Value chains encompass all the activities and interactions required in the creation of a product or service, from primary production to transformation to commercialization and end-consumers. The term “value chain” refers to the process of continued addition of value that occurs while the product passes from one actor in the chain to the next, gradually increasing its degree of transformation. Main actors in a value chain are suppliers, producers, processors, marketers and buyers. They are supported by a range of technical, business and financial service providers. In a value chain the various business activities in the different segments become connected and to some degree coordinated.
Value chain diagnostics is a method for understanding how actors under given framework conditions operate and coordinate their businesses to ensure that primary materials are transformed, stored, and transported and reach, in certain form and quality, end-consumers. Value chain diagnostics also looks at the various effects that operations in the chain have on groups of people, e.g., with regard to poverty reduction, employment, income generation, firm development, economic growth, or environmental sustainability. Common questions that value chain analysis seeks to answer include the following:
  • Who are the actors that participate in businesses across value chains?
  • Are there actors that coordinate activities in the overall value chain?
  • What are the contractual arrangements under which actors buy and sell products?
  • How do actors exchange information and learn about solutions to improve products and business performance?
  • What technical, business and financial services are available to support actors in the chain?
  • How much value do actors add to the product in the different steps in the chain, what are their costs and how is this value distributed?
  • What are the power relations in the chain and to what extent do they determine how economic gains and risks are distributed among chain actors?
  • What kinds of barriers exist for firms to enter the value chain?
  • What is the level of competitiveness of firms in the value chain?
  • What bottlenecks exist and what opportunities are available for development (upgrading) of the value chain?
  • Which policies and institutions constrain/support chain actors and facilitate value chain development?
The results of the diagnostics can inform investors, government officials and key stakeholders as to whether interventions/investment should be considered, and in which parts of the value chain. They also can provide insights on how those interventions should be designed. For example, in cassava production, in Nigeria, are there producers of cassava tubers, what is knowledge base of individuals in the chain etc since fewer companies produced starch from cassava based on international standard, if investment is made who are competitors, risk involved. Are there government policies that could hinder growth...?
Constraints and opportunities in cost reduction and product improvement can be identified, or options for achieving better coordination among chain actors. Hence, value chain diagnostics can form the basis of policies and programmes that foster chain development. Finally, value chain diagnostics can also point to interrelatedness and synergies among different interventions and help with partnership-building and the provision of complementary services.