1.4.1. Value Chain Selection--Overview
Value chain selection is a decision-making process used to determine and rank the competitiveness potential of a select group of value chains. It is conducted to identify value chains for development that will maximize the impact of donor funds. The selection process occurs during the planning stages of a project through prioritization of a short-list of value chains weighted and ranked against selection criteria. The criteria help to create a program that will strengthen industry competitiveness, achieve a desired impact among target beneficiaries, address cross-cutting issues and mobilize private-sector participation to drive change.
While value chain selection should be done at the outset of a new project, it may be revisited at later stages to correct assumptions made during the initial selection, or to accommodate new stakeholder commitment, new end market opportunities and threats, or changes in the enabling environment (see figure on right).
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When selecting value chains for investment, USAID suggests the use of the following general criteria to prioritize a short list of industries:
As depicted in the picture below, these criteria do not necessarily lend equal weight during the selection process; that is, no single criterion is sufficient to determine which industries will achieve project objectives. However, while each criterion can be assigned a different weight, the competitiveness criterion is most often the highest priority since the other objectives cannot be sustained outside of a competitive industry.
Significant and sustainable increases in income and employment occur as a result of growth in an industry. As such, the potential for competitiveness—the ability to achieve and maintain a competitive edge over market rivals through a optimal combination of efficiency, product differentiation and access to new or niche markets—will often be the most important criterion in value chain selection. When measuring competitiveness, it is important to remember that value chains and their end markets are dynamic, and that not all possible value chains may exist--or are nascent--at the time of the analysis. While there are various tools and frameworks for measuring competitiveness, the process is still more of an art than a science.
It is, of course, important that the selection of value chains leads to a program that has the desired impact on the target group, namely, MSEs. As stated in the competitiveness criterion above, significant, sustainable increases in income and employment occur as a result of economic growth. Growth in industries with high rates of MSE participation will impact--that is, reduce--poverty more than growth in industries with low employment and minimal MSE participation. Assessing potential impact at the firm and industry level is key to understanding ways to increase or optimize growth with equity. Another aspect of impact is the multiplier effect of growth in a particular industry. Determining how and where marginal increases in industry revenue are invested in the local and national economy is an important element of impact.
Governments and donors often have a complex set of objectives to consider when determining how and where to allocate resources to both stimulate economic growth as well as affect other cross-cutting issues. For some donors, economic growth is the goal, for others it is simply a means to achieve other objectives such as improved health (including HIV/AIDS), gender equity or sustainably managed environmental resources. Another important cross-cutting concern is the potential to mitigate conflict. Under the AMAP "Value Chain Development in Conflict-Affected Environments" project, USAID investigated how conflict can affect value chain selection and how it should be integrated into selection tools. It is important to note, however, that cross-cutting criteria should be applied after industries have been screened for their capacity to be competitive, without which the gains from investment in any particular sector or industry are unlikely to be sustained.
The concept of industry leadership refers to the willingness of one or more lead firms to invest time and resources (including non-economic resources such as political and social influence, intellectual contributions, etc.) to increasing value chain competitiveness in a way that enhances benefits to MSE producers and the poor. Lead firms are typically larger, financially stronger or more innovative firms, but industry leadership can also come from a public-sector association or even a well-organized, skilled group of producers. Effective industry leadership necessitates transparent relationships with MSEs, a commitment to addressing constraints to MSEs' participation in the value chain, and a willingness to work with other stakeholders to solve industry-wide problems. The quality and strength of industry leadership cuts across competitiveness, impact and cross-cutting issues.
Value chain selection is a process that may be sequenced in a variety of ways, it can take a few days to a couple of weeks to complete, and can employ a single tool or a combination of tools. The approach taken will vary according to the selection criteria preferred, the number of value chains considered, the accessibility of primary and secondary data sources, and the time and resources available. It should be remembered that the purpose of the value chain selection process is to identify the industry or industries to analyze in the next stage of the project cycle. An overly detailed or exhaustive selection process can preempt the value chain analysis, add complexity without adding value, and significantly increase the cost of the selection process. For other common problems to avoid when selecting value chains, please click here.
USAID’s value chain approach uses a combination of qualitative and quantitative tools to carry out the selection process, with an emphasis on qualitative aspects. Data is collected primarily from secondary sources where available and reliable, supplemented by primary research. To guide data collection, each criterion is broken down into several constituent elements. For example, to assess the competitiveness potential one collects information on some or all of the following sub-criteria:
- Market share
- Competition and substitutes (global threats)
- Supporting markets and embedded services
- Business enabling environment, with regards to infrastructure, policy and the socio-economic environment
- Stakeholder commitment
- Market growth, and market opportunities
An industry's growth potential is often the most important sub-criteria when assessing competitiveness potential because without growth competitiveness cannot be sustained.
Similarly, when examining a value chain's impact potential, some sub-criteria to assess include the following:
- Income generation
- MSE participation
- MSE growth
- Livelihood and security
The sub-criteria for cross-cutting issues will depend on the issues prioritized and the country context. Industry leadership includes the following:
- Number of lead firms
- Collaboration between lead firms
- Willingness of lead firms to invest in increased competitiveness
- Lead firms' commitment to MSE participation in the value chain
Tables can be constructed to organize and rate the sub-criteria. For examples, click here.
In addition, a number of tools can be used to assess an industry’s competitiveness; each has its own strengths and weaknesses and varies in its complexity. For a table summarizing and comparing the tools most often used to assess or determine proxies for an industry’s competitiveness potential click here. Two commonly used tools are provided below:
After the sub-criteria are assessed for each value chain, a ranking matrix is generally used to compile the information gathered, analyze the implications and prioritize one or more value chains. A ranking matrix may use a low-medium-high scoring system for sub-criteria, or numeric scores may be assigned. Weights may also be applied to distinguish among multiple criteria that are not all of equal importance. A cautionary note is that the matrix often suggests a level of quantitative rigor for a decision-making process that is largely qualitative. For examples of ranking matrices click here.
To mitigate the risks associated with working in dynamic and sometimes volatile markets, value chain development practitioners can take a portfolio approach to selecting value chains. Adapted from the finance industry, the portfolio approach is a way of selecting value chains with diverse risk profiles so that the realization of a specific risk in one value chain does not undermine overall program progress. To do this, practitioners can rate the levels of different types of risk associated with a variety of variety value chains, such as price volatility, susceptibility to adverse weather, logistical breakdowns, and political risks.
Once one or more value chains have been selected the project cycle can move forward to value chain analysis.