BASICS OF VALUE CHAIN ANALYSIS

Originators: Foundation for MSME Clusters (FMC), UNIDO

Reducing poverty through sustainable industrial growth

Value and Value Addition

Value:

Intermediate value: price that customer is willing to pay for a semi-finished product

Ultimate value: price that consumer (the final customer) is willing to pay

Value Addition:

A process of adding value to a semi-finished product - starting from raw material till it reaches the consumer

By adding some material or services

Such that there is a substantial change in the output

What is the typology of firms involved in a value chain?

Reducing poverty through sustainable industrial growth

Value Chain

High value adding firm

Cluster Consumer

Low value adding firm

Reducing poverty through sustainable industrial growth

Product Value Chain

Primary Activities Likely Attributes

Inbound logistics Ware-housing Inventory Vehicle planning

Operations ProcessSub-contracting

Testing Packaging

Outbound logistics Storing Distributing Order

processingVehicle planning

Marketing Labeling AdvertisingBrand promotion

Sales Channel selection

Sales promotion

Services Installation Repairs Accessory Replacement

Numerous chain relationships

Reducing poverty through sustainable industrial growth

Value Chain Relationships

Chain relationships depend on:

What is to be produced (design of products)

How it is to be produced (definition of the production process: technology, quality standards)

How much has to be produced

What type of chain relationship one finds in a cluster?

Reducing poverty through sustainable industrial growth

Types of Value Chain Relationships

Market based: Supplier of standard product

Network based: Combine complementary competencies and both have more or less equal power in the relationship

Quasi-Hierarchical: One party exercises high degree of control over the other

Hierarchical: Buyer takes ownership of producers in the cluster

Nature of chain relationship decides upon types of value upgradation

Reducing poverty through sustainable industrial growth

Types of Value Chain Upgradation

Process upgradation: transforming inputs into outputs more efficiently

Product upgradation: introducing new products or improving old products

Functional upgradation: changing the mix and acquiring new, superior functions

Intersectoral upgradation: applying competence acquired in a particular function to move into a new sector

Interestingly, type of value upgradation also has a sectoral dimension

Reducing poverty through sustainable industrial growth

Sectoral Dimension

Traditional labour intensive: textiles, leather footwear, etc.

Natural resource based: marble, processed food

High cost engineering intensive: automobiles, auto components, electronics

Reducing poverty through sustainable industrial growth

Using Value Chain Analysis

Comparative analysis of value added in this chain for a representative core firm with respect to:

A benchmark firm within the same cluster

Representative firm in another benchmark cluster

For comparable product

Analysis of type of value upgradation happening and can happen

Comparative analysis of other value adding stakeholders with respect to similar stakeholders in benchmark cluster