CHAPTER 1
Introduction – what this book tells us about commercial value chains that include the poor
Malcolm Harper, John Belt and Rajeev Roy
Abstract
This chapter discusses the theoretical foundations of the topic dealt with in the book: value chains in developing countries and whether they can be inclusive of poor people in ways that will materially benefit them. Value chains that have not received the attention of international development interventions are the focus of the study – to understand in what circumstances poor producers are seen as good business partners. Terms used frequently in the book are also defined to help the reader understand the cases and their contexts a little better. The difficulties of measuring impact of value chain involvement upon the producers are discussed, as well as the choice of the Progress out of Poverty Index to measure economic status. The cases include commodity products, non-commodity food products and other non-food items in a value chain. This chapter provides a short introduction to each case in the book.
Keywords: inclusive value chains; impact; Progress out of Poverty Index; small-scale producers; smallholder farmers
What this book is about
This book is about value chains. Not all value chains, but a particular class of such chains – 'inclusive' value chains – which include and substantially benefit large numbers of poor people. These people are often smallholder farmers, but they may also be artisans, or small-scale retailers or customers.
The 'development community', including United Nations (UN) agencies, bilateral donors such as the British Department for International Development (DFID) and the United States Agency for International Development (USAID), non-government organizations (NGOs) and the governments of poorer countries themselves, have in recent years become involved in promoting and assisting value chains, as it becomes recognized that economic development and the alleviation of poverty are unlikely to be achieved by the public sector alone; the private sector is seen as the main source of growth, and development assistance is increasingly a matter of partnership between public and private entities.
For-profit businesses, which depend almost everywhere on trading goods and services with other businesses, also build value chains, not to alleviate poverty but because such chains are vital for their businesses. Some large businesses whose value chains happen to include and benefit poor people may present these value chains as part of their 'corporate social responsibility' (CSR) activities, but the value chains that are described in this book have not been developed by companies in order to achieve social goals, or to promote a favourable 'image', but because they are good business. The poor people from whom they buy their raw materials, or through or to whom they market their products, are their best partners from a commercial point of view. They can perform whatever functions are necessary, to higher quality standards, or more reliably, or less expensively, than any other suppliers, and it makes good business sense to work with them, and to pay them more than they could earn elsewhere, so that they will do their best to continue.
Business relationships between large corporations and small-scale farmers, or other poor people, are sometimes believed to be necessarily exploitative. It is argued that the main or only reason the corporations have chosen to work with them is because they are cheap, and also because they are plentiful; they can easily be replaced if they become dissatisfied or worn out. This certainly happens in many value chains, but we have tried to find examples that are profitable and 'sustainable' for all their members; it is worthwhile to pay the small-scale farmers or others more than the going rate for undifferentiated crops, or other supplies or services, because they can in some way provide better value for money.
What this book is for
The book is not intended in any way to make a definitive statement about what we have chosen to label 'inclusive commercial value chains'. We aim merely to show by several examples that it is possible and profitable for businesses to build and maintain such value chains, without subsidy or other non-commercial assistance.
We use the term 'value chain' because it briefly describes the sequence or network of businesses, farms, artisans, retail shops and other intermediaries that are needed to get any product to its final users. Many business people who are more concerned with profits than definitions use the terms 'supply chain' or 'distribution channel', but the word 'value' makes the point that the members of a chain do more than 'logistics', the transport and storage or 'place' functions. They add value in many different ways, including production and promotion, so that the final product or service is actually a combination of each of the 'four Ps', as famously conceptualized by McCarthy (1960): Product, Place and Promotion, which can finally be offered to the customer at a Price that represents good value.
We have ourselves been engaged in business in the past, not in global or multinational companies but in medium- and small-scale businesses. One of us was in the marine fishing industry in India for many years, one was a commercial consultant and another worked in international marketing of hardware from the United Kingdom. We had to develop relationships with numbers of suppliers and customers in order to deliver value to our final consumers and at the same time to maximize our own profits and to remunerate our other partners in such a way that they would continue to supply us and buy from us. We had to decide whether to buy direct from manufacturers, or to go through intermediary traders, and also whether to sell the completed products or services direct to the consumers or through a further succession of wholesalers, distributors, retailers or other 'middlemen' (or 'middle women').
We did not realize that we were developing 'value chains' or 'supply chains'; we were involved in marketing, in purchasing, in 'make or buy' decisions, in selecting and managing the optimum supply and marketing channels for our products. Porter (1985) showed how companies, and whole nations, could improve their competitive position by optimizing value chains as a whole, rather than seeing them only through the lens of the 'leader' of the chain. Raphael Kaplinsky (2000) went further, and showed how value chain analysis could be applied not only to maximize the profits of one firm within the chain but also to achieve a 'dynamic shifting of producer rents through the chain', thus improving the share of poor and disadvantaged producers or others.
What this book tells us
Prahalad (2005) writes of 'inclusive capitalism', where he discusses businesses that try to include the poor and underserved markets and consumers. While Prahalad's focus was primarily on the poor as a market, several others have specifically looked at possibilities of including the poor in productive processes (Fairbourne et al, 2007; Harper, 2010; Donovan and Stoian, 2012). These writers and others discuss how poor producers and other intermediary microenterprises such as village-based processors, itinerant vendors and others can be linked into 'modern' value chains, and businesses themselves are under increasing pressure to obtain external certification to show that those who are employed in their value chains are not being exploited.
Several donor agencies have promoted this type of activity by supporting value chains. Their 'value chain approach' supports the development of value chains where inputs, finance, institutional development, business development services or shared infrastructure may be subsidized. A number of multinational corporations have also promoted such value chains, supported in part by their CSR budgets, but these initiatives rarely become mainstream growth businesses.
We aim to demonstrate that including and benefitting the poor can do good and be good business, at the same time.
The managers of the businesses who developed and lead the value chains described in this book may or may not have value analysed the chains in order to maximize their own business's share of the profits, but it should be clear from the cases that they certainly did not make a conscious effort to maximize the shares of their partners in the chain, rich or poor, except insofar as this was necessary to ensure that they would be willing and able to play their part in the growth and sustainability of the total system. The value chain 'leaders' are socially responsible businesses, but not in order to say that they are; it is good business.
We do not suggest that donors, governments and others should never subsidize value chains in order to include and benefit smallholder farmers or other disadvantaged groups. Farmers everywhere, and particularly in the European Union and the United States, are often very heavily subsidized, often to the grave disadvantage of far less wealthy farmers who produce the same crops in poorer countries. Few governments of these poorer countries are rich enough, or misguided enough, to subsidize their farmers to the same level, but our case studies show that it is not always necessary to provide subsidy of any kind to enable the small producers or other poorer participants in a value chain to gain from their inclusion.
'Sustainability' is something of a watchword for many donors; this refers not to the permanence of the donor institutions themselves, although many of them appear to operate as if they are sure that their donations and subsidies will always be required, and that their objective to eliminate poverty will never be achieved. The intention is that the chain will be financially sustainable, in that all the participants will earn enough money from it so that they will wish to remain involved; environmentally sustainable, in that it will not destroy the natural environment on which it, and everyone else survive; and socially sustainable, in that it will benefit or at least not damage the societies that are affected by its operations.
When value chains are supported by donors they presumably intend that the chains will be sustainable, in that the subsidy will not have to be permanent. This does not always happen; such assistance often continues almost indefinitely, and during our search for cases we came across more than one value chain that had received substantial and not always productive subsidy long after it had been established.
Clearly a value chain that must always be subsidized is not 'sustainable', by any normal definition of the term. Some initial assistance may be needed to demonstrate that the value chain can pay its way, or cover its losses before it is large enough to be profitable, but if businesses invest in a value chain from scratch, without any subsidy, it is prima facie more likely to be a chain that will survive, and grow, because its fundamental economics are sound from the outset. We cannot predict whether the value chains that are described in these case studies will or will not prosper, but we suspect that they will last longer and grow larger than chains that depend on subsidy.
There are of course large numbers of such value chains everywhere, in the so-called 'developed' and 'developing countries', trading locally or internationally, satisfying their customers and also making a substantial contribution to the well-being of the low-income smallholders, artisans, traders or customers with whom they are partnered. It was, however, not easy to identify specific cases, or, once we had done so, to obtain the information that was necessary for a suitable case study.
Framework of the study
We used a multistage process to identify and choose the cases. First we publicized the opportunity through our own and other contacts; these were mainly in the 'development' community, rather than with 'real' business people. We asked interested contributors to send us a simple 'map' of the chain, telling us what the products were, approximately how many people were involved at each stage, and some basic data on the funding and economics of the chain. We did not at this stage reveal that we wanted only unsubsidized value chains, because we did not want prospective contributors to be tempted to conceal subsidies.
We received a large number of submissions; many were rejected because they had been subsidized, or they involved very small numbers, or the aspirant contributors were clearly anxious to promote rather than to describe the value chains. We also tried to include cases from a wide range of countries, which handled a number of different products. We short-listed apparently suitable cases, omitting many that had received donor support, and we also had to reject several cases at the initial draft stage, because it became clear that they had been 'aided'.
We were able, thanks to the generosity of KIT in Amsterdam and CTA in Wageningen, to offer a modest fee to the authors, but some companies were naturally reluctant to share confidential information about their own and their partners' costs and revenue, or to spare the necessary time. On one or two occasions, the managers whom we approached also expressed some irritation at the suggestion that they were 'doing good'; they had little respect for the numerous and often ineffective development programmes that they had observed in their own neighbourhoods, and had no wish to be associated with them.
We deliberately avoided the largest and best-known multinational corporations; some of their socially responsible value chains are already well known and have been heavily publicized, and it is sometimes difficult to distinguish between the business realities of the chain and the CSR that the chain leaders wish to publicize.
In spite of these difficulties, we were finally able to obtain a number of case studies that satisfied our criteria. We have tried to ensure that the 15 cases that we finally chose to include in the book are a reasonably representative sample. Seven are from Africa, of which two are about businesses in Somaliland. This may seem disproportionate in relation to that country's population, or even to that of all of Somalia. We felt, however, that the unusual status of both products, a semi-legal stimulant drug known as khat, and cash itself, and the fragile nature of Somaliland, where many international companies fear to do business, where there are few if any 'development projects' and where even foreign relief agencies' staff are often expected to travel with armed guards, was a reasonable guarantee that the value chains would be resilient. All we had to do was to ensure that those who participated in them were making a better living than before.
The remaining cases are from South East Asia and Latin America, and six are from India; this too may seem too many for one country, but it is important to note that the very poor population of India, one country, make up over a quarter of all the world's poor.
Much of the literature on value chains is focused on farm products produced by smallholders. Farming is the dominant source of livelihoods in most poorer countries, although their rural populations are rapidly being overtaken by city dwellers. Twelve of our fifteen cases involve farm products. They include 'traditional' crops such as rice, millet and cotton seed, but we have also included case studies on milk, fresh vegetables, poultry and palm oil, all of which demonstrate less familiar approaches to the production and marketing of such products. And, in addition to khat and cash, we have included case studies on polished granite slabs, cashew nuts and clay stove liners.
The cases do not follow a standard structure; their content is very different, and a standardized format would have made the collection tedious. We hope that each case has retained the individual style of its writer and its environment. We have attempted, however, to ensure that each case study includes certain basic information.
In addition to the obvious data about the country or region, the product or service that is produced by the value chain, and the approximate numbers of people who are involved, each case also includes a 'map' of the value chain, showing the links in the chain, making up the chain from the initial raw materials and other inputs through to the finished product or service, together with an estimate of how much value is added at each stage. This shows how the total price to the final customer is made up, and what proportion of this price is retained by each link.
We aimed to show how the value chains have 'significantly benefited' the poorer people who are involved; this requires information about their condition before they joined the chain, and at the time when our contributors carried out their studies. Incomes may seem to be the best measure of economic well-being, but it is notoriously difficult to measure anyone's income, and even some of our presumably literate and numerate readers might find it difficult to assess the extent to which they are better off today than they were say five years ago.
