Module 2 Session 2: Cooperation and Competition for Upgrading (CC4U)A framework to assess the current picture and frame a future vision for value chain upgrading

Module 2 Session 2 CC4U with Examples 1

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DEFINITION: When rules are confusing or shift-ing and information flows weaken joint action to meet market requirements is considered risky.

CONDITION: Typical weak or uncompetitive value chain where actors see the transaction between buyers and sellers along the chain as the key focus of competition using primarily zero-sum tactics.

EXAMPLE: The rice industry in Ghana, where the negotiations between actors performing different functions are adversarial, focusing on specific transactions. This leads to limited infor-mation flow or investment along the chain and results in an uncompetitive industry domesti-cally.

DEFINITION: When tight but closed channels compete with other channels using zero-sum or monopolistic tactics.

CONDITION: When a channel or even a chain are controlled by single firm, ethnic group or political party allowing that network to closeout new entrants, compete using zero-sum tactics and/or drive behaviors based on misaligned in-formal rules. The result is limited or no upgrad-ing, minimal growth and concentrated benefits.

EXAMPLE: The cattle system in East Timor cattle is dominated by a single ethnic group for production, which limits effective output rela-tionships by skewing production practices to achieve social capital aims.

DEFINITION: When the rules and sanctions are clear to allow actors to transact with confidence despite limited interaction.

CONDITION: Uniform grades and standards, certified intermediaries and services like ware-housing that ensure compliance to standards, certified/regulated exchange platforms like stock exchange or commodity exchange, and effec-tive legal infrastructure to transparently define formal rules and disputes processes.

EXAMPLE: Mature commodity market with an exchange and effective warehousing system as is the case in South Africa with the SAFEX.

DEFINITION: When mechanisms, rules, and information flows exist to drive upgrading and co-investment vertically from function to function.

CONDITION: Norm for many high-performing value chains that see their suppliers and cus-tomers as key to their and the overall system’s performance and future, which drives co-invest-ment and strong pressure to perform.

EXAMPLE: The coffee value chain/or specific channel in certain countries leading to co-branding between the communities and the international buyer. Ethiopian coffee sold into Starbucks presents a good example.

Vertical Relationship — COOPERATION

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Module 2 Session 2 CC4U with Examples 2

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DEFINITION: Vertical integration can also result lower competitiveness of a system when vertical functions are rolled up into a single firm that ei-ther results in the firm being less competitive or the firm using its size/market position to crowd out others firms and foster win-lose transactional relationships with its suppliers and customers.

CONDITION: When firms take on functions beyond their core competency, such as input supply, finance, or aggregation. This can drive up costs without increasing efficiency or com-petitiveness. It can also happen when a firm takes on more and more functions evolving into an almost monopolistic position, where they can use zero sum tactics to push other out of busi-ness or create high barriers to entry—both of which reduce the competitiveness of the overall system.

EXAMPLE: Beef in Zambia is substantially controlled by a single, vertically integrated firm that often uses zero sum tactics to limit new entrants and foster disincentives via aggregators to upgrade at smallholder production levels.

DEFINITION: When function-to-function level competition is driven by win-lose transactions.

CONDITION: Norm for many low-performing value chains as the focus of competition is on the transaction and not on operational perfor-mance at each functional level.

EXAMPLE: A rice aggregator in West Africa that uses farmers’ poor cash management as a tool during harvest time to push farmers into taking prices well below the market. In practice this is done by aggregators offering cash at farm gate when they know the farmer is in desperate need of cash. The aggregator knows the farmer needs the cash and has limited bargaining power, so he can push well below market prices.

DEFINITION: When incentives are aligned at all functional levels around upgrading against market of performance criteria.

CONDITION: Norm for many high-performing value chains as actors do not see their suppliers and buyers as competitors, but more as strate-gic partners since they perform functions that are different and necessary for their success.

EXAMPLE: Kenyan floriculture is an example of value chain that continues to compete effec-tively because the various actors do not focus on competing to win individual negotiations as the inputs move to production and flowers move through to being exported.

DEFINITION: Vertical integration can result in actors competing to take on new functions. When this results in upgrading, it is effective. This is typical a transitional period leading to horizontal competition as it not possible to com-pete in doing different things.

CONDITION: Often time-bound, this occurs when a firm cannot access an effective value chain function so they take on the function, such as a processor taking on aggregation to ensure performance remains high and continues to improve.

EXAMPLE: Processor of cotton asserts control via strict guidelines of behavior on aggregators, even at times using staff to take on the aggrega-tor function to ensure effective management of its suppliers resulting in improved yields, quality and reliability of suppliers. The processor begins to offload this function once it is certain the ag-gregators will follow the rules/code of conduct required to perform.

Vertical Relationship — COMPETITION

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Horizontal Relationship — COOPERATION

Module 2 Session 2 CC4U with Examples 3

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DEFINITION: When firms fail to see the need for joint action or see joint action as posing a greater risk compared to the joint threat or op-portunity.

CONDITION: This is more the norm for low-per-forming value chains when actors do not identify or address threats and/or opportunities as joint. For farmers this might be high prices on input or larger orders for crop. For exporters it could be competition from another country’s industry or a large export order.

EXAMPLE: In the Kenya avocado industry, the primary competitive pressure was from other country industries. The value chain actors would not engage in joint investments or developing joint standards or brands that would allow them to compete more effectively.

DEFINITION: When firms collude to protect themselves from threats or capture opportuni-ties at the expense of upgrading – using zero-sum tactics or acting monopolistically.

CONDITION: When rules foster substantial uncertainty and drive short-term thinking with an aim to maximize immediate gains, even at the risk of the enterprise’s survival. Strong class or ethnic (i.e., friends and family networks/systems) networks and the formal and informal rules that support such networks can also drive such behaviors.

EXAMPLE: In West Africa, market queens are often accused of collusion that stifles competi-tion and drives farmers into recurrent losing positions.

DEFINITION: When there exist no common threats or opportunities, or the joint threat or opportunity can be managed through individual upgrading or new service offering.

CONDITION: This is never a static circum-stance, but there are times when joint action is not required. Typically, this is when the threats and opportunities present in the system do not require joint action to be solved, or intercon-nected systems offer a service that resolves the threat or takes advantage of the opportunity.

EXAMPLE: Smallholder farmers in Zambia were having difficulty accessing inputs due to the very high transaction costs. The input in-dustry responded by re-designing their distribu-tion model that fostered individual farmer action leading to bulk orders and reducing transaction costs substantially.

DEFINITION: When firms see the need to work together on common threats and opportunities.

CONDITION: The norm for high-performing value chains, this is when firms quickly identify threats—such as competition from another industry or policy—or opportunities—such as a large order that requires the production capacity of multi-firms/channels—and then respond by cooperating to address the threat or opportunity.

EXAMPLE: Bangladesh shoe manufacturers work individually to generate domestic and export orders, but when a larger export order comes through they agree to work together to fulfill the order so the industry as a whole can improve its brand image.

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Horizontal Relationship — COMPETITION

Module 2 Session 2 CC4U with Examples 4

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DEFINITION: When there is no incentive—or competitive pressure—to compete on perfor-mance.

CONDITION: This is case when the firms do not see each other as competitors even though they are selling into the same market or even the same buyer. For rural populations this can also be a sign of informal rules that limit or lower the value of investing in economic activi-ties.

EXAMPLE: A coffee farmer in East Timor sees a neighbor investing in improved pruning and reaping good benefits and decides not to take on that practice.

DEFINITION: When firms compete on issues that are not related to upgrading, such as price only, or social capital or access to political power to outperform their competitors.

CONDITION: This is more the norm for low-performing value chains when firms are driven by shorter-term interests and see upgrading operational performance as providing a lower return than using zero-sum tactics to beat their competitor to the sale.

EXAMPLE: In response to a competitor engag-ing in improved promotional tactics with small-holders, an input firm calls the environmental protection agency and indicates that the firm is breaking rules by promoting products in farming communities.

DEFINITION: When sufficient pressure to upgrade comes from rules, relationships and/or other inter-connected systems (service indus-tries, financial industry, media, political, social, etc.).

CONDITION: There are cases when weak val-ue chains upgrade effectively even though there are only few or even one firm at a functional level. Pressure to upgrade comes from within a cooperative relationship (cooperative, solidar-ity group, or community business organization) or from a firm’s own interests. This is a difficult state to be maintained for long periods without evolving to a higher degree of competition that can sustain continued upgrading.

EXAMPLE: In Zambia, in the early stages of rural private vet services, vet entrepreneurs engaged in substantial upgrading via client rela-tions and improvements in how they ran their businesses. There were no other competitors in vicinity.

DEFINITION: When upgrading is a basic re-quirement (the accepted norm) to achieve firm success.

CONDITION: This is the norm for high-per-forming value chains where at each functional level there is competitive pressure to constantly upgrade.

EXAMPLE: A fruit processor in West Africa begins losing some of its smallholder suppliers to a competitor that has engaged in improved supply chain management practice. The pro-cessor improves his supply management tactics in response to the competitive pressure.

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