. 2003. “Standards and Global Trade: A Voice for Africa.” World Bank, Wash- Sources interviewed ington, DC. http://www1.worldbank.org/publications/ ■ Borislav Georgiev, Independent Consultant pdfs/15473frontmat.pdf. ■ Krassen Stanchev, IME World Bank. 2006. “Project Brief on a Proposed Credit in the Amount of SDR 14.0 Million (US$20.0 Million Equivalent) Case Study: Capturing Value through Integration— and Proposed Grant from the Global Environment Facility The Ghanaian Pineapple Industry and Blue Skies Trust Fund in the Amount of US$6.2 Million to the Gov- Holdings Ltd. ernment of Mozambique for a Market-Led Smallholder Development in the Zambezi Valley Project.” Environ- Blue Skies, http://www.bsholdings.com/. ment, Rural and Social Development Unit, AFTS1 Country Danielou, Morgane, and Christophe Ravry. 2005. “The Rise Department 2, Mozambique Africa Region. http://www of Ghana’s Pineapple Industry.” World Bank, Africa .gefweb.org/documents/Council_Documents/GEF_C28/ Region Working Paper Series No. 93. documents/288905-17-06 Revised-MzBriefWPEntry.pdf. Ghana Export Promotion Center News, http://www .gepcghana.com/news.php?item=4&n. Hallam, David, Pascal Liu, Gill Lavers, Paul Pilkauskas, Sources interviewed George Rapsomanikis, and Julie Claro. 2005. “The Market ■ Antonio Miranda, Miranda Caju for Non-Traditional Agricultural Exports.” Commodities ■ Shakti Pal and Jake Walter, TechnoServe Mozambique and Trade Division, FAO. Imbert, Eric. 2003. “The World Pineapple Market: When Growth Goes Hand in Hand with Diversity.” Prepared for the Food and Agricultural Organization (FAO) Tool 6: Capturing Value through Forward and conference, “Committee on Commodity Problems, Backward Integration Intergovernmental Group on Bananas and on Tropical Austin, James E. 1992. Agroindustrial Project Analysis. World Fruits,” Third Session, Puerto de la Cruz, Spain, Bank/Johns Hopkins Press, second edition. December 11–15. BIBLIOGRAPHY 173 Rougé, B., and M. 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Austin Associates, Inc. 2006. “Rwanda Export Promotion Action Plan.” Submitted to the government of Rwanda, Case Study: Ugandan Nile Perch Quality Rwanda Investment and Export Promotion Agency and Management and Certification Ministry of Finance and Economic Planning, May, with assistance from the World Bank. Ponte, Stefano. 2005. “Bans, Tests and Alchemy: Food Safety Lecraw, Donald. 2005. “The Coffee, Tea, Tourism, and Standards and the Ugandan Fish Export Industry.” Danish Handicrafts Sectors: Export Potential and Contribution Institute for International Studies, DIIS Working Paper No. to Growth and Poverty Reduction,” Draft version, Inte- 2005/19. http://www.isn.ethz.ch/pubs/ph/details.cfm?lng= grated Framework, Diagnostic Trade Integration Study. en&id=18423. 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Austin Associates, Inc. Box case study: Ugandan cotton—enterprise-linked ■ Warren Weinstein, J. E. Austin Associates, Inc. extension services model ■ Maurice Wiener, Chemonics, Inc., former Chief of Party, Support for Private Enterprise Expansion and Development USAID/ADAR Project (SPEED). 2003. “Support for Private Enterprise Expansion 176 BIBLIOGRAPHY and Development, Private Sector Takes on Development Tool 11: Improving the Operating Environment by Role.” SPEED Bulletin, June. Promoting Public-Private Dialogue Box case study: Tanzanian coffee and KILICAFE: Box case study: Sri Lankan cinnamon productive public-private dialogue Bolnick, Bruce. 2003. “The Economic Impact of Cluster Ini- TechnoServe, Inc. 2006. Case Study on Coffee in Tanzania. tiatives Under the Competitiveness Initiative Project Washington, DC. Interim Assessment and Recommendations.” Nathan Tschirley, David. 2004. “Cotton in Zambia: An Assessment Associates Inc. of Its Organization, Performance, Current Policy Initia- Iqbal, Mohammad. 1993. “International Trade in Non-Wood tives, and Challenges for the Future.” Forest Products: An Overview.” Food and Agriculture Organization (FAO), Rome, Italy. http://www.fao.org/ Sources interviewed docrep/x5326e/x5326e00.htm#Contents. ■ Thom Dixon, TechnoServe Tanzania Nathan Associates, Inc. 2002. “A Competitiveness Strategy ■ Susan Bornstein, TechnoServe for Sri Lanka’s Spices Industry.” Developed by the Spices Industry Cluster, supported and funded by the Compet- itiveness Initiative, a joint project of the United States Case Study: Improving the Operating Environment Agency for International Development (USAID), Nathan by Promoting Public-Private Dialogue—Botswana Associates Inc., and J. E. Austin Associates, Inc. Colombo, Cattle Producers Association Sri Lanka. Botswana Meat Association. 2006. “Maun Abattoir Fate to USAID. 2005. “Helping restore the legacy of ‘Ceylon cinna- Be Decided Soon.” Daily News, September 22. http:// mon.’” http://www.usaid.gov/lk/news/tos/july05-cinna www.gov.bw/cgi-bin/news.cgi?d=20060922&i=Maun mon.html. _abattoir_fate_to_be_decided_soon. USAID. 2007. “Request for Proposal: Connecting Rural “Advocating for Cattle Policy Reform.” http://www.satradehub. Economies (CORE) for Sri Lanka.” org/CXA_html/ss_case_study.html. “Cattle Farmers Get Higher Prices.” USAID. http://www. usaid.gov/stories/botswana/ss_bw_meat.pdf. 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Research Project, Lusaka, Zambia. “Trade Hub Happenings.” Issue No. 45. http://www.satrade hub.org/CXA_html/docs/HH-Dec2006%20-%20Jan2007 Source interviewed .pdf/http://www.satradehub.org/CXA_html/hh_issue45 ■ Ben Sekamatte, Dunavant Cotton, Zambia .html. BIBLIOGRAPHY 177 Sources interviewed IFPRI, NEPAD, CTA Conference “Successes in African ■ Keith Jefferis, Southern Africa Global Competitiveness Agriculture.” December 1–3, Pretoria. Hub Consultant Okado, Mark. 1999. “Background Paper on Kenya Off- ■ Martin Norman, Hub Manager, Southern Africa Global Season and Specialty Fresh Vegetables and Fruits: Les- Competitiveness Hub sons of Experience from the Kenya Horticulture Indus- ■ Philip Fischer, President, Botswana Cattle Producer’s try.” UN Conference on Trade and Development. Association Shah, Tiku. 2003. “Kenya Avocados.” Presentation on the market, November, Fresh Produce Exporters Association Tool 12: Achieving Synergies through Clustering of Kenya (FPEAK). 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Presentation to the International Symposium on Fresh Jaffee, Steven. 2003. “From Challenge to Opportunity: Produce Supply Chain Management, December 6-10, Transforming Kenya’s Fresh Vegetable Trade in the Con- Chiang Mai, Thailand. text of Emerging Food Safety and Other Standards in Europe.” Agriculture and Rural Development Discussion Source interviewed Paper, World Bank, Washington, DC. ■ Malick Antoine, ESSD Africa, World Bank Minot, N., and M. Ngigi. 2003. “Are Horticultural Exports a Replicable Success Story? Evidence from Kenya and Côte Box case study: The PAID M&E framework d’Ivoire.” International Food Policy Research Institute Adapted from the model developed by Kevin X. Murphy, and Egerton University. Paper presented at the InWEnt, J. E. Austin Associates, Inc. 178 BIBLIOGRAPHY INDEX Boxes, figures, notes, and tables are indicated by b, f, n, and t, respectively. A Belgium, 61, 124 abattoirs, 144–145, 145f, 146, 147, 148 benchmarking and gap assessments of value chains, 25, 55–60. Accelerated Microenterprise Advancement Project (AMAP), 22 See also Ugandan floriculture, benchmarking and gap Achelis Kenya Ltd. (import/export company), 159 analysis of action indicators, 162, 164b background on, 55 ADAR (Assistance a la Dynamisation de Agribusiness au benchmarking targets, 57, 60 Rwanda), 78b benchmarking tool, 55–60 Africa. See sub-Saharan Africa cluster initiatives and, 152 African Action Plan, 7 competitiveness and, 108 AGOA (African Growth and Opportunity Act of 2000, U.S.), 31b data collection and utilization, 57–59, 57f, 60 Agribusiness Development Activity (Rwanda), 112 determining what to benchmark, 56–57, 56b, 60 Agricultural Association of Kenya (AAK), 158 effective benchmarking, 56, 60 Agricultural Competitiveness and Diversification Project mapping and, 132, 152 (Mali, PCDA), 37, 39 public-private dialogue and, 139, 142 Agricultural Productivity Enhancement Program (APEP), 130b purpose of benchmarking, 55–56 Agro Industria Associadas (AIA), 102–103, 103f summary of tool, 60 Amaka Holdings (cotton company), 135 supply chains and, 46 aquaculture, 49–50. See also Ugandan Nile perch support services for value chains and, 132 Arab Republic of Egypt, 50, 93, 131b value chain performance monitoring and, 162 Armenia, glass jar production in, 71b Blommer Chocolate Company, 106b Arm-Glass Company (glass manufacturer), 71b Blue Skies Holdings Ltd. See Ghanaian pineapple industry and assessments. See also benchmarking and gap assessments Blue Skies Holdings Ltd. of value chains BMC (Botswana Meat Commission), 144–145, 146–148 of business environment, 46–47 BMC Act of 1966 (Botswana), 144, 147–148 of human resources, 46, 47 BMOs (business membership organizations), 142, 143t methods for market, 49, 50b Botswana, Bank of, 146 of productivity, 44–45, 47 Botswana Cattle Producers Association (BCPA), 144–149 of supply chain quality, 45–46, 47 abattoirs and, 144–145, 145f, 146, 147, 148 Austin, James, 87 background on, 144–145, 145f avocados. See also Kenyan avocados birth of, 144–146 Fuerte avocado variety, 155, 156, 158, 159, 160 BMC Act revision, 147–148 Hass avocado variety, 159, 160 cattle production system and, 147 monopolistic conditions of, 146 B national herd decline and, 146 banana, 36, 98 outcomes for, 148–149, 148f, 149f bargaining power. See markets and market analysis points to consider, 144 Beach Management Units (BMUs), 124 PPD effects on red meat value chain, 149 179 privatizing BMC, 148 Kenyan avocados and, 155–160, 157f problems for, 146 summary of tool, 153–154 publication of findings and government engagement by, for tea production, 72 146–148, 147f Thai Good Agricultural Practices and, 107b, 118b revenue decline for, 146 Ugandan floriculture and, 64–65, 67t value chain costs for, 146 value chains and, 151 Botswana Meat Commission (BMC), 144–145, 146–148 coffee, 56b, 78b, 116, 141b. See also Rwandan coffee branding and brand names, 20–21, 102–103, 107b, 112, 118b, Coffee Taxation and Benchmarking Initiative (CTBI), 141b 141b, 151 collaboration, horizontal. See horizontal collaboration Brazil, 83n3, 91, 110 and linkages bukas (Nigerian canteens), 51, 53, 53n1 Colombia, 56b, 119b Bulgaria, wine industry in, 89–90b Common Market of Eastern and Southern Africa, 3 Burkina Faso, cotton in, 58b Community Coffee (coffee company), 112 Burundi, 4, 109 Compagnie Fruitière (banana company), 98 “Business Competitive Index,” 48n6 comparative advantages, 29–30, 33, 34–35, 36 Business Development Services (BDS), 22 competitiveness, 26, 105–108. See also Mali, Business Growth Initiative (BGI), 8n4 competitiveness-diversification in businesses and business environments, 8, 12, 25, 26, 46–47, 48n7 goals for, 85 business plans and business models interventions for, 13 designing, 8, 25 in Malian agricultural value chains, 37–39 innovations and, 13 positioning value chain for, 105–108 for Mozambican cashews, 81–82 productivity and, 41 replication of, 25, 77–83, 78–79b, 160 summary of tool, 108 summary of tool, 77 SWOT analysis and, 42 for Zambian cotton, 135–137 value chain analysis and, 10, 12, 23 Competitiveness Diamond, 12, 13f, 42–44, 45f, 47 C Congo, Democratic Republic of, agricultural production CAADP (Comprehensive Africa Agricultural Development decline in, 4 Programme), 1–2 cooperation and trust, 8, 15, 16–20, 116–117, 157 cacao, 106b, 119–120b cooperatives, 117 criollo, 119b cost analysis, 12, 44 forastero, 119b Costa Rica, 56b, 91, 98, 141b Hershey (chocolate company), 106b cost efficiency, 11–12 Cameroon, 58b, 98 Côte d’Ivoire. See Ghana and Côte d’Ivoire pineapple exports Cargill (agricultural company), 137 cotton industry, 35–36, 58b, 129–130b. See also Zambian cotton Carrefour (retail outlet), 107b credit and credit extension, 19, 136–137, 159 cashews, 35–36 Cuba, cigars in, 59f India, cashew production in, 81, 83n3, 101 cut flowers. See floriculture Mozambican. See entries at Mozambican cashews cashmere industry, 42, 42f, 105–107, 108f, 108n1 D catfish. See Nigerian domestic catfish da Gama, Vasco, 131b cattle. See Botswana Cattle Producers Association dairy industry, 43f, 77, 78–79b certifications. See quality standards and certifications Dairy Pakistan, 77, 79b Ceylon. See entries at Sri Lanka data collection and utilization, 57–59 Chemico (agrochemical supplier), 99 deepening of value chains. See value chains, upgrading and Chemipher (U) Ltd. (pesticide testing company), 124 deepening Chiluba, Frederick, 134 delivered results indicators, 162, 165b China, 3, 105–106 Del Monte Foods, 91 Chiquita (banana company), 98 Democratic Republic of Congo, agricultural production decline in, 4 cigars, 59, 59f Department for International Development (DFID, cinnamon production, 131b United Kingdom), 7 citrus fruits, 57–59, 57f Department of Fisheries (DFR, Uganda), 123–124 Clark Cotton (cotton company), 134, 137 differentiation of products, 105, 108 clusters and clustering, 26, 151–154 diversification, 3, 37–39, 65, 88b. See also Mali, background on, 151 competitiveness-diversification in cluster initiatives (CIs), 152, 153–154, 153f, 155–156, 160 Dixie, G., 49, 50, 51, 52 definition of, 9–10 Dizengoff (agrochemical supplier), 99 evaluation of, 152–153 Doing Business Report (World Bank), 48n7, 56 180 INDEX Domestic Resource Costs (DRCs), 30, 33, 34–36 flower auctions, 61, 63t, 65. Dominican Republic, cigars in, 59, 59f Germany, flower exports to, 61 Dunavant (cotton company), 135–137, 136f, 137t Floriculture Training Development Center, 65 foreign direct investment (FDI), 10, 69, 72, 152 E Fresh Producer Exporters Association of Kenya (FPEAK), 74, 158 East African Growers Association (EAGA), 157, 160 Fresh Produce Terminal, Nairobi airport (Kenya), 74 economies of scale, 25, 52, 95–103. See also Mozambican cashews, economies of scale for G Ecuador, 91, 106b, 119–120b Gabinete de Promoção do Sector Comercial Agrário (GPSCA), 34 education system and institutions, 46, 158 gap analysis, 59, 59t, 60t, 61–68, 69. See also benchmarking and Egypt, Arab Republic of, 50, 93, 131b gap assessments of value chains “embedded services,” 22, 130 GDP (gross domestic product), 3, 4t, 37, 55, 144 Engelmann, Ralph, 50f Geomar International Group, 37 Enterprise-Linked Extension Model for cotton industry, 129b Gergely, Nicolas, 36n1 Equity Bank, 159 Gesellschaft für Technische Zusammenarbeit (GTZ), 7 Ethiopia, coffee production in, 109, 111, 141b Ghana, Horticultural Association of (HAG), 92 EU. See European Union Ghana, Sea Freight Pineapple Exporters of (SPEG), 92, 94, 98–99, EurepGAP certification 99n1, 163b, 164f AIA and, 102 Ghana and Côte d’Ivoire pineapple exports, 97–99. See also Blue Skies Holdings Ltd. and, 93 pineapple horticulture and, 88b business partnership benefits, 99 Kenyan avocados and, 157 Office Centrale des Producteurs-Exportateurs d’Ananas et de SPEG and, 99 Bananes, 97–98 Thai Good Agricultural Practices and, 107b, 118b pineapple production in Côte d’Ivoire, 91 Ugandan floriculture and, 65 sea freight pineapple export value chain, 98–99, 98f Ugandan Nile perch and, 123–124 Ghanaian pineapple industry and Blue Skies Holdings Ltd., European Union (EU) 91–94. See also pineapple avocado imports to, 155, 156 background on European market for, 92–93, 92f banana import policies to, 98 Blue Skies Holdings Ltd. value chain, 93–94 Botswana meat export to, 144, 145, 146 European exports, 93, 93f European Commission, 122 industry overview, 91–92 fish import lists for, 124 major pineapple exporters, 91, 92f pineapple exports to, 92–93, 93f, 97–98, 99, 99f, 163b standards for, 163b rose exports to, 88b ginneries for cotton, 129–130b, 134–135, 137. See also cotton Rwandan coffee and, 109 glass jar production, 71b Thai exports to, 118b Glass World Company (GWC), 71b Ugandan Nile perch imports in, 122–123, 125, 127 Global Competitiveness Report (World Economic Forum), vegetable exports to, 74 48n7, 56 Exotic Fruit Exporters Association of Ghana (EFEG), 92 GlobalGAP, 99 export-price parity, 148–149 globalization, 2–4, 10 extension services, 129–130b, 135 Good Agricultural Practices (GAP) EurepGAP. See EurepGAP certification F Kenya-GAP (code of practice for horticulture industry), 158 Fair Trade certification, 78b Thailand, 107b, 118b Farmapines (Ghanaian pineapple exporter), 92, 94n2 Good Manufacturing Practices (GMPs), 125, 126, 126f Farmer Field Schools, 106b governance, 8, 15, 20, 21, 117 FDI (foreign direct investment), 10, 69, 72, 152 government agencies and organizations, 116, 117, 158 feasibility studies, 78b, 132, 164b grapefruit, 36 field schools, 106b, 119–120b grape, 89–90b filières, 10 green beans. See Kenyan green beans firms, lead, 20, 22, 81, 117, 121 gross domestic product (GDP), 3, 4t, 37, 55, 144 First Catering (Ghanaian pineapple processing company), 92 Guarantee Fund (INCAJU), 82 Fischer, Philip, 145, 146 Guatemala, 111, 141b fishing Lake Management Organizations, 124 H Lake Victoria, fishing from, 122, 125 Harmonized System (HS), 131b floriculture, 61–62, 64, 67t, 88b, 152, 153f. See also Ugandan Hazard Analysis and Critical Control Point (HACCP), 102, 123, floriculture, benchmarking and gap analysis of 125, 126f INDEX 181 Holland. See Netherlands Jefferis, Keith, 146, 147 Homegrown (Kenyan horticultural exporter), 75–76 Jei River Farms (Ghanaian pineapple exporter), 92, 98 Honduras, 91 John Lawrence Farms (Ghanaian pineapple export company), 98 horizontal collaboration and linkages. See also vertical integration joint ventures, 69, 72, 95 and linkages in avocado industry, 157 K cashew processors and, 102–103 Kaesetsart University, 118b in clusters, 9 Kenya economies of scale and, 95–96, 100 airfreight tonnage in, 88b integration and, 69 benchmarking of floriculture in, 61, 62–64, 67t market supply and, 25 coffee production in, 109, 111, 141b in value chains, 9, 16, 19 cut flowers in, 152, 153f Horticultural Association of Ghana (HAG), 92 diversification of exports in, 3 Horticulture Crops Development Agency (HCDA, Kenya), 73, 158 FPEAK, 74, 158 human resources assessments, 46, 47 Fresh Produce Terminal, Nairobi airport, 74 map of, 74f I Nile perch production in, 122 Illy-cafe (coffee company), 141b Kenya Agricultural Research Institute (KARI), 158 impact assessment (IA), 161 Kenya-GAP (code of practice for horticulture industry), 158 India, 3, 81, 83n3, 91, 101 Kenyan avocados, 155–160. See also avocados Indonesia, 91 background on, 155–156 Indu-Farm Ltd. (avocado exporter), 157 cluster actors’ roles for, 157–159 information and information sharing cluster for, 157, 157f, 160 in avocado industry, 157, 160 educational organizations and, 158 in cashew industry, 102–103 government organizations and, 158 in literature review, 22 increase in export of, 157, 159f in Nigerian domestic catfish market, 52 industrial organizations and, 158 public-private dialogue and, 142 industry results for, 160 quality standards and certification and, 116–117 input suppliers/providers for, 158–159 value chain analysis and, 11 points to consider, 155 infrastructure, 47, 142 supporting industries for, 158 innovations, 8, 13, 15, 22 value chain for, 156–157, 156f, 157f institutional alignment, 139–140 Kenyan Business Development Services (Kenya BDS) Project, Integral Ghana Ltd. (pineapple company), 98 156–157, 158 integration, 25, 85–90. See also horizontal collaboration and Kenyan green beans, 73–76 linkages; vertical integration and linkages added operations and, 73, 76 backward, 22, 88b background on, 73–74 considerations for, 87 timeline of horticultural development in Kenya, 74 forward integration, 85, 90n1 value chain for, 74–76, 75f Ghanaian pineapple industry and, 91–94 Kenya Plant Health Inspectorate Services (KEPHIS), 158 national value chain perspective on, 85–87, 86f KILICAFE (Association of Kilimanjaro Specialty Coffee summary of tool, 87, 90 Growers), 141b Inter-American Development Bank, 106b Koranco Farms (Ghanaian pineapple exporter), 92 International Development Association (IDA), 33 International Finance Corporation (IFC), 7, 142 L International Food Policy Research Institute (IFPRI), 2 lead firms, 20, 22, 81, 117, 121 investment Liberia, agricultural production decline in, 4 FDI, 10, 69, 72, 152 linkages. See horizontal collaboration and linkages; indicators, 162, 164b vertical integration and linkages TIP, 99n1 Lint Company of Zambia (LINTCO), 134 ISO 9001 certification, 124–125, 125f, 126 literature review of value chains. See value chains, Israel, 159 literature review of Italy, 105, 122, 160 Lonrho Cotton (cotton company), 134, 135 J M J.E. Austin Associates, Inc. Madagascar, aquaculture in, 50 PAID approach to cluster evaluation, 153 maize, 130b “10 Bridges Approach,” 48n5 Mali 182 INDEX cotton in, 58b processing operations for, 82–83, 82f, 83t sustained economic growth in, 4 production decline in, 80, 81f Mali, competitiveness-diversification in, 37–39 sector rebirth for, 82–83 competitiveness of potential offerings, 38 value chain for, 82, 82f competitiveness planning for, 38 Mozambican cashews, economies of scale for, 100–103 future steps, 38–39 Agro Industria Associadas and, 102–103, 103f market demand and market entry conditions for, 38 background on, 100–102 points to consider, 37 decline in exports for, 100, 101f portfolio of agricultural value chains, 37 horizontal link of processors, 102 priority sectors and, 38 lessons learned, 103 value chain analysis and selection approach, 37–38 map of regions of Mozambique, 101f M&E. See monitoring and evaluation packing of cashews, 102, 103t market chains, 18t, 79b points to consider, 100 marketing, 52, 53, 65 shipping costs of cashews, 102, 103t markets and market analysis. See also supply and supply chains value chain for, 102–103 assessment methods for, 49, 50b Mozambique, value chain selection in, 33–36 contestable, 20 analysis of, 34–35 dynamics of, 12 background on, 33 for Ghanaian pineapple, 92–93 findings for, 35–36 globalization of, 2–4, 10 initial list of sectors for, 33–34, 34t in Mali, 38 outcomes and future steps, 36 “market information gate,” 85 points to consider, 33 market opportunities, 36 Mramba, Basil, 141b market power, 8, 15, 20–22 MSP-ABC certification (Good Agriculture Practices certification market segmentation, 44, 73, 74 under EurepGAP), 65 for Nigerian domestic catfish, 49 Murphy, Kevin, 165 positioning for, 26 PAID, 164–165 prioritizing value chains and, 30 supplying, 8, 25 N Marks & Spencer (retailer), 92 Namibia, 146, 148 Mars (chocolate company), 106b National Horticulture Research Centre (NHRC), 158 MD2 pineapple varietal, 91, 99 NEPAD (New Partnership for Africa’s Development), 1, 49 meat, 69, 70–71b, 87, 144–149 Nestlé (chocolate company), 106b M&E (monitoring and evaluation) methods, 161–162, 163f, Netherlands 164–165b. See also monitoring; value chain performance benchmarking of floriculture and, 64, 67t monitoring cashew exports to, 81 Mexico, 91, 155 floriculture exports to, 61, 62, 88b milk, 43f, 77, 78–79b flower auctions in, 61, 63t, 65 Millennium Development Goals (MDGs), 4 NGOs (nongovernmental organizations), 116 Miranda, Antonio, 81–82, 102 Nigerian domestic catfish, 49–53 Miranda Caju Ltd. (Mozambican cashew company), 81–82, 101–102 background on, 49–50 Mongolia consumption factors for, 51, 52, 52f cashmere from, 42, 42f, 105–107, 108f, 108n1 demand for, 51, 51f meat industry in, 69, 70–71b, 87 map of Nigeria, 50f Mongolian Competitiveness Initiative (MCI), 70b market assessments and, 49 monitoring and evaluation (M&E) methods, 161–162, 163f, opportunities for, 51–52, 53 164–165b. See value chain performance monitoring production of, 51 PAID, 162, 164–165b supply of, 51, 51f monopolies, 20, 21, 144, 146, 148 value chain for, 50–53, 51f, 53f Morocco, citrus fruits and tomatoes in, 57–58, 57f value chain interventions and, 52–53, 53f Moshi Coffee Auction, 141b Nile perch. See Ugandan Nile perch Mozambican cashews, 80–83 Nykatonzi ginnery (Uganda), 129b background on, 80–81 economies of scale. See Mozambican cashews, O economies of scale for Office Centrale des Producteurs-Exportateurs d’Ananas et de lead firm model for, 81 Bananes (OCAB, Côte d’Ivoire), 97–98 model replication for, 81–82 Office of Commercial Agricultural Sector Promotion points to consider, 80 (Mozambique), 34 INDEX 183 Ohen, S.B., 49, 50, 51, 52 Q operating environments, 139–149 quality standards and certifications, 26, 115–121 operational productivity, 44–45, 47 AIA and, 102, 103 outgrower schemes, 130, 133n1, 135, 137 associations and cooperatives for, 117 outsourcing, 10, 19 certification bodies, 116, 117, 118b, 121 government agencies and, 117 P information channels for, 116–117 PAID lead firms for, 117, 121 approach to cluster evaluation, 152–153 oversight and governance for, 117 M&E framework, 162, 164–165b for Rwandan coffee, 111–112 Pakistan, 43f, 77, 78–79b standards for product value, 116, 116f, 117, 118b, 121 paprika industry, 35 summary of tool, 121 Partnership to Enhance Agriculture in Rwanda through Linkages supply chain assessment and, 45–46, 47 (PEARL), 78b, 112 Ugandan Nile perch and, 122–127 Peet’s Coffee and Tea (coffee roaster), 141b value chain and, 12, 115, 115f performance monitoring. See monitoring vocabulary for, 115 Pest Control Products Board (PCPB, Kenya), 158 for workforce, 46, 48n5 pesticides and pesticide laboratories, 124, 158–159 Philippines, pineapple production in, 91 R pineapple, 163b, 164f. See also Ghana and Côte d’Ivoire pineapple Rainforest Alliance standards for coffee, 116 exports; Ghanaian pineapple industry and Blue Skies R&D (research and development), 21, 65 Holdings Ltd. “reaching scale,” 97 point-of-purchase (PoP) displays, 107b replication of business models, 25, 77–83, 78–79b, 160 Policy Analysis Department (Mozambican Ministry repositioning of products. See product positioning of Agriculture), 36 research and development (R&D), 21, 65 Polycraft (Ghanaian carton manufacturer), 99 restaurants, 51, 52–53 PoP (point-of-purchase) displays, 107b revealed comparative advantages (RCAs), 29–30, 32n1, 34 Porter, Michael, 12, 47n3, 48n6, 142 rice industry, 35 “Porter Diamond,” 47n3. See also Competitiveness Diamond Romania, 89b Port Tema (Ghana), 99 roses, 61, 62–63, 63t, 64t, 65, 65f, 88b potato industry, 35 Rwanda Coffee Development Authority (OCIR-CAFÉ), poverty and poverty reduction, 1, 2, 4, 31b 109, 113 Prices and Production of Cacao Farmer Field Schools (Ecuador), Rwandan coffee, 109–114 119–120b background on, 109–110, 110f, 110t priority sectors, 29–32, 31b, 38 current and future prospects for, 112–113 private-public dialogue. See public-private dialogue factors to consider, 109 private-public partnerships, 72 global competition, prices, and production, 110 privatization, 148 implementation and outcomes for, 112 process indicators, 162, 164b in-country constraints for, 110–111, 110t producer-driven value chains, 21 as replicable business model, 78b product differentiation, 105, 108 repositioning offer for, 111–112, 111–114f, 113–114t productivity, 4–5, 5f, 41–47, 47n2, 162 product positioning, 44, 107b, 108, 109–114, 111–114t, S 113f, 139 Sainsbury’s (retailer), 92 product specialization, 19, 69, 129, 151 Saranist (investment company), 71b project monitoring (PM), 161 Scotland, cashmere processing in, 105 Projet Croissance Economique sea freight, 98–99 (Senegal), 31b Sea Freight Pineapple Exporters of Ghana (SPEG), 92, 94, 98–99, public-private dialogue (PPD), 26, 139–143 99n1, 163b, 164f generally, 139–142, 140t, 143t segmentation of markets, 44, 73, 74 Botswana Cattle Producers Association Senegal, 30, 31b and, 144–149 sharing of information. See information and clustering and, 151 information sharing enabling environment for, 139 small and medium enterprises (SMEs) Kenya and, 73 cashew processing and, 80, 81 summary of tool, 142–143 demand for services and, 129 Tanzanian coffee and, 141b growth of, 1 public-private partnerships, 72 SME exporters (SMEX), 75 184 INDEX trust and, 116–117 developing new businesses, 25 value chain analysis and, 10 market positioning and, 26 South Africa market supply and, 25 avocado oil imports to, 160 sequencing of, 26, 27f Blue Skies Holdings Ltd. and, 93 value chain results monitoring, 26 cattle production in, 146, 148 Trade and Investment Program (TIP), 99n1 horticulture in, 88b trust and cooperation, 8, 15, 16–20, 116–117, 157 sustained economic growth in, 4 TSC (Sri Lankan Spice Council), 131b Southern Africa Global Competitiveness Hub (SAGCH), 145–146 Turkey, 57–58, 57f Spain, 57–59, 57f, 122 specialization of products, 19, 69, 129, 151 U spices, 131b Uganda Sri Lanka, 72, 131b benchmarking in coffee industry in, 56b Sri Lankan Spice Council (TSC), 131b coffee production in, 141b standards of quality. See quality standards and certifications cotton service model from, 129–130b Starbucks Coffee Corporation, 112, 141b map of, 62f strategic working group (SWOG) meetings, 79b Uganda Fish Processors and Exporters Association (UFPEA), strategies for value chains. See value chain strategies 123, 125 sub-Saharan Africa. See also specific countries Uganda Flower Exporters Association (UFEA), 65 comparison of agricultural productivity in, 4–5, 5f Uganda National Bureau of Standards (UNBS), 122 development agenda in, 1–2 Ugandan floriculture, benchmarking and gap globalization and, 2–4 analysis of, 61–68 share of world trade by, 2, 3f, 4 background and industry description, 61–62 sustained economic growth in, 4, 6t cluster structure and, 64–65, 67t trade growth in, 3, 4t cuttings production in, 63, 66f, 66t sugar and sugarcane industry, 35, 36 flower exports, 65, 68f supermarkets, 92, 107b, 115 outcomes for, 66–68 supply and supply chains. See also markets and market analysis value chain analysis for, 62–64, 62f, 64f assessment of, 45–46, 47 Ugandan Floriculture Competitiveness Plan: 2005–2010, 65 clustering and, 151 Ugandan Nile perch, 122–127. See also Ugandan floriculture, definition of, 9 benchmarking and gap analysis of of Kenyan green beans, 75 certification timeline for, 123 of Nigerian domestic catfish, 51 EurepGAP certification and, 123–124 oversight and management and, 117 export performance for, 125, 127f support services. See value chain support services industry-level certifications, 125 sweetheart roses. See roses industry results for, 125 Swisscontact (technical cooperation firm), 50f intervention and, 123 SWOT (strengths, weakness, opportunities, and threats) analysis, ISO 9001 certification, 124–125, 125f, 126 42, 43f, 44, 47 lessons learned, 125–127 synergies, 151–160 pesticide laboratories and, 124 points to consider, 122 T value chain for, 122–123, 124f Tanzania, 58b, 141b Union Bananière Africaine, 99 “Tanzania Kilimanjaro Limited Edition” coffee brand, 141b United Kingdom Tanzanian Coffee Board, 141b flower exports to, 61, 88b tea, 72 pineapple exports to, 93 technical assistance, 13, 19, 82 supermarkets in, 92 TechnoServe (technical assistance provider), 81–82, vegetable exports to, 73, 75 101–102, 141b United Nations Food and Agriculture Organization “10 Bridges Approach,” 48n5 (FAO), 91 Tesco (retail outlet), 107b United States Thailand, 91, 97, 107b, 118b avocado production in, 155 tomatoes, 57–59, 57f cacao processing in, 106b Tonggu Fruits (Ghanaian pineapple processing company), 92 cashew export to, 102 tools for value chain implementation, 25–27, 27f. cinnamon market in, 131b See also individual tools coffee standards in, 116 business and policy improvements, 26 flower exports to, 65 designing strategies and business plans, 25 Rwandan coffee and, 109, 112 INDEX 185 Thai exports to, 118b initial list of products for, 29–30, 31b Ugandan Nile perch market in, 125 market analysis and, 30 University of Moratuwa, 72 summary of tool, 32 upgrading. See value chains, upgrading and deepening testing commitment and, 31–32 U.S. African Growth and Opportunity Act of 2000 (AGOA), 31b value chain performance monitoring, 8, 26, U.S. Agency for International Development (USAID) 161–165 avocado industry and, 155 Ghanaian pineapple standards and, 163b cashew sector and, 80, 81, 100 implementation of, 162–163, 163f cattle producers and, 145 purpose of monitoring, 161 Ecuadorian cacao and, 119b questions to ask about, 161–162 Mongolian meat industry and, 70b summary of tool, 165 Projet Croissance Economique support by, 31b value chains, literature review of, 15–23, 17–18t Rwandan coffee and, 112 creating trust and, 15, 16–20 SPEG and, 99n1, 163b, 164f governance and, 15, 20 Ugandan cotton and, 129b, 130b innovation, information, and knowledge and, 15, 22 Ugandan Nile perch and, 125 intervention points and, 15, 22 value chain analysis and, 7 market power and, 15, 20–22 U.S. Department of Agriculture (USDA), 70b power relations in value chains, 20, 21f works of particular interest from, 15–16 V value chains, upgrading and deepening, 25, 69–72 value chains, 9–13 adding operations for, 69, 72 Africa’s development agenda and, 1–2 categories of, 22 analysis of, 10–12 commercial joint ventures and, 72 benchmarking. See benchmarking and gap assessments domestic and foreign direct investment and, 69, 72 of value chains domestic capacity and, 30 for Blue Skies Holdings Ltd., 93 Kenyan green beans and, 73, 76 for Botswana cattle, 146, 149 methods for deepening value chain, 69–72 buyer-driven, 21, 92 new entrants/entrepreneurs and, 69 case studies. See individual case studies, e.g. Ugandan specialization and, 69, 129 Nile perch summary of tool, 72 clustering and, 151–152, 155 testing commitment and, 32 competitiveness and, 10, 12, 23, 26, 105–108. vertical integration and, 71, 72 See also competitiveness value chain strategies, 25, 41–48. definition of concepts, 9–10 See also Rwandan coffee gap assessments. See benchmarking and gap assessments business environment assessment and, 46–47, 48n7 of value chains Competitiveness Diamond and, 42–44, 47 for Ghanaian pineapples, 98–99, 98f human resources assessment and, 46, 47 horizontal collaboration and, 95 mapping and, 132 for Kenyan avocados, 156–157, 156f, 157f operational productivity assessment and, 44–45, 47 for Kenyan green beans, 74–76, 75f productivity and, 41–47, 41f monitoring results in development, 26 status assessment of value chains, 41–42, 42f for Mozambican cashews, 82, 82f, 102–103 strategic productivity assessment and, 44, 47 Nigerian domestic catfish and, 49–53, 51f, 53f summary of tool, 47 operating environment implications for, 12–13 supply chain quality assessment and, 45–46, 47 for pineapple exports, 98–99 SWOT analysis of, 42, 47 producer-driven, 21 value chain support services, 26, 129–137 public-private dialogue and, 139, 140, 142 extension services model for, 129, 129b quality and, 12, 115, 115f, 117, 121 mapping of business and financial services, 132, 132f support services for, 129–137 Sri Lankan cinnamon and, 131b tools for implementation. See tools for summary of tool, 132–133 value chain implementation Ugandan cotton and, 129–130b Ugandan floriculture analysis of, 62–64, 62f, 64f Zambian cotton and, 134–137 for Ugandan Nile perch, 122–123, 124f, 126–127 Value Chain Wiki, 7 vertical and horizontal linkages in, 9, 16, 19, 85–87 vertical integration and linkages. See also horizontal collaboration for Zambian cotton, 135, 135f, 136f, 137 and linkages value chain interventions, priority sectors for, 25, 29–32. in avocado industry, 157 See also interventions in floriculture industry, 61–62 domestic capacity and economic impact and, 30–31 Ghanaian pineapple industry and, 91, 97 186 INDEX governance and, 20 Sustainable Development Department of the Africa Region from national value chain perspective, (AFR-SDN), 7 85–87, 88b, 89t Ugandan floriculture sector and, 61, 62 value chain deepening and, 69, 71, 72 World Development Report, 1 in value chains, 6, 16, 19 World Customs Organization (WCO), 131b Vietnam, 56b, 110 World Development Indicators, 56 Vinzavod-Assenovgrad (VA), 89b World Development Report (World Bank), 1 World Economic Forum, 48n6, 56 W washing stations for coffee, 78b Z “weaner” system of cattle production, Zambia, 3, 4, 88b 147, 148, 149 Zambia Airways, 88b West African Economic Monetary Union, 3 Zambian cotton, 134–137 Wienco (agrochemical supplier), 99 background on, 134–135, 135f wine industry, 89–90b Dunavant’s distributor model, 135–137, workforce quality, 46, 48n5 136f, 137t World Bank increase in exports of, 137, 137f agricultural trade facilitation by, 5, 7 points to consider, 134 Doing Business Report, 48n7, 56 sector growth for, 137 IDA loan funds from, 33 Zambian Export Growers Association (ZEGA), 88b Mali and, 37 Zambia Privatization Agency (ZPA), 134 Mozambique and, 34, 36, 81, 101 “Zambique” (cashew brand name), 102, 103 public-private dialogue and, 142 Zimbabwe, 4, 8n3, 88b INDEX 187 ECO-AUDIT Environmental Benefits Statement The World Bank is committed to preserving Saved: endangered forests and natural resources. • 10 trees The Office of the Publisher has chosen to • 3 million British thermal print Building Competitiveness in Africa’s units of total energy Agriculture on recycled paper with 30 per- • 981 pounds of net cent post-consumer waste, in accordance greenhouse gases with the recommended standards for paper (CO2 equivalent) usage set by the Green Press Initiative, a • 4,727 gallons of nonprofit program supporting publishers in waste water using fiber that is not sourced from endan- • 287 pounds of gered forests. For more information, visit solid waste www.greenpressinitiative.org. Value chain–based approaches offer tremendous scope for market-based improvements in production, productivity, rural economy diversification, and household incomes, but are often covered by literature that is too conceptual or heavily focused on analysis. This has created a gap in the information available to planners, practitioners, and value chain participants. Furthermore, few references are available on how these approaches can be applied specifically to developing agriculture in Africa. Building Competitiveness in Africa’s Agriculture: A Guide to Value Chain Concepts and Applications describes practical implementation approaches and illustrates them with scores of real African agribusiness case studies. Using these examples, the Guide presents a range of concepts, analytical tools, and methodologies centered on the value chain that can be used to design, implement, and evaluate agricultural and agribusiness development initiatives. It stresses principles of market focus, collaboration, information sharing, and innovation. The Guide begins by examining core concepts and issues related to value chains. A brief literature review then focuses on five topics of particular relevance to African agricultural value chains. These topics address challenges faced by value chain participants and practitioners that resonate through the many cases described in the book. The core of the book presents methodological tools and approaches that blend important value chain concepts with the topics and with sound business principles. The tools and case studies have been selected for their usefulness in supporting market-driven, private- sector initiatives to improve value chains. The Guide offers 13 implementation approaches, presented within the implementation cycle of a value chain program, followed by descriptions of actual cases. Roughly 60 percent of the examples are from Africa, while the rest come from Europe, Latin America, and Asia. The Guide offers useful guidance to businesspeople, policy makers, representatives of farmer or trade organizations, and others who are engaged in agro-enterprise and agribusiness development. These readers will learn how to use value chain approaches in ways that can contribute to sound operational decisions, improved market linkage, and better results for enterprise and industry development. ISBN 978-0-8213-7952-3 Interactive textbook at www.worldbank.org/pdt SKU 17952