This chapter goes through the theoretical tools chosen for this thesis in order to create an analysis model that will frame the research. The analysis model is driven by value chain Framework, which contributes to mapping out and analyzes the dynamics between the actors in the supply chain, the role of the Social Enterprise and how it can add value throughout the value chain and potentially add value to the market.
Followed by the SEPPS that put forward a stakeholder theory that enables to identify the roles of the poor and look into how they can reorganize in order to form opportunities for the poor to become self-sufficient. Finally the combination of concepts of these two theories sets the frame for the analysis.
5.1 Value Chain
The concept of value chain first popularized in 1985 by Michael Porter, as a strategic and competitive tool, managing activities along the supply chain and how these could be optimized. However, with time, researchers have developed a more in depth or other dimensions in understanding of the value chain, by theory building on value chains. I will present the elements of the value chain in the 20th century globalization context and the challenges that comes with it. Moreover, I will focus on Trienekens
“Agricultural Value Chains in Developing Countries. A framework for Analysis”
(2011), who puts forward a directly relevant recommendation for a framework that can guide a research analysis that I will apply for this thesis.
5.1.1 Definition of Value Chain
Porters presented the value chain was defined as a strategic tool, analyzing a whole string of activities
“Every firm is a collection of activities that are performed to design, produce, market, deliver, and support its product. All these activities, can be represented by using a value chain. A firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities itself”
(Porter, 1985: 36)
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 52! In other words, the scope of the value chain is activities in and outside the company itself, as well as tangible and intangible actives, that all together defines the organization and/or company as a whole. A more recent and shorter value chain description was presented by Kaplinksy (2000) as;
“Full range of activities which are required to bring a product or service passing through the intermediate phases of production to delivery to consumers and final disposal after use”
Thus, in the scope of this thesis, some of the activities will relate directly to the analysis, whereas some are beyond the scope of empirical findings.
5.1.2 Why is Value Chain Analysis Important
Kaplinsky argues that are three main reasons of why value chain analysis is important. 1) Division of labour, has with globalization, changed dramatically. It’s increasingly more common to outsource large and fundamental parts of the supply chain to foreign countries were labor is much cheaper, which effects the overall competiveness of a company. The rapidly changing environment in the globalized markets and asks for greater demands in 2) effective production. In order to tap into 3) global markets, companies must perform value chain management and understand the whole value chain and the mechanisms within the chain, in order optimize it and encompass the full potential of globalization.
“Entry into global markets which allows for sustained income growth – that is, making the best of globalization - requires an understanding of dynamic factors within the whole value chain”
(Kaplinsky, 2011: 9)
Altogether, globalization is inevitable, and understanding the dynamics and mechanisms, can be a strategic and competitive optimization for the organization. The three main areas by Kaplinksy is the embedded theoretical foundation, meaning this is the standpoint and motivation for moving into the different segments of the value chain (Kaplinsky, 2011).
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 53! 5.1.3 Trienekens Value Chain Framework
In Trienekens agricultural value chain framework for developing countries (2011), he first discusses four theoretical approaches, which is general in the understanding of value chain fields and an anchored part of value chain literature. This will be described in the following section followed by his proposal for a Value chain Framework. The theoretical approaches are relevant, in order to identify the context for the case studies in this thesis and in order to support the analysis in chapter 6.
5.1.3.1 Theoretical Approaches to Value Chain
The size of the value chain depends on the type of company as well as geographical stretch e.g. from Philippines to Denmark. Trienekens presents four theoretical approaches that map out the paradigms and approaches of Value Chain relevant for developing countries: Global Value chain, Supply Chain Management, Social Network Theory and New Institutional Economics (Trienekens, 2011).
5.1.3.1.1 Global Value Chain
The Global Value Chain (GVC) is instinctively connected to globalization where goods and services work within a global context affecting and being a part of the global economy. In other words, the GVC works with developing countries on the one hand, where they would produce clothes (the apparel industry) or work on farms.
While the value adding part of the chain, and the end-consumer typically is in developed North countries (Gereffi & Kaplinsky, 2011).
One of the major traits of GVC is that of multinationals and lead firms are in focus, where decisions are top down controlled. The power relationship is unbalanced with power exclusively in the hands of the lead firms. Followed by information asymmetry, making an uneven access to information (Gereffi, 2011).
However, questions are arising, how are the lead firms changing over time, and how their decisions affect the bottom of the value chain, such as growers and farmers?
In the GVC approach, governance and upgrading opportunities in developing countries lies in taking a bigger bite of the value chain. This could include instead of merely providing raw materials, then upgrading through adding production and even packaging and design for the end products’ completion.
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 54! Most GVC are struggling with poor social and environmental condition but the new paradigm is pushing for social and environmental upgrading. It is also argued that in GVC there is no such thing as free trade, only managed trade. Professor Gereffi and Max Havelar coffee brand, promotes the concept of ‘Chains for Change’ that includes agreements such as fair trade. However, in fair trade, it is only the contract workers that are benefiting, so new and innovative GVC are encouraged to include positive affects along the chain (Trienekens & Gereffi, 2011).
Khalid Nadvi takes GVC into the poverty perspective (Trinekens, 2011), In a UN report from 2004, he and a team of researchers put forward a framework for industrial clusters and poverty. In their research they explore if it is possible to have cluster development initiatives in developing countries, linked with global supply chain, that have a positive impact on poverty by giving local firms access to local and global markets. Despite, the well-intentioned focus on well- intentioned intervention he argues that potential economic growth in industrial clusters and geographical agglomeration, it does not automatically mean that poverty reduction and capabilities are gained in the local community (Nadvi, 2004).
”Cluster development programs tend to concentrate on the growth and competitiveness of firms. A poverty focused strategy requires stronger attention to people within clusters, namely entrepreneurs and workers, their households and the wider community”
(Nadvi, 2004: 43)
5.1.3.1.2 Supply Chain Management
The main characteristics in the Supply chain Management approach, is logistic management and generally optimization of inventory across the supply chain.
The SCM is linked to the Commodity chain concept (Porter, 1985), where the activities are vertical and directly linked to the stringent process of a product. This is the ‘classical’ understanding of a value/supply chain. !
In addition, the key activities in SCM include balancing the supply and demand across the entire supply chain including strong information and communication systems. Upgrading opportunities in SCM for developing countries are mainly focused on process and quality improvement of a product (Treineken, 2011).
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 55! 5.1.3.1.3 New institutional Economics
In New intuitional economics (NIE), the governance choices are based on transaction cost economics (TCE). TCE core is to minimize transactions costs along the value chain, and in that way create value. A key feature related to minimizing transaction cost is opportunistic behavior, where
“Value chain actors safeguard against risk of opportunism through joint investment, monitoring systems and specific organizational arrangements such as contracts”
(Trienekens, 2011:58)
NIE is furthermore linked with the clustering approach (Porter, 1998), focusing on monitory benefits by making the best agreements/contracts for developing country producers in very uncertain environments, however, actors involved have high opportunistic behavior (Trienekens, 2011).
5.1.3.1.4 Network Approach
The Social Network theory is based on the structure and interactions between individuals, groups and organizations. The core of the theory is knowledge transfer e.g. technical support and financial support, which are shared between network partners (Trienekens, 2011: 59).
Network activities happen both horizontally and vertically, and business support relationships with other companies and other organizations. Social network theory is closely linked with Social Capital, which is an anchored part of Social Science, augmenting social networks has value. In Value Chain network approach key features are reputation and dependency, trust, impact the structure and the duration of the inter-company relations such as collaborations (Trieneken, 2011:56.)
“A network perspective aims at understanding the totality of relationships and how they jointly can accomplish results”
(Harryson, 2006:14) Harryson distinguishes between loose and strong ties in network and how both can be benefitting the organization in one-way or the other (Harryson, 2006). This idea of
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 56! Network ties are closely linked to other Network approach theorists who argue that trust, reputation and dependencies are essential in inter-firm relationships. Referred to a NIE context, where opportunistic behavior is centerpiece, these network mechanisms are inevitable and more complex than when NEI would predict (Treinekens, 2011).
5.1.4. Framework for Developing Country Value Chain Analysis Based on the four theoretical approaches to value chain, Trienekens put forward three characteristics within the value chain, network structure, its governance and the way value is added. These characteristics are fundamental for the theoretical framework and a part of the analysis model for this thesis.
5.1.4.1 Network Structure
Network structure is a combination of Network theory and supply chain management.
“We conceptualize a value chain as network of horizontal and vertically related companies that jointly aim at/work towards providing products and services to a market”
(Trienekens, 2011: 59) Network structure is understood as Vertical and horizontal, where vertical is related to products and services, which are the straight chain from producer up to end consumer.
Where the horizontal chain is the relationships between actors e.g. between famers, between processors, farmer cooperatives and price agreements support systems such as joint investments (Trienekens, 2011).
Ultimately the chain will directly or indirectly support to lead the company to a market. There may be strategic choices in terms of market channels, which are dependent on which products or services that are delivered to which market, wether the company will use a multi-channel strategy and lastly the number of stages in the channel, eg. is there many middle men traders when attempting to reach the market?
(Trienekens, 2011).
Market channels may refer to ‘marketing channel’ that bridges the gap between the producers and the market.
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 57!
”Channel choices are heavily constrained by market access limitations such as supporting infrastructures to reach markets access to demand and price information and specific demands from these markets such as production according to quality standards ”
(Trienekens, 2011: 62)
The ability of companies to take part in market channels is strongly related to characteristics of these markets. Notwithstanding, reaching the market includes horizontal linkage.
“ The horizontal dimension is shaped by purchasing, production and delivery dependencies between parties that are positioned in the same value chain links, such as sourcing or marketing cooperatives, or collaborative agreements between small and medium size processors, such as exchange of packaging materials in case of demand fluctuations”
(Trienekens, 2011:62) Value chain network structure is dynamic and has both vertical and horizontal network activities and ties that bind the value chain. Trienekens makes an example of how coffee producers have used Fair Trade as a market channel towards specialty shops in the North and in that way increase market shares.
5.1.4.2. Governance and Bargaining Position of Value Chain Actors
Trienekens distinguish between two forms of Governance in the value chain. One being the governance of transaction (monetary costs) and the other related to GVC (Gereffi & Kaplinsky), where the ‘lead-firm’ in a power relationship controls and/or has authority of majority of the value chain. The ‘lead-firms’ govern financial, material and human resources.
“Governance in the value chain is very often understood as the power to define who and who does not participate in the chain, the setting of rules of inclusion, assisting chain participants to achieve the standards set, and monitoring their performance”
(Kaplinsky et al., 2000)""
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 58!
"
In the transaction perspective, when costs are low, actors along the value chain will choose market governance. Some of the factors in the decision-making process for the costs of transactions are joint investments, the ability to measure the agents performance and uncertainty. If the costs are high, there is a tendency to favor contracting and integration for thereby lowering the costs (Trienekens, 2011).
In the developing world context, challenges in governance in the value chain are inevitable. Developing countries tend to have fragile physical infrastructure (storage facilities, roads, telecommunication etc.) and failure of state, such as poor social and political conditions, which all affect the producers of developing countries. Much more support through information exchange is needed to facilitate these transactions.
However, in the food sector, quality certification schemes along with increased monitoring and control with long-term contracts, favors western buyers and more integrated governance in the value chain. Thus, it is argued that using standardization (certification standards) may reduce innovation capabilities that may lead to new value added, due to the general notion that innovation and standardization are argued to be two opponent forces in value chain development (Trienekens, 2011).
In an international value chain context, between North and South countries, standardization may support consolidation of existing value chain, where most of the value added happens in the North.
Gereffi defines governance as authority and power relationships that within a global commodity chains framework are characterized as “buyer-driven” or “producer-driven” chains (Gereffi, 1994, 2011). In short, a “buyer-“producer-driven” chain has very strong retailers and brands where “producer-driven” chains are more vertically integrated along all links of the chain and benefits from technology or scale advantages of integrated suppliers (Gereffi, 2011).
Gereffi furthermore presents five governance structures within the GVC, which Trienekens also includes in his Value chain framework for developing countries (Gereffi, 2011 & Trienekens, 2011).
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 59!
• Market
• Modular
• Relational
• Captive
• Hierarchy
Market governance occurs when transactions are very simple and defined as arm-lengths exchange with little or no formal collaboration between actors and costs of switching partners are low. The core in market governance is price rather than a powerful lead-firm. On the other hand, modular governance in value chain is when more complex transactions are relatively easy to codify. IT and exchanging information are key factors for modular governance (Gereffi 2011 & Trienekens, 2011).
Relational Governance “occurs when buyers and sellers rely on complex information that is not easily transmitted or learned” (Gereffi, 2011:9)
In other words, actors in the relational governance chain will have to share information where trust and reliance are key factors. However, despite the fact that dependency lead-firms will still have demands and needs to be fulfilled, it still holds the greater power in the relational governance chain. Relational governance, takes time to build and switching partners may be slightly difficult and costly (Gereffi, 2011).
In captive governance, Gereffi explains how a small supplier is dependent on one or few buyers, giving the buyers a great deal of power. It is very much related to power relationships were the lead-firm has a high level of monitoring and control. However, the challenges in captive governance tend to be lack of assistance in up-scaling production for the small supplier. The lead-firms expertise and value adding are generally outside the production.
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 60!
“Since the core competence of the lead firms tends to be in areas outside of production, helping suppliers upgrade their production capabilities does not encroach on these core competencies, but benefits the lead firm by increasing the efficiency of the supply chain”
(Gereffi, 2011:10).
In a developing country context, where infrastructure and working/social/political/economic environments tend to be weak, ethical leadership is crucial for the fair treatment of suppliers and a decent share of the market price.
Lastly, Gereffi presents hierarchy governance, where the lead firm develops and manufactures products in-house. It tends to be when a product cannot be codified or systemized, and when the complexity of the product is high that competent suppliers are hard to find. Hierarchy governance is highly characterized as vertical integration with managerial control within the lead firm.
The five typologies characterize the dynamics in values chains and reflect on the different power relationships in the chain. These governance structures can change overtime, e.g. when there is a shift in markets, supplier’s development of competences and innovations (Trienekens, 2011 & Gereffi, 2011).
In the case of developing countries, the opportunities in up-scaling and/or taking in a larger part of the value chain, e.g. Farmers cooperatives with a horizontal relationship, can increase bargaining power for small farmers while lowering costs for retailers who typically purchase from small farmers.
“Increasing capabilities of suppliers and sub-sequent of de-commoditization of the value chain can lead to more balanced power and bargaining relationships in these chains”
(Trienekens, 2011: 66)
As a response to the development of roles in the value chain, there is an increasing demand of global value chain managers (Kaplinsky, 2000). These managers role is to
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 61! manage the mundane transactions (Gereffi) in the value chain, which are costs related to coordinating activities along the chain and typically occur when dealing with non-standard products and/or products that are time sensitive. Trienekens points out how agricultural value chains are very time sensitive and that highly development coordination capabilities are needed (Trienekens, 2011).
5.1.4.3 Value Added
Value adding can be created along the whole value chain by different actors, vertically as well as horizontal. Value can be added on the tangible product, such as quality items and costs of these items, design etc. as well as intangible value such as brand. In the end, it is the consumer’s willingness to pay.
“Value added may be related to quality, costs, delivery times, delivery flexibility, innovativeness, etc. The size of value added is decided by the end-customer’s willingness to pay”
(Trienekens, 2011: 63) The opportunities for company to add value is depending on their specific situation and a number of factors, which typically involve market characteristics and capabilities of actors involved. However, new opportunities for value adding may also be entry of new markets and/or new market channels (Trienekens, 2011).
Kaplinsky stresses that in order to tap into high-income activities with high added value several conditions must be taken into account, such as availability of resource, capabilities of chain actors, infrastructure and potential for economies of scale.
Moreover, to leverage from value adding in these rent categories, it requires participation in global value chains aiming at markets demanding products with high added value (Trienekens, 2011). Trienekens points out that these global value chains are often linked through long-term relationships and supported by foreign direct investments.
Companies with commodities that have very low added value and who trades with Western countries, show unfavorable development. A Research study by Nadvi (2004) showed that even if there was a great increase of 200% in export of fruit and vegetables in Kenya, the same period half the population fell under the poverty line in
Thesis: “Agricultural Social enterprises in the Philippines” by Jacqueline Hansen 62! particular in regards to rural poverty. This indicates that increase in production does not necessarily equal a decrease in poverty. However, Trienekens points out that there is an increase in fair trade and organic specialization.
In the case of food production is not very suited for the upstream part of the value chain in food differentiation because
“Most food chains heterogeneity of raw materials upstream in the value chain is not exploited for serving market heterogeneity downstream the chain”
(Trienekens, 2011: 63) This is due to the high costs of the processing and distribution stages, such as packaging, food safety sterilization and controlling various materials, flow upstream in the chain. For international global value chains, these upstream activities typically happen in developed countries, adding only little value to the production/supplier in the developing country.
Food productions main area of value adding is namely focused on food safety and quality of the product. Quality refers to a number of factors such as color, taste, freshness, and sustainability. While safety is based on the complex rules and regulation on the foods content such as bacteria, heavy metals and expiration date. For producers to tap into the food market, certifications of such standards are mandatory.
Trienekens points out that these standards are very difficult or impossible to achieve for small – medium sized producers due to high certifications costs for producers and high monitoring costs for buyers. Following an argument, that these well intended certifications for quality and safety, (e.g. Food safety laboratory tests and organic certifications) are significant barriers to entry for most these producers, thus there are increasingly initiatives engaging small holders in modern quality schemes (Trienekens, 2011).
5.1.5 Value Chain Constraints
After value chain analysis, Trienekens suggests the following barriers and upgrading options, defining upgrading options build on work of several researchers within the field of value chain and developing countries.
Value chain development is linked with access to market and market orientation.