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3.1.

Value Chain Selection

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3.1. Value Chain Selection


Introduction
Value chain selection is the process of prioritizing industries or value chains based on criteria including their potential for growth and competitiveness, impact, and
contribution to other development objectives such as conflict mitigation, womens empowerment, food security or natural resource management. The selection
process is inherently subjective, and there is always a danger of selecting a value chain for the wrong reasons. The goal of the selection process is to minimize
subjectivity.
Review basic information on value chain selection.

Value Chain Selection Criteria


When selecting value chains for investment, USAID suggests the use of the following general criteria to prioritize a short list of industries:

Criterion 1. Competitiveness Potential


Significant and sustainable increases in income and employment occur as a result of growth in an industry. As such, the potential for competitivenessthe ability to
achieve and maintain a competitive edge over market rivals through an optimal combination of efficiency, product differentiation and access to new or niche
marketswill 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 some possible value chains may not exist--or may be 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.

Criterion 2. Impact Potential


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 and the poor. 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 and employment 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.

Criterion 3. Cross-cutting Issues


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 [1], 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.

Criterion 4. Industry Leadership


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.

What is the Process for Selecting Value Chains?


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. See other common selection problems.

Data Collection around Sub-criteria


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

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3.1. Value Chain Selection

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http://www.microlinks.org/print/6308

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:
* Employment
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

Data Analysis
Tables can be constructed to organize and rate the sub-criteria.
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. View a
table summarizing and comparing the competitiveness assessment tools most often used to assess or determine proxies for an industry's competitiveness potential.
Two commonly used tools are provided below:
Porter's Five Forces
Boston Matrix
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. See examples of ranking matrices.

Taking a Portfolio Approach in Value Chain Selection


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 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.

Resources
Additional Value Chain Selection Resources

Footnotes
1. AMAP Value Chain Development in Conflict-Affected Environments Project

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