Value chain analysis

What is a value chain? It is usually defined as the chain of activities which transform raw materials into something that can be purchased by a final consumer. A value chain can be very short, like in the case of milk, or very long and extremely complex, like in the case of passenger cars or houses.
Why is value chain analysis important for local and regional economic development? In order to understand this, let us have a look at an example (which is taken from Plowing the Sea: Nurturing the Hidden Sources of Growth in the Developing World, by Michael Fairbanks and Stace Lindsay).

The Stupid Cow Syndrom

The Monitor Company worked for the government and private sector leaders of Colombia to study and provide recommendations on how the leather producers in that Andean nation could become more prosperous by exporting to the United States. We began in New York City to find the buyers of leather handbags from around the world, and we interviewed the representatives of 2,000 retail establishments across the United States. The data were complex but boiled down to one clear message: The prices of Colombian handbags were too high and the quality was too low.

We returned to Colombia to ask the manufacturers what lowered their quality and forced them to charge high prices. They told us, "No es nuestra culpa." It is not our fault. They said it was the fault of the local tanneries that supplied them with the hides. The tanneries had a 15 percent tariff protection from the Colombian government, which made the price of competing hides from Argentina too expensive.

We traveled to the rural areas to find the tannery owners. The tanneries pollute the nearby ground and water with harsh chemicals. The owners answered our questions happily. "It is not our fault," they explained, "It is the fault of the mataderos, the slaughterhouses. They provide a low-quality hide to the tanneries because they can sell the meat from the cow for more money with less effort. They have little concern for damaging the hides."

We went into the campo and found slaughterhouses with cowhands, butchers, and managers wielding stopwatches. We asked them the same questions and they explained that it was not their fault; it was the ranchers' fault. "You see," they said, "the ranchers overbrand their cows in an effort to keep the guerrillas, some of whom protect the drug lords, from stealing them." The large number of brands destroys the hides.

We finally reached the ranches, far away from the regional capital. We had reached the end of our search because there was no one left to interview. The ranchers spoke in a rapid local accent. They told us that the problems were not their fault. "No es nuestra culpa," they told us. "Es la culpa de la vaca." It's the cow's fault. The cows are stupid, they explained. They rub their hides against the barbed wire to scratch themselves and to deflect the biting flies of the region.

We had come a long way, banging our laptop computers over washboard surfaced roads and exposing our shoes to destruction from the chemicals in the tanneries and mud. We had learned that Colombian handbag makers cannot compete for the attractive U.S. market because their cows are dumb.

Value chains and local/regional economic development

This example nicely illustrates the relevance of analyzing and understanding the value chain. As part of a diagnostic of a local economy you may come across leather bag producers, whose competitiveness may be precarious. There may be a few things you can do by working with the producers, but then you will find that something is wrong with the leather, which probably comes from a totally different location. Thus, understanding the value chain is important to understand the latitude for local action - and often the limitations for local action.

This is particularly relevant when a value chain is complex and involves activities which are spread across a wide range of different locations. This is a situation where a local economic development effort can quickly reach limits, and where regional or even national development efforts come into play.

Things are even more difficult when local producers are part of international value chains (which are also discussed under the heading of "global value chains"). International value chains are often dominated by global companies; typical examples are Ikea, Nike and Otto Versand. These global companies ("global buyers") are not necessarily interested in local initiatives to stimulate industrial upgrading, in particular if this implies that local producers try to move into a different value chain.

For more information about these issues, have a look at the Value Chain Studies of IDS. There, you will also find two Manuals on Value Chain Research.

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