Welcome to the 4th and last lesson of Module 1: "The Food Value Chain."
In this lesson I will give you an introduction to the food value chain.
At the end of this lesson you will be able to explain the concept of a value chain, explain where we can apply it,
and argue why understanding the value chain is
relevant for businesses, governments, and NGOs. Value chains are an abstract concept -
we generally find two perspectives - the value chain within a firm
and the value chain across firms. Dissecting the value created
within a firm into its components yields the generic value chain Michael Porter already described in 1985.
Porter describes this value chain in the following way:
"The idea of the value chain is based on the process view of organizations,
the idea of seeing a manufacturing or service organization as
a system made up of subsystems each with inputs, transformation processes and outputs.
Inputs, transformation processes, and outputs involves the acquisition and
consumption of resources - money, labour, materials, equipment, buildings, land,
administration and management. How value chain activities are carried out
determines costs and effects profits." The value chain across firms, on the other hand,
is usually viewed as a sequence of the processes ranging from the creation
of goods or services to their delivery to the end consumer.
Not too long ago it seemed businesses were more concerned with the value chains within the firm,
and economists and policy makers with the value chain across firms and sectors.
Today, however, businesses are much more concerned about the whole value chain of which they are part,
because advancing globalization and technology allow for
much more fine tuning of the processes along a value chain.
Such optimization of value chains is desirable for firms, because it can
increase the efficiency of their production and decrease cost and risks.
To do so, however, requires a holistic view of the value chain, making it
imperative for managers to know how to analyze them.
Knowing and understanding the value chain is also necessary to analyze the attractiveness of markets.
We should consider where value can be generated and absorbed and where it is
extracted by competition or rent-seeking.
A framework like Porter's five forces allows us to disentangle the many factors shaping the distribution of the
value across stakeholders - factors such as entry barriers, bargaining power,
price elasticity, institutional constraints, and so on, can be identified and investigated
in isolation to get a clearer picture of this situation. This is not only useful
for businesses to identify ways to maximize profits, but also for
governments, researchers, and NGOs to investigate whether markets are functioning.
Governments and NGOs are interested in value chains because the
interdependencies across firms created by a value chain can have both desirable
and adverse effects on the functioning of the whole market. As each actor in the
value chain strives for maximizing the value they create and the retention of
that value, the preferences of the different actors along the value chain
are not always aligned. This can lead to various forms of market failure.
Economic theory can help us understand the reasons of the various forms of market failures along a value chain.
Understanding these reasons then helps
us come up with solutions, which could be new business models, new institutions, or regulations.
As there are different parties interested in different aspects
of value chains, there are several different definitions of a value chain
such as the following: For instance, the World Bank defines the
value chain as "the full range of value adding activities required to bring a
product or service through the different phases of production."
The United Nations Industrial Development Organization views value chains as "Actors connected along a
chain producing, transforming and bringing goods and services to
end-consumers for a sequenced set of activities." The more business-oriented
definition based on Porter's observation sees the value chain as
"interlinked value-adding activities that convert inputs into outputs which, in turn, add to
the bottom line and help create competitive advantage."
For the time being, the key conceptual and methodological elements of value chain analysis and
development are still evolving. For now, it suffices to remember that the
food value chain links the value generating process of a good or service from
inventors to producers to intermediaries through consumers.
To summarize what we have learned in this lesson: We can look at value chains within and across firms.
Firms take a holistic view of the value chain to
optimize their process and to maximize profits. Governments and NGOs take
holistic view of value chains to identify reasons for market failure and
to learn how to resolve them. Misaligned interests of the actors in a value chain
can lead to market failure. Economic theory can help understand reasons for
market failure and provide guidance for solution. This is the end of lesson 4 and
with it we conclude Module 1: the Introduction to this online course.
Thank you for your attention.
Hannes LangResearch Associate
Luisa MenapaceProfessor
Faical AkaichiResearch Economist
Francesco BimboResearch Economist
Montserrat Costa-FontResearch Economist
Carlo RussoAssociate Professor
Chenguang LiResearch Economist
