Tool 4 - Relationships, Linkages and Trust

 

Introduction Objectives Key Questions Steps Step 1     Map respondents and create categories Step 2     Identify dimensions Step 3     Survey actors Step 4     Analyse the results of the survey Step 5     Identification of power distribution Step 6     Analyse trust What Should be Known after Analysis is Complete

Introduction

 

Trust and linkages are inextricably intertwined within a value chain. Organisations without linkages have little reason to “trust” each other, even if they do not “distrust” the other party. Conversely, trust might not be important if enforcement mechanisms exist to ensure compliance with a given set of rules governing their relationship (for example, contracts and other legal regulations). However, in the absence of an effective mechanism of enforcement, linkages without trust are invariably weak.

 

Terminology

for the purpose of this tool Relationship is defined as a social connection between two parties Linkages are defined as a business relationship between two parties of the value chain/network Trust is social capital formed between two parties enabling a more efficient linkage through the reduction of transaction costs.

 

Whereas relationships, defined as a social connection between two parties may play a role in certain value chains, e.g. a family business with different individual family members or family groups each having specific tasks or specialisations within the value chain (usually with a high level of trust), linkages are the more common norm in most value chains (with varying degrees of trust between actors). From here onwards this tool will therefore focus on linkages and trust.

 

Analysis of linkages involves not only identifying which organisations and actors are linked with one another, but also identifying the reasons for those linkages and whether the linkages are beneficial or not. Actors in the value chain link with one another because they purportedly obtain benefit from those linkages. An identification of the benefits (or lack of them) goes a long way to identifying the constraints in increasing linkages and trust amongst value chain participants.

 

Linkages within a value chain are mostly business linkages, and could be formal but are often informal. The informal linkage refers to the domain of social capital (see also Figure 1 in Tool 3), in which trust can play a central role. Many studies have shown that in a dynamic traditional community the degree of social capital in business activities is high with numerous linkages based on trust.

 

The linkages in value chain can be classified into vertical linkages and horizontal linkages. The vertical linkages are the relationship between actors along the chain. Examples of interactions of farmers with other actors in the chain can take diverse forms:

 

• zSales contract directly with state agro-processing enterprises
• zProduction contract with foreign companies
• zSale to private merchants by oral engagement
• zSale through service co-operatives
• zHandicraft and industrial villages cluster

   

Horizontal linkages on the other hand are linkages between actors at the same level of the value chain, e.g. farmers working together with other farmers, or companies in the same sector liaising with each other on a regular basis. For example, in the cotton industry in Zambia horizontal linkages exist between the different ginning companies operating in the country, while each of these companies have their vertically integrated production and supply value chains.

 

Strengthening the linkages between the different actors in the marketing system will lay the groundwork for improvements to other constraints; establishment of a contract regime, improvements in post-harvest and transportation systems, improvements in quality, and the effective use of market information.  

 

Objectives

 

1. To identify linkages geographically and socially

2. To describe the linkages between different actors in the value chain and their linkages with other actors ancillary to the value chain
3. To describe the linkages between actors by poor and non-poor actors

4. To assess the impact of the linkages on the poor actors in the value chain

 

Key Questions

 

Dimensions of analysis: 

 

1. Do linkages exist?
2. How important are linkages?
3. How many different actors are involved?
4. What is the frequency of contact?
5. What is the level of formality?
6. What are the reasons for having or not having linkages?
7. What are the relative benefits/costs of linkage? What is the level of trust?
8. How long have these linkages existed?
9. How has the formality of the linkages changed or evolved?
10. What is the rate of expansion of linkages over time?

Steps

 

Step 1     Map respondents and create categories

 

When interviewing, separate out into different categories of respondents for both horizontal and vertical linkages in order to analyse later the differences in linkages between the different categories

 

Possible typology of respondents:

 

Wealth – poor, average, better-off

 

Skills – unskilled, low-skilled, high-skilled

 

Gender – male, female

 

Ethnicity – different ethnic types

 

Business type – micro, small, medium, large

 

Period – day labour, temporary labour, permanent labour

 

Status – family, hired

 

Origin – temporary migrant, permanent migrant, locally hired

 

Step 2     Identify dimensions

 

Identify the horizontal linkages between producers and traders varying from individual to group, association and/or cooperatives. The dimensions of analysis of horizontal linkages could include the following:

 

• The objective of the group
• The size and scale of the group
• Benefits for individual to participate in the group, both short and long-term
• Relationship to the selected value chain
• Formal and informal governance of the group ( trust and by-laws)
• Effectiveness of the group on meeting their objectives
• Potential opportunities for the group in the value chain  

Identify relevant dimensions of vertical linkages to investigate. Dimensions of analysis could include the following:

 

• Existence of linkages (Yes/No)
• Number of different actors (number of different people in each organisation grouping)
• Frequency of contact (number of times per year met)
• Level of formality (informal/ verbal agreement / written contract)
• Reason for linkages / Reason for no linkages
• Relative benefits/cost of linkage (benefits>costs / benefits=costs / benefits < costs)
• Level of trust (distrust / no trust / little trust / some trust / full trust)

 

Step 3     Survey actors

 

Conduct survey interviews with relevant value chain actors to identify their linkages with other actors in the chain. For example, interview farmers, traders, processors. First a list of relevant value chain actors is created. Secondly a set of questions on trust are developed and used in a survey instrument; see example in Table 1. 

 

Tool 4 - Table 1: Extract from a survey questionnaire on value chain linkages in the Bangladesh shrimp industry

Business Linkages with Other Organizations    Linkage   Organization     Linkage   How Many Different Individuals/Groups/Organizations  Did Your Business Meet With During Year   Average Frequency of  Meeting  (times per year)  Yes   No   0   1   2   3   4   5   6-10 11-20  21-50  51-100  101-200  200-500  >500   ≤1   2-3  4-6  7-12  >12   Farmer                                               Farmer Group                                          Farmer Cooperative/  Association                                                                                ……..                                                         Linkage Organization     If Linkage = YES, then Typical Nature of Linkage (From Informal to Formal Written Contract)    If Linkage = YES, then  How Much Do You Trust These Individuals/Groups/Organizations?  Informal  Verbal  Arrangement  Formal Written  Contract   Distrust  No Trust   A Little Trust  Some Trust  Full Trust   Farmer                    Farmer Group                    Farmer Cooperative/Association                                  ….

Source: ^[1]

 

Step 4     Analyse the results of the survey

 

The results of the survey can then be analysed in table format or graphically, for example using “Radar Charts” in Excel. Qualitative indicators can be transformed into quantitative indicators by assigning numerical levels – e.g. Levels of Trust (distrust, no trust, little trust, some trust, full trust = -1, 0, 1, 2, 3). Averages can be calculated to aggregate across individual respondents. An example is shown in Figure 1.

 

 

 Source:^[2]

Tool 4: Figure 1: Linkages with different organisations by farm family respondents. In the diagram the percentage of farmers with linkages to each organization/institution is shown, differentiated between poor and better-off households. The diagram shows that poorer farmers have fewer linkages than better-off households.

 

Step 5     Identification of power distribution

 

The issue of power is complex and still highly debated in the value chain literature. For the practical purposes of this toolbook, power will defined as directly related to the level of concentration and access to key assets in the hands of a limited number of actors. Key assets can be both physical resources (e.g. capital, land, credit) and intangible resources (market information, knowledge, personal relationships, reputation). Actors who have exclusive access to key assets and resources are more powerful and have the capacity to influence others in the chain.

 

There are a number of indicators which can be taken into consideration in order to measure the power of actors operating in the chain; these are presented in Table 2 below. Most of the indicators are indexes of concentration (share) and can be combined together in order to understand the overall control exerted on the key resources by specific actors in the chain.

 

Tool 4 - Table 2: Identifying the key governors in the chain. Different actors in a value chain have different levels of power or influence. The below indicators can be used to identify which actors are key governors.

Indicators	Strengths and weaknesses	Source of data
Share of chain sales	Not a strong indicator as may only be a reseller of bought-in materials and may lack influence	Balance sheets
Share of chain value  added	A better indicator for measuring size since it reflects the share of the chain’s activities	Firm-level interviews
Share of chain profits	May be a good reflection of chain power, but may also arise from monopoly control over scarce raw materials (e.g. platinum) and may have little influence over downstream processing	Balance sheets, but it is likely that this data will only be available for publicly­ owned companies
Rate of profit	A poor indicator since minor players in the chain may be relatively profitable but have little influence	Balance sheets, but it is likely that this data will only be available for publicly ­owned companies
Share of chain buying power	A good indicator of power, particularly if there are asymmetries; i.e. its dependence on its suppliers is less than their dependence on the lead firm	Firm-level interviews
Control over a key technology (e.g.  drive- train in autos)  and holder of  distinctive  competence	A good indicator in producer-driven chains (autos, for example), since this defines the distinctive competence of a chain (BMW’s image as a quality, refined car) while the smaller firms ‘fill in the gaps’ in the chain	Firm level interviews
Holder of chain  “market identity”  (e.g. brand name)	May be critical in markets where brand image is very important	Firm-level interviews; studies of market share of brands in final markets

 Source:^[3]

 

Indicators have to be selected according to the focus of the analysis and the availability of data. The number of market partners available to each party and the stability of the exchange relationship (captured in the analysis of contracts) can represent, for instance, easy indicators to understand the vulnerability and the dependence of one actor from the other. As is often the case, small producers may only have access to a limited number of stable channels through which to sell their production; therefore their ability to bargain the price can be limited.

 

Once all the relevant indicators have been chosen, it is possible to calculate a concentration index for each of them. The concentration index can give an idea of how a particular indicator is allocated among the top five or ten actors in the chain. If the second indicator from the table above (the share of the value added in the chain) is used as an example, the following steps can be followed to calculate a concentration index:

 

 

Step 6     Analyse trust

 

Table 3 lists some key features that characterise exchange relationships based on low or high levels of trust.

 

Tool 4 - Table 3 : Differences between chains Characterised by low and high levels of trust 

	Low Trust Chain	High Trust Chain
Length of trading relationship	Short term	Long term
Ordering procedure	Open bidding for orders   Prices negotiated and agreed before order commissioned	Bidding may not take place   Price settled after the contract is awarded
Contractual relationship	Supplier only starts production on receipt of written order	Supplier more flexible about instruction   Would start production without written order
Inspection	Inspection on delivery	Little or no inspection.
Degree of dependence	Supplier has many customers   Customer has multiple procurement sources	Few customers for supplier   Single or dual sourcing by customer
Technical assistance	Expertise rarely pooled   Assistance given only when paid for	Extensive unilateral or bilateral technology transfer over time
Communication	Infrequent and through formal channels.	Frequent and often informal
Price determination	Adversarial, with hiding of information	Non-adversarial.
Credit extended	Punitive or no-credit extended	Easy access, longer payback period, easy terms
Outsourcing payment terms	Long  delays in paying agents and informal economy producers	Payment on receipt of finished goods

 Source: ^[4]

 

The analysis of trust can be based on key questions derived from the above table, such as:

 

1. How long the trading relationship lasted?
2. When and how are prices set?
3. Are there controls and inspections procedures?
4. Is there a contract or an oral arrangement?
5. Is there a high degree of dependency and high level of information sharing?

 

An index of trust can be easily built by scoring and weighting all these characteristics.

 

To save time it sometimes can be useful to directly ask the respondent about their level of trust with regard to a list of other actors in the value chain. The level of trust should be ranked according to a scale (for example:  (-1) distrust; (0) no trust; (1) little trust; (2) some trust; (3) complete trust). The data on trust from various value chain actors can then be inserted in a matrix as shown in Table 4:

 

Tool 4 - Table 4: Example of matrix of trust levels between actors 

	Farmers	Traders	Processors	Moneylenders
Farmers	3	2	1	-1
Traders	3	0	2	0
Processors	1	2	2	2
Moneylenders	2	0	0	2

 

From Table 4 it is possible to see the level of trust actors have for others in the chain, and to check if trust is reciprocal. If it is true that informal arrangements are the results of trust, it has also to be considered that informality makes it more difficult to understand the terms of the arrangement. Whether or not trust is reciprocal can be particularly important to understanding the position of the poor, as it gives a rough idea of the extent to which an agreement is based on trust or simply the result of dependency (no other alternative partners available). In the example above, farmers have some trust in traders while traders have complete trust in farmers; the exchange is therefore almost reciprocated.

 

What Should be Known after Analysis is Complete

 

After having followed all the steps, the key questions outlined below should be able to be answered:

 

• Do linkages exist?
• How important are linkages?
• How many different actors are involved?
• What is the frequency of contact?
• What is the level of formality?
• What are the reasons for linkages, reasons for no linkages?
• What are the relative benefits/costs of linkage?
• What is the level of trust?
• How long have these linkages existed?
• How has the formality of the linkages changed or evolved?
• What is the rate of expansion of linkages over time?

 

Useful Examples

 

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