BASICS OF VALUE CHAIN ANALYSIS Originators: Foundation for MSME Clusters (FMC), UNIDO

Reducing poverty through sustainable industrial growth Value and Value Addition  Value: Intermediate value: price that customer is willing to pay for a semi-finished product Ultimate value: price that consumer (the final customer) is willing to pay  Value Addition: A process of adding value to a semi-finished product - starting from raw material till it reaches the consumer By adding some material or services Such that there is a substantial change in the output  What is the typology of firms involved in a value chain?

Reducing poverty through sustainable industrial growth Value Chain High value adding firm Cluster Consumer Low value adding firm

Reducing poverty through sustainable industrial growth Product Value Chain Primary Activities Likely Attributes Inbound logistics Ware-housingInventoryVehicle planning OperationsProcess Sub- contracting TestingPackaging Outbound logistics StoringDistributing Order processing Vehicle planning MarketingLabelingAdvertising Brand promotion Sales Channel selection Sales promotion ServicesInstallationRepairsAccessoryReplacement  Numerous chain relationships

Reducing poverty through sustainable industrial growth Value Chain Relationships  Chain relationships depend on: What is to be produced (design of products) How it is to be produced (definition of the production process: technology, quality standards) How much has to be produced  What type of chain relationship one finds in a cluster?

Reducing poverty through sustainable industrial growth Types of Value Chain Relationships  Market based: Supplier of standard product  Network based: Combine complementary competencies and both have more or less equal power in the relationship  Quasi-Hierarchical: One party exercises high degree of control over the other  Hierarchical: Buyer takes ownership of producers in the cluster Nature of chain relationship decides upon types of value upgradation

Reducing poverty through sustainable industrial growth Types of Value Chain Upgradation  Process upgradation: transforming inputs into outputs more efficiently  Product upgradation: introducing new products or improving old products  Functional upgradation: changing the mix and acquiring new, superior functions  Intersectoral upgradation: applying competence acquired in a particular function to move into a new sector Interestingly, type of value upgradation also has a sectoral dimension

Reducing poverty through sustainable industrial growth Sectoral Dimension  Traditional labour intensive: textiles, leather footwear, etc.  Natural resource based: marble, processed food  High cost engineering intensive: automobiles, auto components, electronics

Reducing poverty through sustainable industrial growth Using Value Chain Analysis  Comparative analysis of value added in this chain for a representative core firm with respect to: A benchmark firm within the same cluster Representative firm in another benchmark cluster For comparable product  Analysis of type of value upgradation happening and can happen  Comparative analysis of other value adding stakeholders with respect to similar stakeholders in benchmark cluster