From the perspective of exporters, a national export strategy
may seem irrelevant. How, concretely, will a national strategy help
the firm grow its business? The most likely area of interest for
exporters will be in national programmes that help the sector in
which they perform.
Strategy-makers must respond to this 'sector-centric'
preoccupation, for two reasons. First, exporters need to 'buy in'
if the strategy is to be successful. Second, without a
sector-specific orientation, the strategy won't address key
competitiveness issues that ultimately dictate national export
performance.
Sector-level strategy means more than identifying market
opportunities and organizing related support programmes. 'Best
practice' requires deeper analysis, and a wider audience than the
exporter.
Value chain defined
Value chain analysis, in this context, is an innovative tool
that developing countries should consider. The value chain approach
analyses, at the sector level, each link in the 'chain of activity'
- from the time when the product or service is only an idea to the
time when it is disposed of after use. A value chain for any
product or service extends from research and development, through
raw materials supply and production, through delivery to
international buyers, and beyond that to disposal and recycling. By
'mapping' this process from start to finish, strategy-makers can
better determine where they can capture greater value within the
national component of the global value chain.
Newcomers to value chain analysis should note that international
buyers determine value. Quality, dependability, volume,
traceability and speed of delivery are among the elements that
buyers take into account. Buyers' requirements, together with
market conditions - such as market access, standards and
regulations, and consumer preferences - determine whether firms
from a given country can compete effectively.
Thus, a successful sector-based strategy to capture more export
earnings needs to reflect market conditions, buyers' requirements
and the processes required to deliver a product to the market.
This rather obvious conclusion has a less than obvious
implication. Designing sector-level strategy requires full
participation of the private sector. Only the private sector has
the breadth of market knowledge to construct a model of the
sector's global value chain with sufficient detail for a sound
analysis.
An example - fresh vegetables
chain
Twenty years ago, small exporters in Kenya would normally buy
green beans in local wholesale markets or directly from
smallholders, pack them in boxes or sacks and send them to
importers in the United Kingdom, who would sell them through
national wholesale markets. They would then be bought by a variety
of retailers (large and small).
Since then, the business has been completely transformed, notes
John Humphrey of the Institute of Development Studies, University
of Sussex.
- Fresh vegetables are now mainly sold through large
supermarkets. Five supermarket chains account for over 70% of all
fresh food retail sales in the UK.
- Cash-rich but time-poor consumers buy products that are
easy-to-use - ready-trimmed, washed and mixed with other
ingredients. They are much more likely to be wrapped in trays or
cellophane packs than presented loose.
- Product freshness and shelf life have been enhanced by speedier
passage through the supply chain. Levels of quality, continuity of
supply and consistency of quality across the whole year have become
the objectives.
- Food safety requirements and standards are much stricter,
particularly with regard to pesticides and minimum residue levels
fixed by the European Union.
- Traceability now goes from the supermarket shelf to a grower's
field (literally). Suppliers are monitored and regularly audited.
Specialized logistics systems are used to transport fresh
vegetables from Kenya to supermarket shelves in the UK within 48
hours. Processing and packaging takes place almost entirely in
Kenya with mostly imported materials.
- Seed companies, exporters, importers and retailers work
together to develop new product promotions, new varieties and
increased growing seasons.
None of the new requirements for the value chain could have been
obtained through continued reliance on independent smallholders and
wholesale markets. Now a few large exporters dominate the industry.
They are linked in exclusive relationships to UK importers, and the
import business is consolidating rapidly. Thus the emphasis has
switched from finding new markets to improving the efficiency of
imported materials.
Prof. Humphrey notes, "Increasingly, supplying the global market
today seems to involve making parts of a product, often to
specifications given by an international buyer, or defined in
partnership with a buyer." He adds "In extreme cases, buyers or
traders will provide the raw materials, specify what is to be
produced and how, and arrange the logistics. In other cases, the
buyer will specify what is required in terms of performance, assess
the capabilities of the supplier and then contract with a supplier
to provide a product that meets the desired specifications."
Lessons for strategy
What exporters should note about this and other value chain
examples is:
- Production is only one of a number of value-adding links;
import, supply, fiscal, transport and export policies and business
support services must be aligned to support sector
performance.
- Mapping the flow of inputs and outputs - goods and services -
in the production chain allows each firm to determine who else's
behaviour plays an important role in its success.
- Upgrading the performance of individual firms may have little
impact if the 'bigger picture' is not taken into account through a
strategy that facilitates performance for the entire sector.
Four upgrade options for firms
Exporters can retain or capture more earnings through value
chain analysis by evaluating performance gaps, noting where value
could be added at each link in the chain, noting the needs for
business support and upgrading their activities. Firms can
concentrate on one or more of the following:
- Process. Increase efficiency and
effectiveness of internal processes so that these are significantly
better than those of rivals, both within individual links in the
chain (for example, increased inventory turns, lower scrap) and
between the links in the chain (for example, quicker processing of
trade documentation).
- Product. Introduce new products or
improve old products more quickly than rivals. This involves
changing new product development processes both within individual
links in the value chain and in the relationship between different
chain links.
- Functional. Increase value-added by
changing the mix of activities conducted within the firm (for
example, taking responsibility for, or outsourcing, logistics or
design functions) or moving the locus of activities to different
links in the value chain (for example, from manufacturing to
design).
- Chain. Move to a new value chain (for
example, Taiwanese firms switched from the manufacture of
transistor radios to calculators, to televisions, to computer
monitors, to laptops and now to wireless application protocol, or
WAP, phones).
For strategy-makers, too
What is innovative about value chain research during the
Executive Forum process of the past year is that it provides
options for national strategy-makers, not just individual firms.
(Most value chain research has focused on improving performance of
the firm, rather than using it as a tool for trade development at
the national level.) For those looking to boost export performance
from a national perspective, the value chain provides an analytical
framework with three strategic perspectives.
- Increases efficiencies within the existing national
component of the value chain. Mapping the structure
of a 'national value chain' and the value contributed by each link
is the first step. Assessing performance and dynamics between
linkages is the next step. Such an analysis helps the
strategy-maker to determine what type of trade support services
should be provided by which institution and where. A commitment to
greater efficiency, using a public-private sector approach, could
also attract more foreign buyers and investors interested in
sourcing from the country, thereby increasing the overall export
performance of the sector.
- Extends the national value chain. A
map of the global value chain will identify opportunities to
capture greater value by extending the components of the chain
undertaken by companies from a given country. For example, one
could develop local suppliers who would eventually replace foreign
suppliers for inputs required by the sector. Steps could be taken
to create value-addition links, such as grading, product finishing
or consumer packaging.
- Builds new value chains. A new value
chain can be associated with an existing chain, thereby creating a
new export opportunity. For example, in the freshwater fisheries
sector in an African country, wastage from the fish processing
'link' in the national chain was turned into fertilizer exports -
entering a completely different global value chain. From a single
product, two sector-level value chains emerge, with each
contributing to the national economy.
A tool for development
The value chain approach helps strategy-makers gain a better
understanding of how sectors can contribute to national
socioeconomic development by using exports as a tool for
development. It gives an overview of how the sector is addressing
the issues of employment creation, skills development, geographic
diversification of industry and other development issues. This can
feed into the strategy design process, helping the strategy team
determine priorities, both in terms of action for the sector under
review and for the sector's relevance to national export
strategy.
By helping to explain the distribution of benefits, particularly
income, to those participating in the global economy, value chain
analysis makes it easier to identify the policies that can be
implemented for individual producers and countries to increase
their share of these gains.
"Debate around globalization tends to be polarized between two
views - globalization is good for the poor or globalization is
harmful for the poor," notes Mike Morris of the University of
Natal, South Africa. "This is much too simplistic a perspective. It
is less a matter of globalization being intrinsically good or bad,
than how producers and countries insert themselves in the global
economy. The key policy issue is not whether to participate in
global markets, but how to do so in a way that provides for
sustainable income growth."
ITC staff Ian Sayers, Natalie Domeisen and Brian Barclay,
and ITC consultant Peter Hulm contributed to this article.
For more information about value chain analysis, see the
Executive Forum web site (http://www.intracen.org/execforum) and
ITC's Secrets of Strategy Template.
John Humphrey of the Institute of Development Studies,
University of Sussex, United Kingdom, can be contacted at j.humphrey@ids.ac.uk and
Mike Morris of the University of Natal, South Africa, at morrism@nu.ac.za