1.3.4. Horizontal Linkages - Overview

What are Horizontal Linkages?

In a value chain, horizontal linkages are longer-term cooperative arrangements among firms that involve interdependence, trust and resource pooling in order to jointly accomplish common goals. Both formal and informal horizontal linkages can help reduce transaction costs, create economies of scale, and contribute to the increased efficiency and competitiveness of an industry. In addition to lowering the cost of inputs and services (including financial services), inter-firm horizontal linkages can contribute to shared skills and resources and enhance product quality through common production standards. Such linkages also facilitate collective learning and risk sharing while increasing the potential for upgrading and innovation. Small-scale producer groups have strong potential to increase their bargaining power in the marketplace, while processors, suppliers and traders may also form their own groups to strengthen their position within industries.

Cooperation vs. Competition

Cooperation can help firms achieve economies of scale and overcome common constraints to pursue opportunities, while competition encourages innovation and drives firms to upgrade. The most successful horizontal linkages maintain a balance between these two contrasting, but critical and complementary, concepts. Horizontal linkages that do not work well—e.g., a situation where buyers collude on pricing or producers must operate through government-mandated or NGO-promoted associations that are involuntary, poorly managed, or not driven by a commercial purpose—can undermine cooperation and make producers less competitive.

Why Horizontal Linkages Matter

Through effective coordination, horizontal linkages can benefit firms in many of the following ways:

• facilitate bulk purchasing of inputs and services
• reduce transaction costs for buyers
• increase bargaining power of smallholders
• promote collective learning
• enable risk sharing
• influence the creation of industry standards
• catalyze the implementation of marketing strategies and provide access to new markets (for smallholders who cannot sell individually, but can do so as a group)
• encourage firms to advocate for change
• pool resources to purchase expensive shared equipment or services
• supply large quantities demanded by buyers and importers

Types of Horizontal Linkages

Member organizations provide services that include collective production and marketing activities as well as input purchasing, financial services, technology, education, health, policy advocacy, and managing common property resources (water, forests, etc.). There are many different types of horizontal linkages, including cooperatives, associations, clusters and the like.

Traditional, formal (and too often unsuccessful) cooperative models have operational procedures that can be cumbersome and beyond the management capacity of many small-scale enterprises. When choosing the best type of structure, small firms (and facilitators) need to consider members' willingness and ability to access, shape and engage in economically beneficial relationships and to sustain and upgrade them. Though transaction costs may be a factor, minimizing the cost of coordinating member relationships and responsibilities is critical when deciding whether a formal or informal structure is best. Often, different types of formal and informal organizations, such as clusters of producer clubs or societies band together to form legally registered associations to help members purchase inputs, process and market products, access financial and other services, or conduct advocacy.

The Factors and Catalysts that Affect and Facilitate Horizontal Coordination

Groups can be formal or informal (Figure 1) depending on their resources, relationships, roles and rules, and on members’ objectives and knowledge. The degree of formality needed to create or maintain the links between members depends on characteristics that are internal and external to the group. Likewise, catalysts may be internal or external — each one has strengths and weaknesses. Whether the catalyst for group formation is external or internal, producers, processors and others form groups for a variety of reasons including increased efficiency, better product quality and services, improved member ability to negotiate favorable terms and prices, reduced social isolation, and advocacy. These internal and external factors and catalysts affect the horizontal coordination of peers.

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The key to gaining value from horizontal cooperation is recognizing common constraints—inadequate volume, high input costs, lack of market access, unfavorable trade policies, or a combination of these and others—that require collective action. The Agricultural Cooperatives in Ethiopia (ACE)[1] program helped develop and promote a modern, business-oriented agricultural cooperative system that became actively involved in input supply, volume sales, branding, advocacy and marketing crops such as coffee, grains, sesame, nigerseed and others. The coffee cooperatives and their unions have been particularly successful in improving coffee quality and enabling Ethiopian cooperatives to market branded specialty (organic and Fair Trade) coffees to European and U.S. markets. Union lobbying efforts garnered authorization to sell directly to foreign coffee buyers rather than through the low-return domestic auction system.

Characteristics of Good Horizontal Linkages

The success of horizontal linkages between producers, processors, and others depends on a range of conditions that include buyers who demand greater quantity and better-quality product than individuals are able to produce and members who have a similar business orientation, knowledge and resources as well as good working relationships with and trust in one another. While practitioners can build on social capital as a means to develop other linkages, the approach does not come without costs or bring automatic results; only long-term investment that takes relevant factors into account can ensure success. How group meetings are run and the use of explicit contractual obligations, rules and sanctions that can generate and reinforce trust and common understanding and reduce cheating and corruption also matter. In addition, programs that work with poor and other disenfranchised peoples need to choose convenient times and locations for meetings; keep member contributions of time, cash and other resources affordable; and deliver benefits that members and their families value. Benefits may be tangible – livestock assets or education – or intangible such as increased confidence in the ability to interact with outsiders. This interaction of social capital with formal measures to empower individuals suggests that formal and informal institutions complement one another. Very high levels of social capital, however, may hurt competitiveness. This can occur when extensive obligations to the community divert time, energy or money away from an MSE owner’s business; resources that could be better spent on upgrading or certifying the business or on building stronger vertical relationships.

Recommended Good Practices

USAID recommends good practices for facilitating the formation of producer groups, including a thorough analysis of the value chain, the markets and the local culture; a careful weighing of the costs and benefits of meeting market requirements for the product; and facilitating linkages based on win-win economic relationships. Specific examples of good practice follow:

• Analyze the value chain, markets and local culture to determine 1) why cooperation is not occurring or is ineffective in addressing the critical constraints that smallholders and the industry face, and 2) the most appropriate structure for realizing economies of scale, collective learning and increased bargaining power. For example, end-market and value chain analyses of the Indonesian home accessories industry and its global market led to bringing producers together to improve efficiency and transport logistics, purchase bulk inputs and identify other ways to increase the competitiveness of their industry (reference).

• Work with small groups at the bottom of the chain on limited activities with clear economic benefits. Allow group formalization to be driven by the members themselves in response to economic needs. For example, to facilitate farmer access to markets, an NGO in Kenya [2] researched the market to identify opportunities and determine which of their crops had a competitive advantage; provided the farmers with training on market-oriented production and self-organization; and initiated meetings between group representatives and a buyer. The strategy did not directly create groups, but it did enable the communities to form groups and to develop market linkages for themselves.

• Carefully weigh the costs of meeting product requirements in a highly competitive market and of sustaining horizontal linkages with expected returns to group members. Do not encourage producers to form associations if the rest of the chain does not function properly. For example, when coffee prices collapsed, some Kenyan farmers [3] decided to go into dairy farming due to high local demand for milk. To bypass traders (who made over 50% in profits) and ensure regular payment, they organized themselves into a group, obtained a license from the dairy board, rented a stall in town, and began collecting milk. In the first week they sold 250 liters/day and faced demand for another 150 liters. Over time, the group grew to 1,000 members who diversified product lines and began selling snacks along with milk.

• Base the value chain linkages on economic win-win relationships and initiate them through internal catalysts, where possible. Links forged by outside agents such as NGOs can lead to expectations of long-term, subsidized assistance; meanwhile, links formed for commercial activities can create effective incentive and lead to increased investment in the group. For example, the Bangladesh JOBS[4] project worked with TMSS, a national women’s NGO/MFI, to develop a producer group--in this case, a handicrafts association--from its micro-entrepreneur client base. In exchange for products, TMSS provided the group with business training and technical assistance, brokerage and financial services. Although these activities deliver some immediate benefits to the group, the relationship with TMSS has the potential to distort the commercial viability of the group’s product.

• Trust is an essential element of effective cooperation. Building on the social capital generated by group activities can provide an entry point to develop horizontal linkages for economic activities. For example, in Zimbabwe, [5] women who belonged to a women’s association played an effective role in collective decision-making, financial management, rule-making and other aspects of local water management. Other members of the group trusted and listened to the association members because of strong track records, and these women were more likely than non-members to occupy important positions on committees and be involved in group decision-making.

Lessons from the Field

Participation in value chains does not necessarily translate into increased benefits for MSEs—producers must also be able to access higher-value markets and more profitable functions within the chains. In many cases, upgrading is key to profitable and sustainable MSE participation and horizontal linkages can provide opportunities for upgrading through collective learning, cost and risk sharing, enhanced management capacity and better access to support services. The following examples from the field reveal some lessons learned about developing strong horizontal linkages and the types of benefits that can result.

1. Understanding the benefits sought through cooperation is essential.
2. There are a range of factors that influence the form that cooperation takes.
3. Appropriate systems and tools can improve the effectiveness of horizontal linkages.

Resources

• The Nature, Determinants and Consequences of MSE Participation in Value Chains: Evidence from the Horticulture and Handicrafts Sectors in Guatemala. Bloom, David, et al. AMAP BDS Knowledge and Practice microREPORT #78, 2007.
• Walking Tightropes: Supporting Farmer Organizations for Market Access, Chirwa, Ephraim, et al., Natural Resource Perspectives, Number 99. The Overseas Development Institute, U.K., November 2005.
• Social Capital, Dikito-Wachtmeister, Mercy S., IFPRI 2020 Focus No. 06 - Brief 09, August 2001. 
• GTZ ValueLinks Manual
• Modal Choice in International Alliances between Producers of Horticultural Products., Neven David, and Thomas Reardon, Michigan State University Department of Agricultural Economics. Paper delivered at the 5th International Conference on Chain and Network Management in Agribusiness, 2002.
• Farmer Organizations for Market Access: Briefing Paper, Stockbridge, Michael, Dorward, Andrew, Kydd, Jonathan, Department for International Development (DFID) Crop Post Harvest Research Programme of the Natural Resources Research Programme, 2003.

Footnotes

1. Ethiopia – Agricultural Cooperatives in Ethiopia (ACE) Program
2. ValueLinks Manual: The Methodology of Value Chain Promotion, GTZ 2007
3. Using the Value Chain Approach for Pro Poor Development, Experiences from SNV in Asia
4. USAID/Bangladesh JOBS Project
5. Mercy S. Dikito-Wachtmeister, Social Capital, 2020 Focus No. 06 - Brief 09, August 2001