Feed the Future
This project is part of the U.S. Government's global hunger and food security initiative.

2.5.3. Embedded Services

What are Embedded Services and Products?

Embedded services occur when a buyer of an enterprise's products or a seller of inputs to an enterprise also provides "free" services or products as part of the transactional relationship.[1] In these scenarios, the enterprise does not pay direct fees for the services or products; service providers (e.g., the input suppliers or buyers) cover the costs--although, of course, the enterprise may pay for the product or service indirectly through higher input costs or lower prices received from buyers. For example, export companies, in addition to export services, often provide technical assistance, training, finance and/or inputs to their small enterprise suppliers. The exporter provides these services because it makes good business sense to do so and it ensures the exporter receives high-quality goods from the small enterprises. The services are embedded in the transaction the two parties have with one another.

The frequent provision of high-quality embedded services typifies effective vertical linkages. Lead firms can provide a wide range of embedded services to affiliated suppliers and buyers to ensure consistent quality of end products and services. These embedded services are often seen as an integral part of business transactions and considered a necessary cost of doing business.

Supporting Market Businesses Offering Embedded Services

Providers of supporting market products and services have an incentive to embed a range of additional services in their relationships with clients in the value chain. For example, agricultural input providers routinely provide technical advice to customers on how best to apply seeds and fertilizers; this ensures customer satisfaction and differentiates them from other suppliers. It is important to be aware, however, that some businesses provide technical support that promotes unnecessary services. Such practices can often be addressed through awareness raising initiatives.

Embedded services in some cases represent a stage of development, after which these embedded services spin out of the value chain and are provided by businesses in the supporting market. This process can happen in one of two ways. Sometimes a value chain actor sees a market opportunity to provide what is currently an embedded product or service on a fee basis directly to other value chain actors. For example, an employee of a large craft producer in Haiti responsible for procuring metal drums as raw material to independent artisan contractors recognized an opportunity to start his own business as a supplier of metal drums to the artisans.

At other times, value chain actors may contract with or arrange for supporting market businesses to provide embedded services on their behalf to specific value chain recipients. Such arrangements have the potential to foster on-going relations between supporting market businesses and a group of value chain actors. For example, exporters of fresh vegetables in Kenya successfully negotiated with agricultural input businesses to provide lower-cost, good quality seed and other inputs to small-scale farmers in their out-grower schemes. The exporters pay the agricultural input suppliers directly for large quantities of inputs and authorize disbursement to specific farmers.

Footnotes

  1. Terms Used in Enterprise Development: Rethinking BDS; Lusby, Frank, Action for Enterprise, October 2004.