Value Chains…

In the last twenty four hours, I have attended two meetings that have stood out in totally different ways. The first meeting appealed to my intellect, challenged my thinking and gave me opportunity to detail what I understand as the best approach possible in realizing maximum returns for players in a given products and sectors. This is perhaps from the fact that it was an intimate meet up with two professionals I admire, my boss and a visiting executive of a Ugandan financial institution. 

The second meeting insulted my intellect, wasted my time and completely shut down my patience. The ‘professionals’ in this case were Government officers busy bodies out to spend as much time away from office as possible and try as hard as possible to look like the most important people from the organizations that sent them. It was characterized with completely useless monotones of what they found to be the reasons why things are not working and how possible they can make them work… like it will even go anywhere nkt! 

Anyway, I resolved to do an analysis of The Value Chain, the importance of understanding it and how it can be useful in helping the businessman at various points… especially in agricultural based functions as a Strategic Management Concept. Something we debated through for quite some time last evening with the first group… and something the second group thought was too much detail by an expert out to make their lives hard. 

According to Wikipedia, A Value Chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities.

To better understand the activities through which a firm develops a competitive advantage and create shareholder value, it is useful to separate the business system into a series of value-generating activities, The Value Chain. Michael Porter, the name behind the invention identified primary and support activities as below;

The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin. The firm’s primary value chain activities are Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales and Service. These primary activities are supported by the firm Infrastructure, Human resources, Technology and Procurement functions. 

The firm’s margin of profit depends on its effectiveness in performing these activities efficiently, so that the amount a customer is willing to pay for the products exceeds the cost of the activities of the value chain. It is in these activities that a firm has the opportunity to generate superior value. A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation. 

Ok, I realize this post sounds seriously technical, no wonder the characters at Ministry of Trade looked at me funny earlier. Let’s try and look at this in the most basic way possible: 

There is a Juice firm located in Nairobi which relies on farm produce in terms of mangoes and pineapples from Makueni and Thika counties (now that the new constitution is in place) respectively. For farmers to pay attention to their farms and realize the finest produce possible, they have to be assured of good returns from the Juice factory owners whenever they deliver ripe fruits. For the Juice factory to be able to realize a good market share both locally and for export, they have to be able to realize appropriate raw materials for their juice concentrate for lack of that results to lower grades of packaged juice and concentrate for sale hence low returns. The value chain in this case involves the entire process from the farm to the supermarket shelves. 

How do we ensure that the end product fetches maximum returns, is less risk prone and every investor in the value chain (i.e. the farmer, the supplier, the factory owners, the packaging zone, the supermarket/ export people etc…?). This becomes a community, more like an all inclusive process that gives everyone a role to play. In a snapshot: 

  • The Extension Officers will be sent from the relevant Government Ministry to offer service and advice to the farmers…
  • The relevant farmers’ body will engage Agricultural Finance Corporation in developing a product that will appeal to farmers in terms of realizing appropriate input for their farms at a manageable cost…
  • The Cooperative Societies for farmers involved in Makueni and Thika Counties will be readily available to engage the possible factories from Nairobi Industrial area in buying the fruits at reasonable pricing for their good and for the farmers’ well being… The Corporative society will administer the loan repayments to the Agricultural Finance Corporation…
  • The Juice factory will issue good payments for good produce and as such produce and package high grade juice for Supermarkets and exports…
  • The end product will fetch high prices that will trickle back upto good wages for the employees on the farm… Or something like that…

Anyway, my mind is tired from trying to talk some characters into logic this morning… I resign on that note… Hope this makes sense.

3 thoughts on “Value Chains…

  1. I like the way County is the hottest word in the country right now…that’s the best a finance person could come up with. Ok, re reading the post with a bit more seriousness now.

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