Workshop 2: Value Chain Development and Inclusive Business Models at The Caribbean-Pacific Agri-Food Forum 2015 (CPAF2015) taking place 2-6 November in Barbados with support from the Intra-ACP Agricultural Policy programme, organized in partnership with the Barbados Agricultural Society (BAS) and the Inter-American Institute for Cooperation on Agriculture (IICA). http://www.cta.int/en/news/caribbean-pacific-agri-food-forum.html

1. Value chain integration
2015, Monika Sopov, Joost Guijt

2. Objectives
By the end of the session you can
 Define what vertical and horizontal integrations are
 Identify forces that stimulate and hinder integrations in
general
 Identify forces that stimulate and hinder integrations in
agriculture

3. Guiding questions
What is the difference between “comparative
advantage” and “competitive advantage”?
What is the difference between a supply chain and a
value chain or value net?
What differences are there between the efficiency of
an individual enterprise and the efficiency of a
market chain as a system?

4. Value Chain
 The value chain describes the full range of activities
which are required to bring a product or service from
conception, through the different phases of production
(involving a combination of physical transformation and
the input of various producer services), delivery to final
consumers, and final disposal after use. (Kaplinsky)

5. Value chain
According to Hobbs et al. (2000) 5, a value chain is differentiated
from a production / supply chain because:
● Participants in the value chain have a long-term strategic vision.
● Participants recognize their interdependence and are disposed to work
together to define common object, share risks and benefits, and make
the relation work.
● It is oriented by demand and not by supply, and thus responds to
consumer needs.
● Participants have a shared commitment to control product quality and
consistency.
● Participants have a high level of confidence in one another that allows
greater security in business and facilitates the development of common
goals and objectives

6. Enterprise relations
Factors Supply chain Value chain
Information flow Little or none Extensive
Principal focus Cost / price Value / quality
Strategy Basic product (commodity) Differentiated product
Orientation Led by supply Led by demand
Organizational
structure
Independent actors Interdependent actors
Philosophy Competitiveness of the
enterprise
Competitiveness of the
market chain
Adapted from Hobbs et al. (2000)

7. Supply chain structure and flows within the
chain
Seed suppliers Wholesale purchasers
Exporting companies
End Customer
(the source
of funds)Growers
Distributors
Produce
Funds, information, know-how

8. Supply networks
DistributorsMother
Earth
Converters Customers
Capital
Know-how
Information
Produce

9. Tools used for market chain analysis
include
 Value chain mapping
 (Market chain history)
 Market research
 Quantifying performance (value added, production costs,
cost drivers, transaction costs, benchmarking)
 Economic and financial analysis

10. Assignment 1
Analyzing supply chains (1)
Draw a supply chain
● Map the core processes in the value chain
● Map the actors involved at the various stages in the
chain
● Map the activities as the product moves along the chain
● Map the support service providers to the chain. Who are
the main actors in the chain?
● Who is the most important in the chain?
● Where is the most value created in the chain?
● Who has the most power in the chain?

11. Assignment 1
Analyzing supply chains (2)
Draw a supply chain
● Map information flow
● Map constraints

12. Coordination vs. Integration
 Horizontal Integration
● Growth via acquisition of one or more similar firms
operating at the same stage of the production-
marketing chain
 Vertical Coordination
● Organization of economic activity including all the
ways of harmonizing the various stages of
production-processing-distribution chain
 Vertical Integration
● Partial or full ownership of the various stages of
production-processing-distribution chain

13. Vertical and Horizontal Integration
Farmer Farmer
Processor Processor
Wholesaler Wholesaler
Acquisitions or mergers of suppliers or customer businesses are vertical
integration
Acquisitions or mergers of competing businesses are horizontal integrations

14. Examples

15. Intermediate Forms of Organization:
A Continuum of Governance
Arrangements
SPOT
MARKET
INTERNAL
HIERARCHY
(full integration)
RANGE OF INTERMEDIATE FORMS
LONG-TERM
CONTRACTS
STRATEGIC
ALLIANCES
QUASI-VERTICAL
INTEGRATION
(PARTIAL OWNERSHIP)
both parties invest
resources into the
relationship
eg. joint venture,
franchises, licenses

16. Strategy categories along the vertical
coordination continuum (1)
Strategy Definition Example
Spot Market Coordination intensity is low.
Parties engage in price
discovery and make either a
yes or no decision to enter
the transaction. It is easy to
walk away from the
transaction.
A corn farmer who calls up
local grain elevators to find
out the current cash price for
corn. The corn farmer
decides to sell his corn to the
highest bidder.
Specification
contract
Coordination intensity is
moderately low. Contracts
are based on the legally
enforceable establishment of
specific and detailed
conditions of exchange.
A potato farmer that signs a
production contract with a
potato processor for a
specific quality and quantity
of potatoes at a specified
delivery time.

17. Relation-based
alliance
Coordination intensity is
moderate. Relationship
based on shared risk and
benefits emanating from
mutually identified
objectives.
Wal-Mart and Procter &
Gamble,where Wal-Mart
agrees to share propriety
sales and inventory
information and P&G
physically locate their
employees at Wal-Mart’s
headquarters.
Equity-based
alliance
Coordination intensity is
moderately high.
Agricultural cooperative,
private firms who form a
joint venture.
Vertical
integration
Coordination intensity is
high.
Tyson coordinates the entire
poultry process from
genetics to the retail shelf
Dutch exporters in Ethiopia,
Kenya
Strategy categories along the vertical
coordination continuum (2)

18. Vertical integration can occur in 2 directions:
● Backward Integration (producing own inputs)
● Forward Integration (disposing of own outputs)
Source: Robert M. Grant, Contemporary Strategy Analysis, Basil Blackwell, 1995
Directions of Vertical Integration

19. Discussion
 Why vertical integration?

20. Dependency
• Suppliers
• Customers
Dependency
• Suppliers
• Customers
Why Vertical Integration?
 Factors
● Reduce transaction
costs
● Secure access to
resources (raw
material, distribution)
● Internalize an
externality
(technology)
● Increase monopoly
power
● Better quality control
and coordination
Dependency
Business
1
Business
2

21. Analyzing Vertical Integration: The Transaction
Cost Perspective
Market
transaction
Monitoring
costs
Monitoring
costs
Enforcement
costs
Enforcement
costs
Costs of
written
contract
Costs of
written
contract
Search costsSearch costs
Negotiating
costs
Negotiating
costs

22. Risks of Vertical Integration
Risks
● Costs and expenses
associated with
increased overhead and
capital expenditures
● Differences between
stages in optimal scale
of operation
● Managing strategically
different businesses
● Loss of flexibility
resulting from inability
to respond quickly to
changes in the external
environment
Business
1
Business
2
Dependency

23.  The number of companies
 The requirements for specific investment
 The difficulty of specifying and managing contracts
 Uncertainty of market demand
 Scale of operations (difference)
Discussion
Will it hinder or motivate vertical
integration?

24.  What is governance?

25. Characteristics of governance
 Interactions between firms along a value chain are
somewhat organized.
 Value chains are governed when parameters requiring
product, process, and logistic qualification are set
which have consequences up or down the value chain
 Power asymmetry

26. Functions of Governance
 Three functions of governance (the “separation of
powers”)
● the legislature (making the laws)
● the executive (implementing the laws)
● judiciary (monitoring the conformance to laws)

27. Consequences of (not) complying
 Sanction
● Negative
● exclusion
● limiting the role which particular producers
play in the chain
● imposing cost penalties for non-
conformance
● Rewards
● Different level of auditing

28. Governance in Value Chains

29. Discussion
More tightly aligned supply chains are increasingly
becoming common-place in the food production and
distribution industries.
1. What drives the formation of more tightly aligned
supply chains?
2. What are the core competencies in chain
formation?
3. What are the key barriers to chain formation?

30. What drives the formation of more tightly
aligned supply chains?
 1.1 Responding to demand and consumption
 1.2 Managing /allocating risks
 1.3 Productivity and technology
 1.4 Government regulations and policies
 1.5 Resources – efficiency and lowering cost

31. 2. Core competencies for chain formation
 1. capacity to trust and to be trust-worthy
 2. improved ability to respond and customize products to end-user
needs,
 3. increased focus on product and process development,
 4. continued focus on cost control and efficiency,
 5. more emphasis on risk management,
 6. optimization of the logistics and transportation/distribution
system,
 7. a focus on holistic systems that integrate the entire supply
chain,
 8. increased emphasis on quality and quality assurance along the
chain,
 9. more emphasis on information and information sharing,
 10. increased skill in negotiation and joint decision-making,
 11. development of cooperative/collaborative attitudes and
perspectives,

32. 3. Barriers to chain formation
Lack of
 1. mutual trust by chain participants (A)
 2. communication and information flow across chain
participants (K, A)
 3. commitment and willingness to invest in chain infrastructure
(D)
 4. awareness of the benefits and costs of more tightly aligned
supply chains (A)
 5. equitable sharing of the risk and rewards in a supply chain
(D, K, A)
 6. an acceptable governance system with equitable sharing of
power and control (D, K, A)
 7. a policy environment that does not constrain or limit chain
(A, K, D)
 8. willingness to adopt a collaborative vs. competitive business
approach (A, D, K, A)

33. Soy case study
1.Please analyze industry from the view of the joint venture (Porter’s
five forces)
2.What are the options for sourcing soy now, and how will it change in
the future? What will happen when soy will be traded on ECX? How
can Seba Foods still ensure inclusiveness?
3.In light of the risks the company is facing, was vertical integration a
good idea? Provide your reasons. What are the risks in contract
farming?
4.How to prepare for the launch of the Tasty Soy? What should be the
marketing strategy of the company?
5.What is HACCP? What are the benefits of using HACCP?
6.Tasty Soy Pieces

34. 1. Inclusiveness (Rabobank / IFC - adapted
from Vermeulen and Cotula, 2010):
How values are shared between producers (smallholders) and
buyers (agribusiness companies).
1. Ownership: of the business (equity shares) and of key
project assets such as land and processing facilities.
2. Voice: the ability to influence key business decisions,
including weight in decision-making arrangements for review
and grievance and mechanisms for dealing with information
access.
3. Risk: including commercial risk, but also wider risk such as
political and reputational risk.
4. Reward: the sharing of economic costs and benefits,
including price-setting and finance arrangements

35. 1. Inclusiveness - CDI
1.Create opportunities that enable small-scale farmers and their
cooperatives to become economically viable business partners
in supply chains.
2.Support small- and medium-scale enterprises to enable them
to flourish as processors and service providers along the
supply chain.
3.Provide employment opportunities in processing and service
enterprises under fair labour conditions.
4.Establish agri-hubs and clusters that help to drive overall
rural economic prosperity.
5.Deliver healthy, affordable, accessible food products and ser-
vices for low-income consumers in rural and urban areas.

36. 2. Sourcing options for Seba
a.Source from small holders
i.Spot market
ii.Contract farming
1.Outgrower model
2.Nucleus estate model
b.Source from large scale, commercial) farms, however, this
option does not fit the business model of the involved
parties.
c.Source from farm owned by Seba Foods, which is not yet
in existence at the time of writing the case. However, this
option does not fit the model of the involved parties.

37. 3. Risks in contract farming
 Quantity
 Quality
 Contracts / agreements
 Collection of produce
 Extension support
 Side selling
 Access to credit
 Pricing methods and payments
 Risk sharing
 Contract enforcement

38. 4. Risks Seba food will face
1.Climate risks: not enough soybeans will be produced locally
2.Price volatility as already described in the case
3.Market risks: Ethiopian consumers aren’t interested in buying
TSP
4.Political risk
5.ECX

39. ECX
ECX consists of 55 warehouses in 17 regional locations.
It has grown from trading 138,000 ton in its first year to
508,000 tons in its third year, with nearly equal shares of
coffee and oilseeds and pulses.
The value of the ECX rose 368% between 2010 and 2011 to
reach US$1.1 billion.
In July 2011, its total membership equalled 243 with total
clients, who trade through members, numbered about 7,800.
Farmer Cooperatives represented 2.4 million smallholder
farmers, which make up 12% of the membership.
Next day payment
Provides market data

40. Improvement points ECX, 1
 Due to the fact that the minimum parcels to be traded on ECX floor are 5 tons,
most (small) farmers are obliged to sell the product through middle man. That
results in lower prices to the farmer. The expectations were that farmer would get
higher income!
 Quality grading has shown great mishaps. Many exporters and producers complain
about the lack of consistency in quality. In fact many parcels in the highest category
should not have been classified as such.
 Due to the grading, many exporters and producers lose money as they need to
adjust before use/export.
 Prices on ECX are still higher than world market levels. As result, export potential is
not tapped in full.
 Due to introduction ECX the tracking and tracing system has gone ‘out of the
window’. The Identity Preserved mechanism (as in tracking and tracing) are
increasing demanded by importers in Japan/Europe and USA.

41. Improvement points ECX, 2
 Quality deterioration, due to storage should also be
mentioned. Formerly exporters bought through middle men
and this went (time wise) quite fast. Now, with physical
storage of product this demands longer periods.
 Increased costs on warehousing. Both in and out. Some
people indicate this to be around birr 150 (each time in and
out). That means that ECX causes higher prices, which at the
end will be fed back to the farmer again – farmer lose out). In
other words farmer suffers rather than benefits from ECX.

42. 5. Competitive edge of Ethiopia

43. 6. HACCP
 Principle 1: Conduct a hazard analysis. –biological, chemical,
or physical
 Principle 2: Identify critical control points. – A critical control
point (CCP) is a point, step, or procedure in a food
manufacturing process at which control can be applied and, as
a result, a food safety hazard can be prevented, eliminated, or
reduced to an acceptable level.
 Principle 3: Establish critical limits for each critical control
point.
 Principle 4: Establish critical control point monitoring
requirements.
 Principle 5: Establish corrective actions.

44. 6. HACCP
 Principle 6: Establish procedures for ensuring the HACCP
system is working as intended.
 Principle 7: Establish record keeping procedures. – The HACCP
regulation requires that all plants maintain certain documents,
including its hazard analysis and written HACCP plan, and
records documenting the monitoring of critical control points,
critical limits, verification activities, and the handling of
processing deviations

45. Example of a value market chain: “Las
Brisas,” Santa Cruz de Turrialba
 Las Brisas, began activities over 10 years ago,
 It functioned like all the other plants in the cheese-
making cluster of Santa Cruz de Turrialba in Costa Rica:
unstable relations with suppliers and buyers.
 Change: establishment of trust-based relationships with
both suppliers and buyers.

46. Example of a value market chain: “Las
Brisas,” Santa Cruz de Turrialba
 On the milk production input market side, La Brisas made its
biggest milk provider a new partner in the business, and
thus guaranteed 70% of its daily consumption
 On the output market side, Las Brisas pursued two market
strategies.
● Biscuit factory – to produce a special cheese for
manufacturing biscuits. The two businesses jointly obtained
support from the University of Costa Rica for specific
research on the best type of cheese for the biscuits. Through
this product development process Las Brisas was able to
enter a new market, in which no competition existed, as well
as assisting the biscuit factory to expand production and
sales.
● Important chain of supermarkets in San José, the country’s
capital - application of a methodical quality control process
for its own brand. This relationship has resulted in joint
promotion and marketing strategies as well as the
development and testing of new products based on
consumer demands detected by the supermarket

47. What are the results has Las Brisas achieved
through its value chain strategy?
The quality of its products is recognized as being
the best in the zone and, therefore, has high
acceptance in the market.
Las Brisas is the only business from the cheese
cluster in Santa Cruz that sells consistently
directly to supermarkets in San José. In 2001, a
promotion of cream was so successful that it
contracted additional production with other plants
of Santa Cruz, but under its supervision and
brand.
Las Brisas suffers less than other businesses
during times of milk shortage.

48. Business canvas