Value chain development tools

The above mentioned descriptive and analytical tools are already a source of detailed knowledge that helps towards practical policy interventions and value chain development measures. Especially the governance structures linked to power differentials within chains give much insight on which links or even individual firms efforts should be focused on, what skills, capital and capabilities may be missing, and what market access problems chain links face. In addition to these value chain theory contains two additional tools, benchmarking and

upgrading, which can be used to affect value creation and distribution within value chains. Again, it should be noted that the underlying theoretical and empirical work discussed previously on the moving quality window (Sutton, 2007b), the productivity versus quality paradox (Neary;Eckel;Iacovone;& Javorcik, 2015) and the possible inefficiencies following from individual company decisions (Costinot;Vogel;& Wang, 2013) (Baldwin & Venables, 2013) should be kept in mind when considering the below outlined practical tools.

3.2.3.1 Benchmarking

In essence, benchmarking means the analysis of productive efficiency of actors within the chain or the entire chain in comparison to other chains. Individual companies and the entire chain face following drivers:

 Cost competitiveness  Quality

 Lead times

 Capacity to make minor and frequent change

 Capacity to fundamentally change products and processes

Benchmarking thus means firstly understanding and measuring the present state of how things happen in a chain link or the entire chain, and second comparing the results against references points. These reference points against which performance is measured can be the following:

33  Own historic performance

 Performance of companies or chains with similar characteristics

 Performance of companies in the same sector, but producing different products  Performance of companies in other sectors, but with similar processes

Benchmarking has mostly been applied to activities that involve the transformation of inputs, but as has been stated before, many activities that define the effectivity and performance of the value chain are no longer in these activities. This is why analysis of design, marketing and management activities are of growing importance. A similar approach also applies to benchmarking practices and performance, where practices used, such as a quality circles and continuous improvement schemes, may affect effectivity even more than performance of e.g. logistics services. Thus the question of what to benchmark requires consideration in trying to change value creation and distribution issues. (Kaplinsky & Morris, 2002).

3.2.3.2 Upgrading

In practical terms value chain analysis assists in locating links in the chain that are weaker than others and can subsequently be improved or upgraded. It thus deals with the competitive position of a chain link within the chain and across chains. In real terms the performance of a link is determined by its effectiveness of performing its core task or the bargaining power in the chain, captured in the notion of governance structures explained previously (Rudenko, 2008). Upgrading can occur on four levels within a value chain (Kaplinsky & Morris, 2002):

1. Process upgrading: Making processes within chain links more efficient than those of rivals. This notion of upgrading also involves the improvement of processes between chain links, for example the coordination of orders and delivery times.

2. Product upgrading: Introducing new products or improving the quality of old products faster than rivals.

3. Functional upgrading: Changing the mix activities within a chain link, e.g. outsourcing accounting or taking charge of logistics to customer, or moving to different links in the chain through vertical integration.

4. Chain upgrading: Moving to a new value chain, where the link or chain core competence can be leveraged in a new way.

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Value chain analysis can help in formulating upgrading strategies in these different spheres by describing and analysing sources of competitiveness that arise from factors like local competitors, infrastructure, customers and coordination between companies, given the environmental structures of barriers to entry, trade and rent and governance (Rudenko, 2008). In reference to what parties external to the chain, e.g. government agencies, can do to aid and set in motion the processes of upgrading, Schmitz (2005) states that Business Development Services (BDS) are often used especially in the developing country context. These measures include consulting, training, business planning and funding. There is debate whether these services actually contribute positively to upgrading processes, but it seems that when combined with aid in inter-link coordination and business relationship building, they do have positive effects. Schmitz (2005) does, however, provide critique regarding the limitations of value chain analysis in upgrading. In essence, upgrading has to happen and be initiated by companies within the chain, which sets reservations on whether this will actually happen. Especially when developing country production and value chains are in question and external parties try to push for the development of a chain, barriers, e.g. size of companies, exist. Buyers may not be willing to buy from a multitude of smaller producers even when price and availability issues are not a problem. The core of this argument is that in modern value chains transaction costs play a large role and often arise from larger complexity. If a company cannot trace the origin of its products and govern the chain it is linked to, there are concrete costs in reputation and coordination that make these changes less appealing. An additional concern arises when competitive positions of lead firms are contested by upgrading activities. Lead firms play a very important role in governing the entire chain and determining the effects of upgrading activities. If these activities include functional upgrading, which restructures the mix of activities within the chain, lead firms may block upgrading activities. The role of lead firms in determining changes in value creation and distribution through upgrading activities throughout the chain are also highly relevant in the case of the Namibian diamond industry discussed later in chapter 4.