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