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Smallholder farmers have difficulties entering established value chains with value-added products. In this paper, we look at smallholders’ capability to establish and sustainably manage a competitive and economically viable local dairy value chain through the case of Twawose, a small dairy goat co-operative in Tanzania. The analysis uses a value chain approach as a framework to identify the possibilities for upgrading and the determinants of competitiveness in value chains in which smallholder farmers can participate. Results highlight the benefits Twawose participants receive, but caution that a multitude of constraints could impede scaling-up in the future.