Secrets to success #2: Add all kinds of value

In this series of posts, I am exploring four common characteristics of rural economies to show how they can be used as a lens to understand rural problems and spark rural solutions. Today’s post addresses the characteristic I have called Structural positioning at the tail of global value chains.

This statement is shorthand for the way that rural economies are often positioned within global economies – a positioning that is, with few exceptions, highly disadvantageous. In this post, I’ll briefly review how a seat at the tail often leads to a whole raft of more familiar-sounding rural economic problems, such as unemployment. I’ll also show how some rural communities are bucking the trend.

First, What is a value chain? Basically, it’s a way of describing how goods and services are produced – through a process of transformation that adds value. A potato may be harvested, washed, sorted, transported, chopped, cooked, salted, packaged, shipped, and ultimately sold from a retail display as a bag of chips. The process starts with raw materials, and each activity in the chain adds value. Each business in the chain reaps some of that value in return.

The problem with rural economies in the context of global economies is that rural economic activities are often concentrated in the far end of the chain – the metaphorical ‘tail’ – back where potatoes are dug out of the ground, cows milked, or timber harvested. These activities are called primary production, and they sit at the heart of many rural economies.

Producing primary products and sending them elsewhere to be processed has been a standard recipe for economic disadvantage from the days of colonisation to the reign of contemporary corporations. This is because, while primary products are intrinsically valuable, they don’t capture a lot of this value when they are sold. At each step in the value chain, as products are processed, transported, and on-sold, other businesses earn their share. And when those other businesses are large and powerful, they have a lot of control over what that share looks like, and how big it is.

The practical fallout is that primary producers in rural regions often have little control over the terms under which they sell their products and capture only a small proportion of the value that they generate. Of a $2 bottle of milk, for instance, the dairy farmer might receive about 50 cents. This pattern is repeated across industries. Because profit margins are low, even a small price drop can render production unviable. The effects in rural economies can be dramatic: businesses forced to cut labour or close, farms forced to amalgamate. The flow-ons follow: unemployment and population loss in rural regions.

None of this is new – these are longstanding problems. The good news is, rural communities find solutions. One popular solution is called Value Adding. Value adding aims to capture more value from products by adding value locally, for instance by producing potato chips instead of selling potatoes. Value Adding has been part of the rural economic development landscape for at least 20 years. It makes sense, though it only works sometimes. The secret to success is in how we think about value.

If value adding were simply about re-establishing local manufacturing or processing operations (butter factories, textile factories, paper mills), then why do we see these same types of ventures regularly closing or moving offshore to somewhere cheaper. In practice, some rural value-adding ventures succeed, and some fail. What’s the difference?

When I think about successful rural economic ventures, they tend to do something more than just move their product a bit further down the chain. Rather, they generate value in a way that makes their product or service special, so that it can’t be easily duplicated somewhere else. For instance:

  • They add value through quality
  • They add value through distinctiveness
  • They add value through community connection
  • They explicitly add social, cultural and/or environmental value

One example is provenance: that is, the reputation attached to where a product is from. A potato is not necessarily just a potato; in the US, for instance, Idaho potatoes command a premium. Where a product is from can communicate high quality and distinctive attributes: such as taste, history, and symbolic value. In Australia, think of the Barossa wine region or King Island cheese. Provenance can add a lot of value; for this reason many regions protect their label fiercely. And while provenance typically refers to food and drink, the same principle can be applied to any venture that leverages a distinctive local attribute into a desirable good or service: from Bendigo pottery to Byron Bay tourism.

Another example is community connection. The value of community connection is what powers Buy Local campaigns. Customers choose to Buy Local because the product or service is located in the local community. This adds extra value. In some cases, rural towns may embrace their local businesses to the extent that they become an iconic community presence, such as the Beechworth Bakery. For their part, businesses may build community connection into their business models: for instance, Bendigo Bank. Leveraging value through community connection is also increasingly possible via digital platforms; some rural businesses mobilise online communities to excellent effect.

Many rural economic activities create social, cultural, and/or environmental value. These important sources of value creation are often overlooked in discussions of rural economies. For example, rural organisations have always generated enormous amounts of valuable products and services for their communities through mobilising volunteers. When rural communities are seeking to develop economic options, they would do well to consider the types of social, cultural and environmental value that they are well-placed to generate. A range of ideas, from social enterprise, to traditional cultural industries, to community-based renewable energy, suggests strategies that rural communities can use to play to their social, cultural and environmental strengths.

In the end, rural economies are not trapped at the tail. By playing to their strengths, rural communities can – and do – create viable and distinctive products and services that enable them to thrive.

Next: Secrets to success #3: Re-imagine space

Published by The Bush Prof

Professor Robyn Eversole is a practical regional development academic based in rural Tasmania.

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