Operating in the Agri Value Chain

Definition: A value chain can be described as the interlinked value-adding activities that convert inputs into outputs which, in turn, add to the bottom line and help create competitive advantage. The chain of activities gives the products more added value than the sum of added values of all activities.

The value chain concept provides a way of understanding relationships between businesses, methods for increasing efficiency, and ways to enable businesses to increase productivity and add value. Value-chain approaches in the agriculture sector are a vehicle for linking small businesses to markets and are essential for improving South Africa’s economy and reducing poverty.

In order to understand your value chain, you could draw a simple diagram that shows the key processes and inputs that contribute to your final product. In general, the value chain of most agribusinesses looks like this:

How Does the Value Chain Work?

At its simplest, a value chain is an activity path through an organisation. It tells you what the organisation does and the order in which it does it. It should also tell you something about how it does it.

Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a fruit farm that needs its products to be packed will require its pack house to be located nearby its farm. This will maintain the quality of the product and minimise the cost of transportation.

A value chain can be a very helpful tool for understanding the difference between two organisations that appear to be functioning in similar ways in the same sector. This is because organisations can construct their value chains in very different ways. A different design of the value chain, by which we mean a different activity path through the organisation, might simply indicate a different way of doing things, or it might generate notable competitive advantage.

The Value Chain Marketing System

In a Value Chain marketing system, farmers are linked to the needs of consumers, working closely with suppliers and processors to produce the specific goods required by consumers. Using this approach, and through continuous innovation and feedback between different stages along the value chain, the farmer's market power and profitability can be enhanced. Rather than focusing profits on one or two links, players at all levels of the value chain can benefit. Well-functioning value chains are said to be more efficient in bringing products to consumers and therefore all actors, including small-scale producers and poor consumers, should benefit from value chain development.

The market is based on integrated transactions and information. Consumers purchase products that are produced according to their preferences. The farmer becomes the core link in producing the products that the consumers desire.

Research and development, whilst including techniques targeted at increased production, is also focused on consumer needs, and attempts to take account of all of the links, and dependencies in the value chain, e.g. processing, environmental and social costs or considerations, as well factors such as health impacts, education and learning.

Communication is in both directions. It is important that both consumers and processors are made aware of factors limiting production, just as much as farmers and other producers are made aware of consumer requirements.

The value chain can help answer questions regarding:

• How the products you produce, reach the final consumer
• The economic relationships between players in the chain
• How this structure is likely to change over time
• The key threats to the entire value chain
• The key determinants of your share of the profits created by the chain.

Value chains can be used to identify sources of increased efficiency and also to facilitate ‘benchmarking’ of how competitors create value and how their activities compare with yours. Value chain analysis has four underlying elements:

Underlying Elements of Value Chain Analysis

You may find that even a very simple overview of an organisation's value chain gives a great deal of insight into its relative strengths and weaknesses. It is also the case that imaginative approaches to reconstructing (‘reconfiguring’) the value chain can release new ways of clustering resources and therefore new types of capability within organisations.

Analysis of the value chain enables us to identify where an organisation's distinctive capabilities are based. They may arise from clear advantages in particular functions (e.g. R& D, manufacture), or from the integration of individual functional capabilities. These distinctive capabilities give rise to core competencies, which are what make the organisation what it is. They are the key to the continued success of the institution, and effective strategies need to recognise and build on them.

Value chain analysis, together with an understanding of an organisation's key capabilities, can provide a basis for decisions about whether to integrate all stages of the value chain within the same organisation or to enter into partnerships with other organisations better equipped to deliver some of those stages. Equally, value chain analysis may allow an organisation to make decisions about whether to extend its activities up or down the value chain. Certain activities on any value chain might add a high proportion of financial value to the finished product or service: these are known as high value-added activities.

Examples are:

• Diversify enterprises
• Market outside the commodity supply chains
• Emphasise direct marketing and premium specialty markets
• Consider forming a cooperative with other farmers
• Add value through on-farm processing

The structure of the value chain will have a direct impact on you and your direct competitors’ profitability.

To a large extent, the amount of profit that can be obtained by you is dependent upon the final value that your entire value chain delivers to the consumer. It is also important to realise that your value chain also competes against other value chains that may be delivering products and services to the same customers that your chain delivers to. Agricultural businesses that focus only on the firms nearest to them in the value chain are not likely to anticipate major structural changes that can dramatically impact their profitability.

Principles in establishing a strong value chain:

• Start small and grow naturally
• Make decisions based on good records
• Create a high-quality product
• Follow demand-driven production
• Get everyone involved
• Keep informed
• Plan for the future
• Evaluate continuously
• Preserve
• Capitalise adequately
• Focus

The Role of the Producer in the Value Chain

The producer is a pivotal part of the value chain. They convert inputs into outputs (e.g. fruit, wheat, milk, etc.) thereby adding value to the final product. The decisions they make regarding how to use resources (land, seed, cattle, labour, technology, soil, fertiliser, chemicals, equipment etc) and farming techniques, skills and processes will determine the value that is added at this stage in the value chain. Therefore, they should always seek to farm efficiently and effectively so as to maximise value.

Value will be maximised if the farmer produces high quality and volumes of product at the lowest possible input cost.

Apart from focusing on the final product, value can be added by using and selling by-products from the production process. For example, peach pips can be sold to landscapers to use in gardens or inferior grade fruit can be juiced or dried for resale.

Each part of the supply chain adds value in a similar manner by using their resources, skills, techniques, etc. to add maximum value to the value chain. Value can be added by producing something, such as cheese, or by offering a service that enhances the overall value of the outputs from the values chain, e.g. marketing.

Value Add to Raw Product Vertical Integration in the Value Chain

Value added agriculture is a process of increasing the economic value and consumer appeal of an agricultural commodity. It is an alternative production and marketing strategy that requires a better understanding of the rapidly changing food industry and food safety issues, consumer preferences, business savvy, and teamwork.

The more value you add to your raw product, the more appealing it will be to customers and the more they will pay for it. As farmers struggle to find ways to increase farm income, interest in “adding value” to raw agricultural products has grown tremendously. The value of farm products can be increased in endless ways:

Value Adding Activities to Raw Agricultural Products

Today, more than ever, adding value means “selling the sizzle, not the steak.” The “sizzle” comes from information, education, entertainment, image, and other intangible attributes. Because of the many regulations involved with food processing, some people may choose to add value in other ways. On a larger scale, producer-controlled processing for energy, fibre, and other non-food uses are options. On a smaller scale, items such as flower arrangements, garlic braids, grapevine wreaths, willow baskets, wheat straw weavings, sheep and goat milk soaps, and wool mulch are a few examples. In addition, ideas for providing entertainment, information, and other services associated with direct marketing are abundant.

Obtaining Competitive Advantage in the Value Chain

A Competitive advantage can be defined as an advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers than its competition. There can be many types of competitive advantages including the firm's cost structure, product offerings, distribution network and customer support.

Success in the long run requires all of the above, plus the added advantage that comes from whatever it is about your operation that cannot be copied or can only be copied with great difficulty or expense. For example, focusing on your location will attract buyers who want to "buy local." Tell the story of your farm—no one else will have quite the same story.

However, there is a growing need for farmers to become market oriented. In other words: find out first what the market most likely wants and try to produce according to market specifications/demands. Reasons are that consumers have specific demands on quality, food safety and the social conditions under which the products are grown. After they have gained this knowledge, they will decide to whom and how to sell their product. If they do so, there is a better chance that they will get a better price for the product.

Click here to view a video that explains the sustainable agribusiness and food value chains.